Private equity firms buy companies with borrowed money, hold them for 5 to 7 years, and sell for profit. Critics call it predatory value extraction. Supporters say it fixes broken companies. The debate hinges on whether leverage and expertise create real value or just extract it.
Chapters
What is private equity? Well, thankfully the clue is in the name: private equity. Private because investments are made in private companies and not publicly traded companies. Equity because private equity funds take a minority, majority, or complete ownership stake in a company. Private equity actually encompasses a wide range of alternative asset classes, from venture capital and growth equity through to turnaround funds and buyout funds. However, when someone mentions private equity, they're usually talking about buyout funds, where the PE fund, backed by pension funds, endowments, sovereign wealth funds, and high net worth individuals, buy entire companies. Their intention is to improve the company's performance over a 5 to 7 year period and then sell it, making a healthy return. A private equity buyout's secret sauce is debt. By buying companies with a mixture of debt and their own funds, PE funds can effectively buy more companies, generate more profit, and therefore receive a higher return on their invested capital. By using debt to turbocharge returns, private equity has become one of the best-performing asset classes over the last 10 years, as more investors go hunting for returns in alternative investments. However, private equity is not without its critics. Skeptics argue that private equity exemplifies the sharp end of capitalism, pumping companies full of debt, extracting cash and assets, and then selling for a quick profit. Advocates, on the other hand, would say that private equity investors dedicate their time, talent, and money to turn underperforming companies around to the benefit of all stakeholders. Barbarians at the gates or saviors of capitalism? I'll let you be the judge.
