Private equity is eating the world: Why your next business partner is likely Private Equity.

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To borrow Marc Andreessen’s famous words, “Software is eating the world,” it’s now clear that private equity (PE) is not only devouring software companies by the dozens but also buying up hundreds of middle-market businesses across various sectors worldwide. As PE’s reach expands, more entrepreneurs are considering private equity as their next business partner, a pathway to liquidity, and even the “second bite of the apple.”

Let’s explore why private equity is rapidly becoming the go-to choice for business owners looking to scale, exit, or accelerate growth.

The Private Equity Phenomenon: A Quick Look at the Stats

Between 2000 and 2021, private equity returns have consistently outpaced the stock market. While the S&P 500 delivered a return of 6.9%, PE achieved an impressive 11% return. This outperformance has drawn institutional investors by the billions, solidifying PE’s place as a dominant force in the investment landscape. Let’s break down the key statistics driving this trend:

• Record Fundraising and Dry Powder: Over the past decade, PE funds have seen fundraising levels skyrocket—with total assets increasing significantly. In fact, fundraising speed has accelerated, with PE funds now raising capital in half the time it once took. As a result, these funds are under pressure to deploy their capital swiftly, pushing PE to acquire middle-market companies to generate return on investment (ROI).
• Increasing PE Funds: There are now over 18,000 private equity funds registered in the U.S. alone, a sign of the growing competition within the PE space. With funds proliferating, more and more PE firms are hunting for middle-market assets, looking to scale up their portfolios and create higher returns.
• M&A Dominance: In 2021, PE firms led over 20% of all M&A transactions—a number that has steadily increased. PE’s internal rate of return (IRR) hit 27% in 2021, outperforming other private market asset classes. McKinsey’s data shows that PE continues to dominate both the private equity and public market equity space, indicating that PE is in high demand.
• Diverse Capital Strategies: In the past, PE primarily focused on buyouts, but the sector has diversified. Today, PE funds engage in a broader array of asset classes, including secondary buyouts, minority investments, and growth equity plays. This diversification allows PE to become a one-stop shop for middle-market companies, ensuring they have the capital and expertise to drive success at every stage of the growth cycle.

Why Partner with Private Equity?

Private equity isn’t just for large corporations—middle-market companies are seeing significant value in collaborating with PE to accelerate growth and unlock new opportunities. So why should you consider partnering with PE? Here’s a breakdown of the advantages:

1. Access to Capital: One of the most immediate benefits of partnering with private equity is access to capital. PE allows business owners to leverage external funds to accelerate business expansion while removing personal guarantees. This enables you to scale your business without risking personal assets—ultimately reducing financial pressure while focusing on growth.
2. Expertise & Deal Know-How: Private equity firms are deal experts—they’ve engineered hundreds (if not thousands) of transactions, meaning they bring invaluable experience to the table. Their ability to spot pitfalls, navigate complex negotiations, and guide you toward profitable growth can save you time, money, and the “dumb tax” associated with first-time entrepreneurs who lack the same depth of experience.
3. Return-Focused, Dispassionate Investors: Unlike business owners who might prioritize lifestyle or personal goals, PE investors are return-driven. Their sole purpose is to generate high returns on investment, which means their approach is often more disciplined and strategic than that of an entrepreneur focused on day-to-day operations. This level of financial discipline is a major asset, especially for middle-market companies who need a solid growth plan.
4. ROI-Driven Capital Expenditures: Unlike many small-business owners who might feel inclined to make investments based on passion or loyalty, PE firms demand returns on every dollar spent. They analyze every capital expenditure (CapEx) to ensure that it will lead to measurable growth. This level of financial rigor can help you avoid the costly mistakes that many business owners make when expanding their companies.
5. A Strategic Rolodex: Another key advantage of working with private equity is the access to their network of portfolio companies, industry connections, and partners. PE firms can often introduce you to key players within their ecosystem, opening doors for partnerships, joint ventures, or even internal growth strategies that would be otherwise difficult to secure.
6. The “Second Bite of the Apple”: Perhaps the most significant benefit of partnering with private equity is the potential for a second bite of the apple—an opportunity for substantial financial gain after your initial sale. Many business owners sell their companies, retaining a minority stake in the form of rolled equity. When PE firms then grow the business, that equity often appreciates, giving business owners a larger payout down the road. In some cases, entrepreneurs end up making multiple exits over the course of several years, receiving multiple “bites” of their initial sale.

The Cautionary Tale: Watch Out for Professional Buyers

While private equity brings numerous advantages, it’s essential to remember that PE firms are professional financial buyers. They are experts at negotiating and valuing companies, which means they are unlikely to overpay for your business. Their goal is to secure deals at favorable terms, and you must be prepared for hard negotiations.

To avoid being taken advantage of, ensure you have experienced advisors by your side. They can help you assess the offer, negotiate favorable terms, and ensure you get the best deal possible, especially as private equity continues to expand into new sectors and increasingly dominate the middle-market M&A landscape.

Conclusion: Make PE Your Next Strategic Partner

As private equity continues to gobble up middle-market companies, it’s becoming clear that the sector offers a promising route for business owners seeking to grow, exit, or scale their companies. Whether you’re looking for capital, expertise, or a second bite of the apple, private equity could be your key to building long-term wealth.

If you’re considering the sale or recapitalization of your company, it’s crucial to understand the role of private equity in the current market and how they can help you unlock your business’s true potential. Reach out today to discuss how private equity can help you accelerate your business growth and secure the future of your company.

Are you interested in learning how to leverage private equity for your business growth, or how to best position your company for a successful exit strategy? Reach out for a consultation and discover the opportunities available in the private equity market.

Talk to the Experts at Merit Investment Bank!

J. Craig Dickens 
Chairman
Craig.Dickens@MeritInvestmentBank.com
253-370-8893

Securities offered through Finalis Securities LLC Member FINRA/SIPC. Merit Investment Bank and Finalis Securities LLC are separate, unaffiliated entities.