Why PE Investments Fail?

Private Equity investments provide a sense of security and an initiation to growth to many companies worldwide. They are known to build and grow companies. Private Equity (PE) is an investment which is realized in the long term. This long term focus is aligned with the interest of both the investor and the company to succeed and grow the company.  But these notions are turning out to be fictitious considering the current scenario. According to some studies conducted, 16% of the companies shut down in the seeding stage and only 21% of the companies later go ahead with angel fund.

Prodding further on this, it becomes essential for PEs to analyze what could be reasons for such failure considering both the parties get into such an agreement with a win-win scenario in mind. PEs invest in the companies with an intention to develop and grow the company within a short period of time, making it lucrative for potential buyers and realizing maximum return on investment. The companies too, in an urge to succeed, rush in with their strategies with an aim to build and grow this company. These companies give in to the pressure of the PEs to perform better and falter to execute the strategies in the right manner while hastening the process. Some companies fail to understand the actual market requirement and do not optimally utilize the resources available with them. The PEs too, are not often very well equipped to mentor, monitor and strategise the growth path for these companies.  PEs who invest in varied industries often lack the complete understanding and expertise required to succeed in those industries. They work on the simple rule of thumb of return on investment to determine the success of a company. Companies’, who have just taken baby steps in the market and are yet to establish themselves, need someone to back them up with the required know how and strategy to run the business and succeed.

 This indicates that today companies not only need investment to build and establish themselves, but they also need profound levels of expertise to align, hold up and lend a hand in bringing the required changes. These companies need someone to analyze the strengths and weaknesses from a third party perspective, understand the market conditions, provide expert opinion on the functioning of the company and be those extra pair of hands that could facilitate in bringing about the right changes in the company.  PEs along with the association of such specialists could be rest assured about the company’s progress. This will enable them to transform the company and move towards accomplishment of the set objectives. To keep up the focus on organization’s goals and increase its opportunity to grow, an independent voice and an unbiased view by an expert which is not influenced by both the parties of interest (PE or company management) is essential. This provides the required perspective in decision making. Organizations are facilitated to strategise and put their plans into action. PEs aligning with such specialists brings about the right mix of investment backed with expert advice fulfilling the purpose of the business.

Pratibha Sharma.

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