By Shasha Dai
When it comes to private equity ownership, midmarket executives either love it or hate it, according to a new survey from the National Center for the Middle Market.
The survey of 1,000 senior executives at U.S. midmarket businesses was conducted in December as part of a regular series of quarterly polls by the research center, which is housed within Ohio State University's Fisher College of Business.
Of the 1,000 respondents, about 28% work at a company that is either wholly or partially owned by private equity shops, according to the center. Those respondents cited the following factors as the biggest advantage of the private equity ownership structure: flexibility in business decisions, freedom from public disclosure of financial performance, easy access to debt and equity, and the ability to expand into other regions.
About 22% of the respondents from companies with private equity backing noted that there are disadvantages to private equity ownership. They include slow decision making, too much meddling from the parent company, an overly short-term focus on earnings and cash flows, too much intervention in the day-to-day running of the business, insufficient equity shares for employees, overly complex capital structures, rich management fees and unrealistic return expectations. The remaining 78% of survey respondents from private equity-backed companies said they did not see any disadvantages to private equity ownership.
"The advantages and disadvantages are matched," said Thomas Stewart, executive director of the center. "You like [private equity firms] or dislike them for fairly similar reasons, which suggests to me the ownership or management style of private equity firms varies."
The mixed experience of businesses may explain why a high percentage of those whose companies are not private equity backed said they aren't open to having private equity investment. Of the executives not backed by private equity firms, 29% said they had been approached by potential investors.
Although 14% of those who had been approached by potential investors said they would be likely to sell a stake in the business in the next 12 months, 40% said they were unlikely to deal. Another 33% said they would never sell to a private equity firm. The remainder said they were unsure or undecided.
Mr. Stewart said there are certain businesses in the sample base for which private equity is never an option. Those include nonprofit outfits, and partnerships such as law firms, he said. The center doesn't break down the respondents according to their corporate governance structure.
Still, Mr. Stewart acknowledged the 14% of people that are likely to sell to private equity represent a small percentage of the sample base, reflecting private equity ownership as a "low preference" for the other executives.
Nonetheless, firm reputation is important to wooing entrepreneurs and management teams.
"There are 'good guys' and 'bad buys'" among private equity firms, said Mr. Stewart. "If they are competing for the same target company, the references [on the firms] would be different."