The Inanity of Private Equity Investors

In the acquisition financing world, middle market private equity investors are held in high esteem. They are a sought-after relationship by lenders and service providers due to their continual investment activity and fee generation potential. Most people enter the private equity industry via adjacent professions such as big banks, investment banks or consulting firms where they had minor roles in specific deal related workflows such a modelling, PowerPoint creation or industry research. These functions are siloed from direct interaction with the company for whom the acquisition financing is provided for, leading to a learning and understanding gap for these soon-to-be young private equity participants.

While they know how to build a super slick model with fancy inputs, they do not know how to talk to a business owner in language that the owner will understand and relate to. Because these people have apprenticed with other older smart, yet similarly insulated people, they absorb their language and ways of analyzing and framing questions. The questioning approach often fails to meet the business owner where they are and instead devolves into elitist deal speak. Many private equity investors go about their information gathering process forcing their pre-conceived notions on the business owner, as opposed to first understanding the mindset of the owner and what is important to them.

Additionally, during the acquisition financing diligence, private equity investors often underwhelm on grasping the operational greatness of a company. They can identify above average financial metrics but are not able to understand the strength of underlying business processes (i.e. innovation, production or sales) without an army of specialized consultants in their ear. The dual challenge of relating to the business owner and grasping the business process is a major issue within the acquisition financing world that extends beyond private equity into the direct lending segment as well. Sooner or later, the funds will have to change and bring in senior leaders with strong operating backgrounds to help them bridge this gap. The most talented entrepreneurs want to work with people as skilled in their craft as they are. They are not impressed with big funds run by people that ask weak questions.