In the last two weeks, I've seen more comments passed on Private Equity than can be imagined. What is clear is that most people have no idea what it is. The media is most responsible for this perpetuation of ignorance, as it mischaracterizes Private Equity at every turn, to the highly probably delight of the current administration. Alas, this article is not about media bias or politics. It is a primer on Private Equity. Let's call it Private Equity 101.
The first point that must be made is that Private Equity is not predatory. Plain and simply, it is not an ACTIVIST process. It is NOT corporate raiding. It is NOT a hedgefund. It is a COLLABORATIVE service. This means that corporations hire Private Equity firms to improve their businesses. There is nothing hostile about the activities of a Private Equity firm. They counsel and advise firms on what they must do to increase their level of success. I know this may come as a shock to some of you, but sometimes, in order to improve, a corporation must lay off a number of their employees. One way to improve your bottom line is to cut expenses. Employees typically make up the bulk of corporate expense. Naturally, this would be included in a cost cutting program. If cost cutting allows you to remain in business, their should be no doubt in taking this course of action. Corporations cannot print money, as do governments. Hence, they must make difficult decisions with greater frequency than our elected officials.
More often than not, companies require an infusion of capital to improve their businesses. Private Equity firms provide financing to their clients. Where do they get the money that they provide to the corporations? From the INVESTORS in the Private Equity firm. Who invests in Private Equity firms? The largest investors in Private Equity firms are PUBLIC AND CORPORATE PENSION PLANS. That's right. If you're a public employee or an employee of a larger corporation, chances are rather strong that your pension is invested in Private Equity. Corporate raiders and venture capitalists do NOT invest in private equity. They are engaging in predatory practices, while Private Equity firms are hired in an ADVISORY CAPACITY to firms that WISH to have this.
Finally, the Private Equity model is predicated on the continued success of the entity that they advise. That means that if the company falters or fails, the Private Equity firm will NOT be compensated. Compensation is tied to success. Hedgefund managers get paid, whether they succeed or fail. Corporate raiders collect on the breakup and aquisition fees, whether the deal is successful or not. Private Equity clients MUST SUCCEED in order for the Private Equity firm to succeed.
Most of you who are reading this are politically predisposed. You know who you're voting for in November. This was not an attempt to steer you to one candidate or another, since, as I just pointed out, you've already made up your mind. My goal was to add just enough to your store of knowledge to avoid hearing further mischaracterizations of what Private Equity is.