Question

This assignment concerns the idea of "private equity," a notion that is very important to the financial strategy of firms. We had a brief discussion on Blackrock, which is a private equity firm. Many companies have recently been bought by private equity, including Dell. Private equity firms argue that they can re-engineer the firm without shareholders breathing down their neck.

But private equity can be a very dangerous thing. Private operators buy companies by borrowing money, then load the debt on the companies books, strip it of all value, and leave it to go bankrupt. A particularly egregious case involved the Simmons mattress company, and the same might be unfolding at Toys R Us.

In his 2014 letter to investors, Warren Buffet had warned about the ethics of this phenomenon:

Families that own successful businesses have multiple options when they contemplate sale. Frequently, the best decision is to do nothing. There are worse things in life than having a prosperous business that one understands well. But sitting tight is seldom recommended by Wall Street. (Don’t ask the barber whether you need a haircut.)

When one part of a family wishes to sell while others wish to continue, a public offering often makes sense. But, when owners wish to cash out entirely, they usually consider one of two paths.

The first is sale to a competitor who is salivating at the possibility of wringing “synergies” from the combining of the two companies. This buyer invariably contemplates getting rid of large numbers of the seller’s associates, the very people who have helped the owner build his business. A caring owner, however – and there are plenty of them – usually does not want to leave his long-time associates sadly singing the old country song: “She got the goldmine, I got the shaft.”

The second choice for sellers is the Wall Street buyer. For some years, these purchasers accurately called themselves “leveraged buyout firms.” When that term got a bad name in the early 1990s – remember RJR and Barbarians at the Gate? – these buyers hastily relabeled themselves “private-equity.”

The name may have changed but that was all: Equity is dramatically reduced and debt is piled on in virtually all private-equity purchases. Indeed, the amount that a private-equity purchaser offers to the seller is in part determined by the buyer assessing the maximum amount of debt that can be placed on the acquired company.

Later, if things go well and equity begins to build, leveraged buy-out shops will often seek to re-leverage with new borrowings. They then typically use part of the proceeds to pay a huge dividend that drives equity sharply downward, sometimes even to a negative figure.

In truth, “equity” is a dirty word for many private-equity buyers; what they love is debt. And, because debt is currently so inexpensive, these buyers can frequently pay top dollar. Later, the business will be resold, often to another leveraged buyer. In effect, the business becomes a piece of merchandise.

So workers and customers suffer, while financiers make money.

In this assignment, please write a 500-word analysis of private equity. Give your essay an original title. You can be pro-private equity or anti. I want you demonstrate how well you understand this concept.

Answer 1

Private Equity: A Bane

Private equity is a source of funds for companies that make investments in other companies. In other words, a private equity firm helps a company financially when the owners of the company want to sell it or to make money out of the company. There are many other ways of making money from the sale of the sale of the company but the private equity method is more popular these days. The private equity firms are well organized institutional investors as well as individuals who buy a company. This kind of equity is not listed in the stock market. So, there is no organized body that controls the functioning of private equity unlike public equity which is regulated by various bodies and is driven by demand and supply. The owners of a company will want to sell and make money out of it only when the company has not been performing well or up to the expectations of the owners. In such a situation only the owners feel that they should sell it to a private equity firm. The private equity firms source money, buy a company and change the way the company operates. It imposes different ways and means so that the operations of the company can be improved. The employees and workers of the company are worried as the ownership of the company has changed and their job might be at risk. The private equity firms are not answerable to any one regarding their policies and measures taken. This affects the company. Though the operations of the company might improve due to the steps taken by the private equity firm, it might lose the trust and faith of the people who had contributed in building up the company. The future of the company becomes insecure and there is no guarantee that the private equity firm will continue with the company. If it finds another private equity firm that is interested in the company then it will sell the company to them. Thus, private equity is not at all a good option. It should not be practiced by the owners of any company. When the owners work hard and build a company then they should be patient enough to tolerate and go through the tough phases of the company also it cannot be sold off for a certain amount of money to an outsider who has never been related with the working of the company. Hence, I am of the opinion that private equity firm should not be practiced by a company. Instead the management should try to introduce new and innovative methods in order to increase their productivity and improve them.