A number of myths have sprung up about the relationship between private equity and entrepreneurship, thanks to the fact that the sector's operations are by their very nature not public. So I've decided to tackle the more common misperceptions.
● Private equity and venture capital are the same thing. Absolutely not. Private equity (PE) generally backs established businesses using debt and equity, normally carrying out leveraged buy-outs of entire companies. By contrast, venture capital provides development funding to early-stage companies, mostly in the high-technology or biotechnology sectors. The private equity industry is probably 50 times the size of the venture capital industry – partly because, until recently, it has shown better returns. This confusion is compounded thanks to entities such as the British Venture Capital Association, which in reality is dominated by private equity interests – but politically it pays to play the venture capital card.
● Private equity takes control of and runs companies. The people who run a business backed with private equity are usually the same executives who ran it before. PE managers may turn up to board meetings once a month but they are invariably non-executives who would not be able to take command if the entire team running the operation walked out. Well-run PE houses partner with entrepreneurs to create value – that is the only way the system works.