Private equity: driving growth and competitiveness

By Maureen Aylward

We are focusing this week on business financing and the economy. We asked our Zintro experts how private equity investments are driving or influencing competitiveness in the global economy.

Konstantin Karabanov, an economic development consultant, says from the resource-based perspective there are three main factors by which private equity investments drive firm competitiveness that capital, knowledge, and network of contacts. “Private equity enables capable founders and managers to realize their bright business ideas by providing long-term financing to companies,” says Karabanov. “Google would not have become what it is without Sequoia Capital. Capital resources can develop entrepreneurial potential, improve the managerial skills, train existing employees, attract new talent, get access to modern technology, and act on opportunities for horizontal and vertical integration through merger and acquisitions.”

Karabanov says that private equity investors usually have business intelligence and knowledge of local, regional, and international industry trends and markets. They provide company managers with valuable contacts and international exposure. “Private equity can also ensure that the best corporate governance practices are in place, and this is especially important with emerging market companies. This is vital for enhancing competitive position in the eyes of potential shareholders and regulators worldwide,” he says.

Michael Hirschberg, an investment banker, says that private equity’s impact on business structure and competitiveness is powerful and beneficial. “Private equity investments are constantly criticized for a couple of reasons, namely adding debt and cutting costs. Much has been made of the use of leverage in private equity transactions, but the proof is in the returns firms deliver to their clients and investors. By focusing on cash flows instead of solely profits and revenues, the firm increases efficiency and cash turnover,” Hirschberg says. “Portfolio firms under private equity influence generally cut costs through trimming of redundant positions, meaning loss of jobs. There are frequently divestitures or sales of underperforming or non-related divisions and product lines. Although there are temporary job losses at the parent company or through a merger or acquisition, the long-term benefits to existing employees and stakeholders clearly outweigh the criticism.”

DBodenstein, a corporate attorney, says that investments by private equity firms have played an increasingly important role in global corporate finance since the financial crisis began in 2008. Revelations of sloppy lending practices by commercial banks resulted in a credit crunch that left many businesses unable to obtain lines of credit or similar traditional commercial debt financing. To some extent, private equity firms have stepped in to fill this gap.

“One point worth noting is that private equity investments are not necessarily made in the form of equity investments; rather, private equity firms are acting as senior or even mezzanine lenders as well as equity investors, thereby diversifying the industry’s offerings to cover a far broader playing field,” explains Bodenstein. “As a result, the private equity industry has played an increasingly larger role in driving competitiveness, mostly through improving the efficiency of their portfolio companies.”

Bodenstein says that private equity firms typically seek to improve efficiencies in their portfolio companies by a variety of means, depending on the industries in which the companies operate. One of the most common means is through achieving efficiencies of scale. This can be effected through consolidation of operations or, increasingly, by aggregating purchases from suppliers in order to obtain volume discounts and cut supply costs.

Anil Bansal, an expert in business planning and private equity, says that private equity firms and venture capital companies seek to invest in developing industries, economies, entrepreneurs, and nations to improve rates of return on available funds. “Private equity firms are the largest source to enhance capital to needy business. They tap innovative business products and practices and enhance entry to existing and new markets with existing or improved designs, technologies and ideas,” says Bansal. “Apart from products, there is enhancement of new corporate practices, new jobs creation, and connecting available resources to enter markets with fresh concepts and ideas.

Bansal say that private equity funds:

• Support the due diligence in underdeveloped businesses;
• Provide existing, underutilized, or young talent to nurture business ideas and develop market competition on price, product, and promotions to allow choices to consumers;
• Bring capital as well as strategic, technical, and commercial support to develop the organization and compete in open market with existing challenges;
• Make small businesses into next generation, global businesses and enhance the speed of expansion; and
• Drive global practices to gain advantages and ensure efficiencies.

DMA Consulting, a private equity consultant, says that private equity allows investments to take place on a much more personal level. That is, accredited investors can get belly-to-belly with entrepreneurs and see their investments at work, as opposed to a cold, distant, arms-length transaction on the stock exchange. “This is particularly compelling when the investor and investee are in different geographies. By giving investors the opportunity to directly connect with businesses, it gives them a new appreciation for what quality deals exist out there and perhaps gives them a different perspective over the more traditional markets,” he says. “If an investor has the appetite for private equity deals, and can find one of the solid, lucrative opportunities that exist, it is a far more interesting and rewarding experience. The more this occurs, the greater the competition for traditional markets.”

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