Private equity rates well with company owners who use it to raise capital, according to a Conference Board of Canada report.
Highlights of the report include:
- Thirty-five owners and senior managers of portfolio companies — the recipients of the investments — gave high scores for their overall experience with private equity.
- Private equity made two main contributions: strategic focus and finance.
- Private equity can be a good fit as a source of investment capital for family-owned firms.
- Increased investment in Canadian firms is crucial to improve Canada’s lagging productivity and competitiveness.
Private equity currently amounts to just a fraction of the overall Canadian equity market. These investments are distinguished by their relatively high risk and long-term (typically seven to 10 years) investment horizon.
Read: Primer on private equity
Canada has a large pool of privately-held enterprises, many of them family-owned. The long-term focus of private equity appeals to many of these company owners. In addition, private equity is closer to the existing governance structure of privately-held firms than a publicly traded firm would be.
The report points out some downsides of private equity investments. Some private equity firms may use excessive leverage in executing deals, which constrains cash flow. Other interviewees pointed out instances of high management fees or undisclosed management fees.
Prospective portfolio companies also need to be aware that private equity is an actively-managed form of investing that involves relinquishment of senior management control.
Despite the challenges, respondents were highly favourable toward private equity. Funders did indeed deliver on their value proposition. The key to success is for the private equity company and the portfolio company to be on the same strategic page.
In successful cases, there is alignment between private equity objectives and portfolio company objectives. Portfolio companies are given clear direction and are largely left to control the day-to-day management of the company.