Why Does Everyone Hate PE?
Welcome back to the Mid Market Insider!
Let’s jump in…
This week I want to explore why people hate Private Equity because it doesn't have the best reputation.
Here is a comment a viewer left on my recent YouTube video and I totally agree.
I wouldn’t like it if PE firms monopolized all the vet hospitals around me leading to a surge in price.
In this edition, we will explore some of the reasons why people have a negative connotation about PE and whether it’s justified.
1. Availability heuristic
(Mental shortcuts that people use to make quick decisions by relying on information that is most readily available to them)
As an example, let’s look at the recent headlines about Boeing.
While current news might make us feel as though flying is becoming riskier, aviation fatalities dropped from 50 to 17 per billion passengers in 2024, with accidents declining from 2.05 to 1.87 accidents per million departures.
Similarly, while negative PE headlines grab attention, they represent a tiny fraction of the industry's 62,000 companies and $12 trillion in total value.
We tend to let prominent negative examples shape our perception of entire industries, rather than considering broader data.
2. Finance to financiers
When you look at the creators in our world i.e. Steve Jobs, Mark Zuckerberg, etc., the first thing that comes to our mind is genius.
Why?
Because they are creators, outliers who decided to forge their own path. And that is something we as a population can relate to.
When it comes to finance or Wall Street types who are geniuses in their own right, we typically don’t hold them in the same reverence as the creators of the world.
Why?
Because they aren’t creators.
Instead, some of us think of them as pompous arrogant people who are disconnected from the regular world.
3. Financial engineering subset of PE
Private equity firms operate with diverse strategies and objectives.
Some firms, like Four Pillars, focus on value creation by partnering with businesses to accelerate their growth, improve operations, and unlock untapped potential. (Please excuse the shameless plug.)
However, certain PE practices can have negative societal impacts.
A prime example is the trend of PE firms and hedge funds acquiring residential properties en masse. This practice often prices out individual homebuyers, particularly first-time buyers and middle-class families, while artificially driving up housing costs in entire neighborhoods.
Such strategies prioritize short-term profits over community well-being.
My interest in private equity stems from its potential to transform businesses - whether they're hidden gems operating below their potential or struggling companies that need strategic guidance. Not pricing people out of their ability to buy homes.
4. Strip and flip
The public perception of private equity has been largely shaped by high-profile cases of aggressive corporate restructuring.
When asked, most people envision PE professionals as ruthless financiers who acquire companies only to dismantle them - laying off workers, selling valuable assets, and maximizing short-term profits at the expense of long-term sustainability.
While these destructive practices do exist within the industry, they represent just one approach to private equity.
An alternative philosophy, which I strongly advocate for, focuses on value creation through strategic investment and growth.
This means investing in workforce development, upgrading equipment and technology, improving operational efficiency, and expanding market presence. The goal is to build stronger, more competitive businesses that create jobs and contribute to economic growth, rather than strip them for quick profits.
This growth-oriented approach not only generates sustainable returns for investors but also preserves and enhances the legacy of these businesses.
5. Corporatization of PE
The private equity industry is following the same path that has transformed many dynamic industries into corporate behemoths.
The telltale signs range from: layers of bureaucracy slowing decision-making, a loss of personal touch in business relationships, and market dominance that makes it difficult for smaller firms to compete.
This corporatization of PE represents a concerning shift from its entrepreneurial roots.
As the industry grows more institutionalized, it risks losing the nimble, innovative spirit that once defined it.
Large PE firms increasingly resemble the very corporations they once sought to transform - with rigid structures and standardized processes replacing the creative, personalized approaches that drove early success in the industry.
While this broader industry trend may be inevitable, individual firms can choose a different path.
At Four Pillars, we're committed to preserving the entrepreneurial DNA that makes private equity uniquely powerful - maintaining the agility to move quickly, the creativity to find unconventional solutions, and the personal engagement that builds lasting business relationships.
This approach stands in stark contrast to the industry's drift toward corporatization, which has contributed to PE's sometimes negative reputation.
The challenge lies in maintaining this entrepreneurial spirit while scaling operations - ensuring that growth doesn't have to come at the expense of innovation and personal touch.
While private equity often gets a bad rap, it's crucial to distinguish between different approaches within the industry.
Yes, some practices deserve criticism - from aggressive asset stripping to market monopolization.
However, PE at its best can be a powerful force for business transformation and growth.
The key lies in maintaining the industry's entrepreneurial spirit and focusing on sustainable value creation rather than short-term gains.
As the industry evolves, firms have a choice: follow the path toward corporatization or stay true to PE's original mission of building better businesses.
I know that was a lot but if you want to learn more make sure to check out my YouTube video here.
The Lessons:
Headlines Don't Tell the Full Story: Our perception of private equity is often skewed by the availability heuristic - we focus on negative headlines while overlooking the thousands of successful PE partnerships that strengthen businesses and create value.
Not All PE is Created Equal: There's a stark contrast between value-creation strategies (focusing on growth, operational improvements, and long-term sustainability) and value-extraction approaches (strip-and-flip, asset monetization, market monopolization). Understanding these differences is crucial for both investors and the public.
Preserving Entrepreneurial Spirit is Key: As PE firms grow larger, maintaining agility and personal touch becomes increasingly challenging. The industry's future success may depend on finding ways to scale without succumbing to corporate bureaucracy and standardization.
📅 Next Week:
In next week's newsletter, we will dive into how various assets are treated during a sale, with particular emphasis on working capital.
Keep building,
Nick
P.S.
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