Private equity is making quite a buzz in the trades industry. I can hardly go a day without it being brought up — on a trades podcast, in an interview with a potential job candidate or someone on LinkedIn reaching out to me about it.
Even though private equity is by no means something new — and has been active in many other industries for a long time — it has been making more moves in the plumbing and contracting industry in recent years.
What is private equity?
To get things started, before I add my own personal insight, here is a brief overview of private equity if you prompt ChatGPT for information:
Private equity refers to a type of investment where funds are directly invested in private companies. Here’s a breakdown of how it works.
Private Equity Firms — These are investment firms that raise capital from various investors, such as pension funds, wealthy individuals and institutional investors.
Acquisition — The private equity firm uses the pooled capital to acquire stakes in private companies. The goal is often to take control or significantly influence the management and operations of these companies.
Value Creation — After acquisition, private equity firms work to improve the company’s value. This can involve restructuring, improving efficiency, expanding markets or other strategic changes.
Exit Strategy — After enhancing the company’s value, the private equity firm looks to sell for a profit.
Returns — Investors in the private equity fund receive returns based on the profits made from these sales.
Private equity can offer high returns, but it’s also risky and involves a longer-term commitment, usually ranging from 5 to 10 years. It’s often used to fund startups, expand companies, or turn around struggling businesses.
Money talks
I’d like to break it down a little further and give my perspective on what it all means for private equity, stakeholders, middle management, frontline employees and customers.
Private equity acquisitions in the trades industry space represent one thing — money. They aren’t acquiring companies to make the trades (or the world) a better place. Their entire reason for existence is to turn a profit. The way they do that is to underpay for a company in hopes of making it perform “better” (at least from a profit and loss perspective) and then turn around and sell it again. That is how they make their money.
Some of the most common ways they do this are to:
- Cut overhead by eliminating and/or consolidating roles which results in fewer jobs in that market and an increased workload on the remaining staff with no commensurate increase in pay to make up for the additional duties.
- Centralize or offshore administrative jobs such as customer service, dispatching, accounting, human resources, etc., again resulting in a hit to the company culture and fewer jobs available in that market.
- Make big changes to other fixed-cost expenses such as cellphone providers, health insurance, retirement, payroll software, etc. under the pretense of getting better results with more buying power. The pitch is that with all of the companies under the same private equity group pooling their resources, they can negotiate for better rates. This sounds good in theory. In practice it is not always the case. Through my firsthand experience, the health and retirement benefits actually got worse. The match and vesting period for the retirement became less favorable for the employees and the health benefits got worse and more expensive.
- Freeze pay raises.
- Compress wages, which is where you let longer-term, higher-paid employees go with the purpose of replacing them shortly thereafter with someone who is cheaper.
- B shares or B stock. This helps to retain key employees based on a promise of a later payout. The reason that I list it here is that it will then be used as a reason to not give raises or to pay more to existing staff as they absorb more responsibilities that are incurred from downsizing the overhead team.
The max potential upside from all of this is increased profitability resulting in a higher valuation and quicker turnover to a different private equity group, which really only benefits the private equity group and shareholders. Everyone else at the company has the joy of doing it all over again with the new private equity group, which will of course be looking to increase profitability and decrease costs. And the cycle continues.
Copy and paste management
Another common thing that happens is that the private equity groups think the same strategy and style that has worked in other markets can just be copied and pasted in any new market where they make an acquisition. This often results in dissonance and can be detrimental to the acquired company’s culture.
One of the first questions I ask potential job candidates is, “What has you looking for other job opportunities?” The most common response by far is something like, “My company was purchased by a private equity group a few months back and I hate it there now.” When I ask them to elaborate, common themes emerge: I’m just a number now, I no longer have a voice there, they are changing the pay structure, benefits are worse, they are laying lots of people off. All things that are straight from the private equity playbook.
I have not done an extensive interview process by any means, but of the many prior business owners I have spoken with over the past few months, every single one has told me that if they had to do it over again, they would not sell to private equity. One of them even shared with me how after the fact, they found out that they were no longer going to be allowed to give out Christmas bonuses to their employees that they had been doing for years. They also let me know that they planned on doing it anyway.
Get educated
All of this is creating a great opportunity for small- to medium-sized businesses. I talk to many people at such companies all over the country and they are thriving. Employees are engaged and part of the process. They are valued and have agency because they work with the decision-makers on a daily basis rather than having to answer to a private equity group that is in another state. Private equity is driving experienced employees away in droves, which is making it much easier to hire qualified employees. Customers get a better experience because they are being served by employees who are engaged.
You may be reading this and thinking, “What’s your point? And also you seem pretty biased.”
Fair assessment.
My main point is education and telling both sides of the story. Private equity acquisitions may not always be bad, but they are most definitely not always good.
As for bias, I am a little based on my personal experiences. But I want to educate tradespeople on the dark side of private equity and give enough information for them to make an informed decision on where they stand with it.
