Why Private Equity is Leaving Millions on the Table

Private equity firms are known for moving fast. They buy companies, cut costs, try to make them more efficient, and then turn around and sell them for a profit (either as a whole or split up into pieces). It’s a solid business model, but after years of corporate consolidation and bottom-line focus, it’s starting to show cracks. 

Companies left and right are choosing cost over quality, and profits over people. 

Too often, the first thing private equity firms do after buying a company is strip it down. They reduce staff, pull back R&D investment, and focus only on how to increase profitability. Yes, this looks very good on next quarter’s balance sheet, but it also has long term ramifications – weakening the brand, hurting employee morale, and making it harder to grow in the long run.

There’s a better way. And private equity firms are in a perfect position to lead it.

Stop Stripping, Start Building

Today, many private equity firms act like glorified real estate moguls, flipping fixer-upper companies for short term profits. Instead, what if they took a similar approach to venture capital and made growth-focused investments only for established businesses? 

Private equity firms have something most business owners don’t: access to capital, deep networks, experienced advisors, and a portfolio of other companies that can create opportunities for synergy. Those assets should be rocket fuel for growth. 

So why don’t they take this approach? 

One reason is an over emphasis on short term profits instead of long term gains. I’ve talked in the past about how I think it’s a missed opportunity to focus on next quarter instead of creating a strong strategic vision for the future.

The other element to this, in my experience, is that most private equity investors come from finance. They’re great at unpacking numbers and tracking company performance, but they don’t often have backgrounds in marketing, branding, or customer insight. And with those skills comes the ability to see past today’s numbers to what’s possible tomorrow. 

When you take the time to understand your customers, your brand, and your competitors, you can find new ways to innovate and grow. You can enter new markets, launch better products, improve your messaging, or win back customers you’ve lost.

That kind of insight doesn’t come from a P&L statement. It comes from listening.

Use Market Research to Grow Smarter

If you want to grow your investments, not just manage them, the first step is strategic market research that clarifies where the company or brand sits today and where it could go in the future. 

Here are 5 types of market research every private equity firm should do after (or even before) making an investment:

1. Brand Health Study
   Find out how customers really see your brand. Is it strong, weak, trusted, or forgettable? How loyal are they? How easily or readily would they switch to a competitor if the products or quality changes?
   

2. Customer Journey Mapping
   Understand how your customers interact with your brand and make decisions. Where do they get their information from? What are the most important factors when making choices? Are there opportunities to increase purchase frequency or overall value?
   

3. Competitive Landscape Review
   Stack up the brand against your key competitors. That means today’s competitors and the aspirational ones you’re hoping to compete with in the future. What are they doing better in the eyes of the consumer? Where can you win?
   

4. Market Expansion Study
   Growth can come in all shapes and forms, especially when new leaders come in with a fresh perspective. Are there new places, industries, or customer types you could serve with what you already have? Some of the best innovations come from applying an existing technology in a new space.
   

5. Employee Interviews
   This is one of the biggest missed opportunities I see from all types of organizations. Instead of looking at spreadsheets to find efficiency gains, go and talk to your front line employees. Learn their experiences and how they believe things can be done better, faster, cheaper – it will be much more effective and also boost morale. 
   

Private equity has the power to do more than earn short term profits. They can create positive ripples through the economy by investing in and growing small and mid-size businesses to have a better shot at competing with corporate giants. They can grow companies, inspire people, and build real value. All they need to do is transition to this growth mindset, entertain a longer-term vision for their investments, and use real human insights to guide their decisions.