Customer Type: PE Firms

At a time when companies are in desperate need of capital (and every other form of support they can get), the private equity industry has assumed a larger role in the U.S. economy. That’s why now is a good time to take a closer look at private equity – how it functions, the ways in which it’s misunderstood, and how it can help companies get through one of the most difficult economic downturns in decades. Drew Maloney is the President and CEO of the American Investment Council (AIC), and we’re delighted that he was willing to speak with us about how his industry works, how PE firms are responding to COVID-19, and what other companies can learn from private equity.  

Sean Mooney: What role does PE play in the U.S. economy?  

Drew Maloney: Private equity plays a significant role in the economy – the industry invests in more than 30,000 companies in every state and district, directly employs 8 million workers, and provides capital, expertise, and supply chains to help companies grow and restructure. PE investments also provide significant returns to retirees throughout the country, making retirements more secure.  

During economic distress like this one, flexible and patient capital is more important than ever for businesses to stay open and continue to employ their workers.  

SM: What are the biggest misconceptions about the industry?   

DM: At AIC, our primary mission is to educate policymakers about success stories. In the news cycle, conflict sells. But the majority of PE deals are successful. The fact is that private equity investors are deeply committed to the success of their portfolio companies. In addition to the reputational risk of failed investments, they’re required to have “skin of the game” and invest in the funds that they manage. 

PE firms invest in businesses of all sizes, but particularly in the middle market. Many of these businesses don’t get the attention of the big splashy public companies, so the public doesn’t necessarily hear about the value that private equity is able to create in their portfolio companies. It’s incumbent on the industry to explain how we’re helping companies get through COVID-19 and making the economy stronger. We have to define ourselves or others will define us. 

SM: How did the private equity industry perform during the Great Recession? 

DM: PE-backed companies are better positioned to ride out a downturn – during the last recession, for example, they generated returns well above 10 percent per year. For one thing, they’re much more nimble, agile, and can move faster. For another, they have operational expertise, access to capital, and extensive networks, which eases the burden on managers and allows them to take the time to create lasting value. This is what I describe as long-term, patient capital. 

SM: How is the PE industry responding to COVID-19?   

DM: PE managers are working to save and strengthen the businesses in their portfolio. As liquidity dried up earlier this year, private equity managers made PIPE deals with public companies, invested in debt instruments in dislocated markets, and made equity investments in businesses that needed capital to ride out the pandemic. They also contributed to their communities, donating hospital beds, spearheading back to school initiatives, and providing resources to teachers and parents.  

For example, we recently launched a new Back to School initiative because we know so many families are trying to navigate this unprecedented school year. If you visit our website, you can learn how private equity-backed companies are helping make school safer and more accessible for students, teachers, and parents.   

SM: What can non-PE backed companies learn from the PE industry, particularly during COVID-19?  

DM: First of all, they need to have the flexibility to react to a rapidly changing marketplace. They should always think ten years out and try to make decisions over the long term. It’s also important to avoid panicking – tap into your networks, develop a plan, and be prepared for an environment of uncertainty for the foreseeable future.

Private equity is a widely misunderstood industry – from the common belief that Private Equity firms snatch up companies just to strip them down and sell them to the lack of awareness about the pivotal role PE plays in the modern economy. Gretchen Perkins is a partner who focuses on business development at Huron Capital, and there’s nobody better to correct the mistaken assumptions about her industry and give us a glimpse into the current state of PE. Gretchen was kind enough to answer a few of our questions about the state of her industry, the effects of COVID-19 on her firm, and what she envisions for the future. 

Sean Mooney: Tell me a bit about Huron Capital’s investment focus. 

Gretchen Perkins: We’re a middle market PE firm that implements a buy and build strategy to grow businesses. We focus on business services, consumer goods, and specialized industrial companies in the United States and Canada. We have both a control buyout strategy and a non-control equity strategy.  

SM: What are a few of the biggest myths about the PE industry? 

GP: The single biggest myth about PE firms is that we buy companies and sell them in pieces to make our money. The PE industry is a significant job creator across the U.S. – over the past ten years, PE-backed businesses created more jobs and secured more sales than other companies. There’s a reason college endowments, pension funds, insurance companies, foundations, and nonprofits invest in PE – it has been the single leading asset class over the past 20 years. There are billions of dollars flowing into PE because of the returns and the fact that the industry creates more value and is less volatile than other investment vehicles. 

Despite the perception that PE firms always take over and try to sell companies quickly, the PE industry plays a long-term game. Firms generally want business owners to stay and maintain equity in the business – they don’t just take over.   We want to make the companies substantially better over time because it’s the best interest of both our firm and our stakeholders. 

SM: What was your firm’s initial response to COVID-19? 

GP: We acted several weeks before everything started shutting down to increase support for our portfolio companies. For example, we developed a Rapid Response Playbook focused on the implementation of safety protocols and developing guidelines for remote work. There are 7,000 employees at our portfolio companies, and their safety is our top priority.  

SM: How do the prospects for recovery look?  

GP: When the crisis hit, we immediately started doing 13-week cash flow forecasts, and we’ve discovered that things aren’t as bad as we initially thought it could have been. Now we’re focused on implementing our Restart Playbook, which is designed to take a close look at business operations across our portfolio and help companies emerge from the crisis even stronger and more adaptable. We’re doing everything we can to help our portfolio companies navigate COVID-19 and the economic aftermath, but our management teams are rising to the occasion. This should serve as a reminder that in the current state of PE, firms are more interested in finding effective partners they can work with to build great companies over the long run than ineffectively micromanaging the companies in their portfolios.  

SM: What types of businesses are you focused on investing in and growing now?  

GP: We’re looking at add-on acquisitions to companies that can thrive during the crisis – insurance companies, for instance. We are also looking into food and beverage businesses that have proven to be COVID-19 resistant. But what we’re most interested in are companies that have solid leadership teams and growth potential – these are the partners that will help us move into the post-COVID-19 era in a stronger position than ever.