Is PE Bad or Good?

Woman coaching children's basketball

If you did not like PE class, you were not smiling like these children are.

Do those of you who were not that athletic in middle/junior high school or high school remember when you had to take PE class? Did you try to avoid it as much as the academically challenged tried (and likely succeeded!) to avoid calculus or chemistry? That “PE” stood for physical education.

What’s the value of PE (physical education)?

Those of you who did not like PE likely questioned its value: “Why do I need to take PE? What good does it do?” Since then many schools have eliminated PE classes. And now the U.S. has a child obesity problem. Do you see any correlation between the elimination of PE classes and childhood obesity? Just a teeny bit, eh?

What’s the value of PE (private equity)?

This brings me to the “PE”, which stands for private equity. For many larger small business owners and medium business owners, this “PE” is what you think of when you hear the term now, just as you thought of the physical education “PE” when you were a teenager. And just as many people try to malign this PE.

Like the PE in the first and second paragraph, some people do not understand the role PE plays. Just as physical education plays a role in your physical health, private equity plays a role in the financial health of the U.S. economy (and beyond). Main Street tends to associate private equity with the large firms with billionaire (or near-billionaire) owners. Because the vast majority of small and medium businesses are classified as Main Street businesses, this thinking applies to most SMB owners.

 

Investopedia's PE definition

From Investopedia: the definition of private equity.

Most PE firms do well only if the firms they invest in do well.

Successful private equity firms that serve SMBs enjoy financial returns similar to the large PE firms. However, instead of concentrating headquarters on the East Coast, these firms are spread out across the U.S. to better target and serve regional specialties. PE firm owners and partners make their money by investing in businesses. If the businesses private equity firms invest in do well, so do the PE firms. Many owners point to a few stories in the media about PE firms pulling their cash out of the firms they invested in and leaving behind a failing business. This is rare, but gets more media coverage because controversy increases viewership.

The problem with negative thinking regarding PE firms

The problem with this negative thinking and scape goating of private equity firms, is the following, “That which you malign and scape goat, you can never attract.” Think about it. When you think negatively about something and blame it for your trouble, would you ever consider researching, exploring, and learning more about it in order to use it to your advantage? No! Conversely, if you were to be approached by a PE firm, you’d likely hang up the phone on the caller before hearing what he had to say. In this way, those business owners who scape goat private equity cut themselves off from a potential, highly valuable funding source.

What PE firms can do

Private equity firms can help you pull monetize your business and pull money out. This lets you reap one of the financial benefits of business ownership – net worth creation – while still retaining ownership and control of your company. A PE firm can help you buy out a partner, delay retirement, or sell a stake to a family member. PE firms can provide the funding you need to grow your business while bringing the professionalism and insights you do not always receive with less savvy investors. Additionally, if you are ready to sell and your company runs well without you, a PE firm can help you maximize the amount of money you receive for your company.

You can read some of my previous blog posts for a more in-depth explanation of what PE firms do. My goal today is to help those of you who join in the PE bashing despite little or no direct experience with them to expand your thinking.

 

Sample Dan Primack Term Sheet

A sample of Dan Primack’s “Term Sheet” newsletter.

A resource to learn more

If you want to learn even more about PE firms, what they do, why they have value, and identify some potential contacts, check out the daily “Term Sheet” by Fortune’s Dan Primack. This is a free daily (M-F) newsletter which summarizes private equity and venture capital deals for medium businesses receiving $5 million and up in capital.