Private Equity Has Never Been More Alluring
The investors come bearing money and with promises of relevant expertise and a glide path to that elusive next level. Should entrepreneurs believe them?
By Emily E. Smith
In 2010, a few years after Raegan Moya-Jones had started baby lifestyle company aden + anais, private equity firm Seidler Equity Partners invested in the business. Moya-Jones found in Seidler a supportive, collaborative business partner who left her in charge—an ideal scenario for an entrepreneur eager to see her fledgling company take flight. “They were literally too good to be true as partners,” she says. “I had an extraordinarily great experience with private equity the first time out of the gate.”
But by 2013, aden + anais, the maker of muslin swaddles, clothing, bedding and other baby products, had grown into a $50 million brand and was ready to scale further. This time, Moya-Jones sold a majority stake in the company to another private equity firm. She felt blindsided when the firm wanted to call the shots, questioned her every decision and ultimately fired her. “They came in Day One and started to tell me what to do and manage the business from afar,” she says. “They didn’t truly understand the business and clearly weren’t operators but thought they were. It was just a horrible relationship from pretty much the minute the ink dried on the contract.”
Private equity firms have amassed cash reserves of as much as $3 trillion—a number that has risen dramatically since 2014. As a result, many business owners and entrepreneurs are faced with the question of whether selling to private equity is the right move. And as Moya-Jones experienced in her company’s beginnings, private equity firms can fortify a young company with financial and sometimes even moral support to help a founder reach new levels of success.
But it’s important to understand that private equity investors are often more interested in short-term profits than a company’s long-term health. The basic PE business model is to buy companies that are struggling or that have potential to grow, repackage them by cutting costs or accelerating the growth, and flip them for a profit. One way to repackage a business, of course, is to replace the founder with so-called professional management.
Sometimes it works. But the harm done by this model has also made headlines: One recent study reported that 10 of the 14 biggest retail bankruptcies since 2012 involved private equity-owned companies, and that 1.3 million retail jobs have been lost as a result of private equity buyouts. Private equity is seen as enough of a problem that proposed legislation would overhaul the way it’s regulated and add worker protections at private equity-owned companies.
The best salesmen in the world
The rise of private equity has been driven by several factors, says Harvard Business School Professor Josh Lerner, who heads the school’s Entrepreneurial Management Unit. The private equity pool has been fed, he says, by money from institutional investors such as pension funds, endowments and family offices in their quest for higher returns. On the other side of the equation, entrepreneurs have become more enthusiastic about striking deals with private equity—a likely result, Lerner says, of growing familiarity with this type of investor: “They’ve said, ‘Well, my friend here got some money and the business grew. And then he got some more money.’ And as a result, they become much more comfortable with this as an investment area.”
Increasingly, business owners are being courted by private equity investors, who employ highly effective sales tactics, says Dave Whorton, founder and CEO of the Tugboat Institute, an Idaho-based business organization that aims to help entrepreneurs build sustainable businesses. The classic line, he says, is a private equity firm complimenting business owners on what wonderful businesses they’ve built—and how a partnership with private equity is the jet fuel to help rocket the business to the next level. “These are the best salesmen in the world,” he says. “They can raise tremendous amounts of capital, and they can convince people to do things that only later they say, ‘Why? Why did I do that?’”
Tugboat Institute helps business owners build and scale evergreen companies—those designed to be around for a long time (like, 100 years or more) rather than as a vehicle for a lucrative exit for the founder. While the high-dollar offers from investors can be attractive, Wharton argues business owners may be able to make more if they keep the company for themselves and focus on growing it sustainably. What’s more, he says, businesses that resist outside capital have a better shot at longevity, paying their workers fairly and contributing to their community. “Private equity can make an appeal to you and say, ‘You’ll make more money by selling to us,’” he says. “Whether that ends up being true or not only time will tell. I think most people’s experiences on this have not been very positive.”
I’ve always been the boss
Doug Tatum, chairman of national business advisory group Newport, sees considerable value in private equity investments. He says there’s some evidence to suggest that private equity-backed companies are more resilient and can scale more effectively. In fact, he argues that private equity investors have been unfairly maligned. “Private equity provides a national reward system for entrepreneurs that build successful businesses in every industry,” he says.
Ken Krivacic is an optometrist who has owned his own eye clinic in Irving, Texas, for more than 30 years. As private equity moved into his industry and more practices were sold to investment firms, Krivacic says he resisted the change. “I like seeing patients,” he says. “But I also like the business side of it—managing a practice, running a practice, seeing it grow. I’ve really enjoyed that over the years.” If he sold to private equity, the hardest part would be relinquishing control. “I’ve always been the boss,” he says.
In spite of that concern, Krivacic sold his practice to a private equity firm in February 2020 with an agreement that he would stay on for three years. Overall, he’s happy with the deal: The private equity firm paid more for the practice than a younger doctor would have, and he gets to keep seeing patients on his preferred schedule of three-and-a-half days per week. “This is a way to ease into retirement,” he says.
The hardest part, Krivacic says, has been giving up control, just as he predicted. “When you’re in it yourself, you’re a much smaller unit, and to change things is much easier,” he says. Now, working with a company that owns 700 offices, “it’s just a different animal.” But ultimately, the deal gave him the simple exit plan and comfortable retirement he was after.
Lerner, the Harvard professor, says the best thing entrepreneurs can do before selling a stake in their company is to evaluate the potential buyer carefully. “Not all private equity groups are created equal,” he says. “Understanding who you’re dealing with is very important.”
He recommends talking to other business owners who have taken funding from specific private equity investors to gain a deeper understanding of who they are and what it might be like to work with them. “Getting those kinds of references is extremely, extremely useful,” he says.
Embarrassment and shame
Moya-Jones expected her second private equity deal to be just as fruitful as her first. Instead, she says it’s been an emotional ordeal to untangle herself from the company she created and felt so passionate about. She remains the biggest individual shareholder, so her finances are still wrapped up in the business. Several months after she was terminated, she resigned from her board position. “I just quite honestly found it too difficult to be watching things going on that I didn’t agree with and have zero ability to do anything about,” she says.
Now Moya-Jones receives quarterly results statements but knows little about the day-to-day management decisions. “I don’t really have any idea anymore, which is very odd given that I lived and breathed it for over a decade, and my oldest daughter’s name is still on the door,” she says.
Moya-Jones still believes good private equity firms, like the one she partnered with initially, can help founders flourish. But she says a lot of the horror stories about private equity remain untold because of non-disparagement agreements and founders’ own feelings of failure. “There’s a lot of embarrassment and shame about admitting that you were fired from your own company,” she says. She’s compelled to share her story because she hopes to help other entrepreneurs avoid the fate she met.
Since her separation from aden + anais, Moya-Jones has written a book about her experience creating the company—and about dealing with the good and bad of private equity She’s also launched a new company. “It couldn’t be further removed from baby products,” she says. The new business? Saint Luna Spirits, a small-batch boutique moonshine maker. She and her business partner self-funded the new venture, but Moya-Jones says she would consider working with private equity investors again someday. “I’ve had the best and worst experience with two separate PE firms,” she says. “There are definitely good ones out there, you just need to be vigilant with the diligence when vetting them.”
CORRECTION: An earlier version of this story reported that private equity firms had amassed as much as $3 billion to invest. The correct number is $3 trillion.