Why private equity investments rarely spell the end for management teams

It would be fair to say that private equity is what makes the world spin around, nowadays. It’s something that is frequently turned to in business, in a bid to take companies to the next level.

However, something else that could be said about this form of financing is that it spells a lot of misconceptions. Considering some of the complexity that is behind it, this is hardly surprising. At the same time, it can be quite worrying for some people, particularly if you are involved in the existing management team.

It’s that existing management team that today’s post is going to focus on. As Marc Leder has testified in countless interviews, this is one of the key parts of a decision whenever his investment company takes control of a new company. Leder isn’t alone in these thoughts either; the notion that management teams are immediately discarded is a complete myth and through the course of this post we will take a look at some of the reasons why this is the case.

The inside-knowledge factor

One of the main reasons why private equity investors like to retain the existing management team is because of their inside-knowledge. Let’s not forget that this is the team which has experienced all of the trials and tribulations over the years, and knows exactly what makes this organization tick.

Sure, the private equity investors might be looking to make some changes, but they will still need knowledge of what has happened in the past, and why certain processes are followed. This is something that any new management team is very unlikely to be able to offer.

It’s all about reputation

One of the first things that private equity investment groups check is the reputation of a company that they are thinking about acquiring. Not only that, but they will look even deeper, and try and sense the reputation of the management team that already exists.

The reason behind this is simple; money is something that can’t buy a reputation. Once it is damaged, it will take a long time before this properly recovers. As such, if the existing management team has a good reputation in the industry, this is something that is going to be taken full advantage of by the investors. If they don’t happen to have that elusive reputation, there’s a good chance they won’t turn to that company in the first place anyway.

The bottom line

In truth, this is probably the least important part for a company, but it will still be a consideration when the issue of management teams is put on the table.

As most people know, replacing staff, particularly in high-profile management positions, doesn’t come cheap. It doesn’t just cost money to bring new people in, but replacing an existing team is going to impact your bottom line.

This is a cost that can easily be avoided. In fact, unless the company is being run in disastrous fashion, investors will always look to avoid such a cost.

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