03.07.22

Debunking the myths about partnering with private equity

Tom Matthews


At Pemba, we are fortunate to work with lots of amazing entrepreneurs and founders. In fact, we spend most of our days meeting with founders of private businesses and seeking to understand what their specific objectives and key challenges are and how Pemba might be able to assist.

Whenever we meet a founder for the first time, we are very conscious of the many preconceived perceptions about private equity and we work hard to overcome these. This process takes time, involves lots of interactions and often the founder speaking to other people we have partnered with, many of whom have been in similar situations and faced similar concerns.

This article sets out some of the common misconceptions that we face and hopefully illustrates that the “reality could not be further from the truth”.

Misconception #1: private equity firms put their own interests before the company’s

Yes, it is true that private equity firms have a commitment to their investors to make money; but to do that, it’s in their best interests to help their partner companies (and therefore the founders and management teams) succeed.

What many founders don’t appreciate is that in private equity we only make a return for our investors at the final exit event (i.e. when we sell the business in the future – usually in a 3-5 year time horizon). It is therefore essential for us to work together with the founders and management teams we partner with to build the business to achieve a value-maximising exit event by this end point. It’s also important that decisions are made which create long term shareholder value rather focusing on short term profit maximisation.

The other key point is if we Pemba make a good return on the exit event, then the founders and management teams that invested alongside us also make substantial financial returns. Accordingly, we have a focus on building genuine “win : win” partnerships.

Misconception #2: I’ll lose control

Often, during the early interactions with a founder, one of their main fears in partnering with a growth investor is the perception that they need to give up operational control of their business. However, nothing could be further from the truth.

Pemba is an interested but not an intrusive investor. At Pemba we don’t meddle in the day-to-day operations of the business, but rather empower the founder and senior management to do what they do best (i.e. run the business, pursue the organic growth initiatives and, if the business is embarking on an M&A strategy, to integrate the bolt-on acquisitions).

Our whole branding and even name reflects this philosophy. Pemba is a common Sherpa name. Like the Sherpa, we are seasoned mountaineers in terms of building market-leading businesses but when we partner with a business, it’s not our journey; it’s the founder’s and management team’s journey. We view our role as helping the founder and management team scale their summit (i.e. achieve their objectives) safely and successfully.

We therefore see our job as the experienced guide to assist the founder and management team on their ascent to the summit. Think of the role Pemba plays with its partner companies like an outsourced corporate development function. Our skills are in sourcing and transacting strategic bolt-on acquisitions, inputting into the strategic vision, providing operational and strategic insights (e.g. new market entry strategy, price optimisation, etc.), financing, enabling access to additional expertise (e.g. marketing, enterprise sales, people and culture, etc.) and helping prepare the business to achieve a value maximising exit event in the future.

Our belief at Pemba is that by each party (i.e. the founder, management and Pemba) focusing on their respective strengths, together we can develop the business further and faster.

Misconception #3: private equity will look to remove my staff

At Pemba, we take great pride in being a partnership investor. We have a strong focus on PEOPLE and spend a lot of time getting to know founders and managements team of the businesses we invest in to ensure we share the same cultural values and strategic vision.

Central to Pemba’s model is to “back” the key individuals at the heart of the organisation (usually the founder and senior management) to drive the accelerated growth initiatives. We believe the most crucial element of any successful business is the talent and people driving them. At Pemba, we look to retain and incentivise the key people at the heart of the businesses that we invest in. This is often through equity participation to ensure interests are aligned. This involves bringing these key people into the equity and supporting their transition from employee to owner.

Misconception #4: private equity will look to cut costs

As noted in previous articles there are lots of different types of private equity investors, from turnaround specialists (who focus on improving underperforming businesses) to larger leveraged buyout funds (who use debt to help drive their returns).

Whilst a lot of private equity investors do indeed look to cut costs to drive operational improvement, for growth investors like Pemba usually the opposite is true. We add additional growth costs into the business shortly after our initial investment in a company. These growth costs could include things like a CFO, additional business development managers, customer success officers, further investment in product, etc.

It usually takes time before we start to see a return on investment from these growth costs, so there is often a short term dip in the profits of the business before they increase once these investments start to pay off. This explains why we usually back businesses with high and sustainable profit margins, where we can make the deliberate decision to sacrifice a bit of margin in the short term to make investments to achieve longer term accelerated and sustainable growth in both revenue and profits.

Final remarks

Hopefully this article has provided some useful insights into why founders need not be wary of partnering with a growth investor like Pemba. However, please don’t just take my word for it but rather follow this link to hear directly from some of the founders we have partnered with, where they share their preconceived perceptions of private equity and what Pemba did to alleviate their concerns.

What next?

If you are interested in partnering with a growth investor like Pemba and are keen to understand more, then please contact me at tomm@pemba.com.au and we can discuss further.

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