Private equity investing is all the rage nowadays, fueled by an excess of available capital looking for a home. Technology firms of all stripes are receiving private equity funding, especially vendors in the financial technology space. And it's not just newer technology providers that are turning to private equity for funding -- for example, even Palm, the once-dominant PDA and smart-phone provider, tapped Elevation Partners for $325 million.
Recently, Palm's Treo has faced stiff competition from Research in Motion's BlackBerry, and it will soon have to square off against Apple's iPhone. But perhaps more important than the truckload of cash that will help restructure the company, Elevation Partners will bring in new management. And this is where the argument begins.
Not many investors will give away $325 million without some strings attached. Why would they? Proponents of private equity say that while the process brings in needed funding, more important, it can bring new perspective and insight to the management team. Normally, the private equity firm has influence -- sometimes a very large influence -- over the company's strategy.
Opponents say that while the equity is helpful, the new management -- often unfamiliar with the industry -- mucks up the company and turns it into something of little value at the end of the day. Both opinions are correct. Many fledgling companies and other struggling companies have been turned into raging successes with management that knows how to successfully grow small businesses. And sometimes small, successful companies have been destroyed by private equity managers who dream of earning big returns on the investment but do not know one thing about the smaller companies' respective businesses.
But what is really at a premium is not the cash -- it's the management skill. Just as a technology developer sometimes lacks business acumen, small business owners sometimes lack the skills to successfully grow a company. IT organizations in financial services are complex, large and essential to the business -- managing the many moving parts in an IT shop takes a skilled manager who understands the business, IT and the limitations of technology. Any private equity firm investing in financial services technology providers will also need similar management skills. Otherwise, they risk turning a once promising company into a bad investment.
Greg MacSweeney is editorial director of InformationWeek Financial Services, whose brands include Wall Street & Technology, Bank Systems & Technology, Advanced Trading, and Insurance & Technology. View Full Bio