Question

Explain the impact of private equity firm acquisition of manufacturing and retail firms.

Please answer the above question No plagiarism and 400 words limit  

Answer 1

Answer-

Private equity is a financial instrument that shows that an individual owns part of a company that is not listed publicly. Private equity is derived from high net worth business people as well as companies that buy shares of private legal entities or take control of public legal entities with a strategy to have them privately and removing them officially from the register of the public stock exchange. Private equity acquisition in manufacturing and retail firms has positive and negative impacts on business. Private equity firms work by investing its resources in companies that are in operation.
Reports show that private equity firms injected three hundred and forty-seven billion U.S dollars into two thousand and eighty-three legal entities during the year 2012 across distinct legal entities in distinct states of the United States. Some of the companies which were the biggest recipients of private equity include Texas and Colorado. The deals which private equity can take are of different forms, for instance, leveraged buyout, growth capital, and mezzanine financing. The demerits of private equity firm acquisition are depicted below.
1.   Big amounts of funds provided
When private equity is compared with other forms of funding, private equity can offer the highest amounts of funds which can be proved by the deals that are quantified in hundreds of millions of dollars by private equity. Therefore, with large amounts of money provided to companies, the impacts will be of great significance as the company will be able to hire more employees and be able to expand thus the efficient operation of the company.
2.   Incentives
The private equity legal entities always lend a lot of funds to invest such financial resources and are required to repay the amount borrowed and as we obtaining interest from their investment. To obtain such interest, private equity requires commercial enterprises to be successful. Shareholders in the private equity legal entities always have their funds injected into the business well and get supplemental funds out of their performance emoluments when the private equity firm makes a profit, thus they will have strong individual incentives to increment the value of the legal entity.
3.   Great returns
The alliance of great skill, major funding, and bonus issue might be very strong. Studies done by Boston Consulting Group discovered that over sixty-six percent of the private equity deals gave an annual return in terms of profit made growing by twenty percent and progressed a year later to profit growth of fifty percent from half of the deals of the private equity.
4.   Active involvement
Studies show that other forms of funding have less involvement with the running of businesses that borrow such financial institution funds. Private equity is much more different from other forms of funding because it will assist companies in concluding examinations or assessments all the aspects of the firm to check whether the business can maximize its worth.
Despite the distinct merits that the private equity firm has, it is also associated with demerits which are as follows.
A.   Loss of supervision control
In addition to funds, the company can fail to manage and control the direction in which the commercial enterprise has to take. With the active involvement of private equity firms, the business might lose control over some other aspects that the private equity will manage. Through their active involvement can be significant at the same time it simply means losing control of other elements that are basic to the legal entity, for instance, determination of plans for the firm, the mode of recruiting and selecting employees, and manner of firing them.
B.   Eligibility
The private equity legal enterprises are striving to find specific categories of firms to invest in. Therefore, the category of a firm that the private equity firms are looking for should be big enough to aid major financing made to them, and as well they have to provide the ability to make huge profits within a short period.
C.   Loss or dilution of the business ownership stake
This appears a major demerit. Ownership stake is lost since the business indeed obtains a lot of money injected into their enterprise for investment purposes but they have to offer much higher shares of the firm to private equity firms. The money lending institutions of private equity normally demand to have a higher percentage of the shares of the firm implying that the business will lose ownership to the private equity firms since they have a majority stake of shares.
D.   Distinct definitions of value
Private equity legal entities are in existence to make investments in legal entities, make them be much more valuable, and offer their stakes to buyers to earn them substantial profit which is good for entities that could be interested in creating much more value. This definition by private equity firm seems explicit and restricted because it is determined only on the financial value of the firm about certain dates about a period of five years after the first investment after the firm has sold its stake and has registered in profit. But for firm proprietors, the definition of value is broader and lay more emphasis on elements such as the associations between workers and the clients of the company and the image of the entity as well.