Native Instruments was only the tip of the iceberg. Private equity is pervasive in the music production industry, tied up with hardware, software and music distribution companies. How is this affecting the music you make?
Unless you’re big into finance, the first time you heard about private equity was likely in reference to Native Instruments. The German company, which was born out of the Berlin electronic music scene in the 1990s, was taken over by private investment firm Francisco Partners in 2021, which also scooped up iZotope and Plugin Alliance. Earlier this year, it was revealed that NI had declared insolvency, having accrued £250 million in debt by 2023.
How does one of the biggest music production companies, with top-tier products like Kontakt in its catalog, end up in such dire straits? The answer is entirely to do with the shocking business practices of private equity, a type of investment outfit that will swoop in on a struggling company and do whatever it can to wring a profit out of it - even if that means riding it into the ground.
And it’s not just Native Instruments either. Private equity firms own or are majority stakeholders in hardware companies such as Elektron and AlphaTheta, software outfits like Image-Line, digital distributors TuneCore and DistroKid, and even retailers Sweetwater and Reverb. They are everywhere.
Should we be worried?
What Is Private Equity?
Private equity operates differently than other types of investment firms. Unlike venture capital, where a person or entity makes investments in exchange for minority ownership, private equity firms generally purchase a company outright or leverage a hostile takeover through the purchase of majority shares. It does this with money pooled from a group of investors, who let the PE firms run the company on their behalf. The firm will then typically run the company for a set period of years, eventually either taking it public or selling it to another buyer.
Unlike venture capitalists, who want the company to succeed, the whole goal for the PE firm is to only generate profits for its investors. If taking the bought company to profitability will make them the most money, that’s what they’ll do. If, on the other hand, declaring insolvency or even closing up shop altogether is the more profitable path, then buckle up because it’s going to be a bumpy ride into the ground.
“Private equity firms own companies for an average of seven years,” explains journalist Megan Greenwell in her book on the subject, Bad Company. “They’re trying to sell for a profit, not grow the business over the course of decades. Investing in research and development, improving products or services, ramping up sales strategies – these are all years-long processes. Cutting costs, on the other hand, pays off almost instantly.”
This can also mean borrowing heavily to bring the company to a state where the firm and investors can make their money. Conveniently for the PE firms – and disastrously for the company – money is borrowed entirely under the company’s name. “Even though the firm is the company’s sole owner,” explains Megan, “it is not legally responsible for paying the money back. The company and its employees shoulder the risk.”
[quote align=right text="Unlike venture capitalists, who want the company to succeed, the whole goal for the PE firm is to only generate profits for its investors"]
Deal With The Devil
In the best-case scenario, when private equi