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Is fear of private equity hurting growth of businesses?

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Private equity continues to be the bad boy of investing. This despite the fact that it is a big accelerator of growth and is more flexible than other investing options. When it does serve – businesses with revenue of $10-100 million – it does a fine job, too. Two-thirds of the PE deals serve smaller firms, not large leveraged buyouts.

But why are Australian businesses still so wary of PE?

Surveys in previous years have consistently showed less than 5% of businesses consider private equity to drive growth. This winter’s Private Business Barometer, a study by PriceWaterhouseCoopers, revealed much of the same – only 5% of the 342 businesses that planned to raise funds over the next 12 months said they would consider private equity.

But could Australian business be shooting themselves in the foot by ignoring real, and available, opportunities for growth?

“It seems that private equity may have something of an image problem. With a significant proportion of companies surveyed either planning investments or ownership succession (or both), there appear to be widespread misconceptions about what private equity is and the role it can play for owners considering investments and/or succession,” said PwC Private Clients partner Alan Elliott.

Surely, private equity players could ponder an image makeover after reading this.

  • Only one in 10 private businesses private equity gained knowledge of private equity from first-hand experience, meaning a whopping 90% learned about it through friends, colleagues or media, or simply know nothing about private equity.
  • Over two-thirds (68%) in the survey claimed “some” or “good” knowledge of private equity but the key finding is the other part – 32% have no understanding.

“The results reinforce what we see consistently – understanding of private equity among private businesses is low and misconceptions are high,” said Elliott.

What haunts businesses about private equity is real, even though it may be misplaced. A full 40% of those surveyed stayed away from private equity because they fear loss of control.

Still, AVCAL chief Katherine Woodthorpe urges business owners to keep an open mind and explore private equity in order to create value and growth.

“Despite what they think they know private business owners owe it to themselves and their business to be curious about private equity. Investigate it as either a source of funding or a viable part of a succession plan,” she said.

May we suggest PE players take the first step forward and ease the fears of businesses?

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