An Explanation Of Private Equity

The term private equity is one that can occasionally fill people with confusion

, but it is one that occurs a great deal in the news and media. In this article we'll attempt to shed some light on what in some people's eyes is a controversial aspect of business.

In basic terms, private equity is cash funds that are invested into firms that are not traded on a public basis, or on a stock exchange. It could also be funds that are invested as part of buyouts of publicly traded firms with the long term view to make them completely private firms.

While this article does not have the scope to go into detail about the various other terms associated with private equity, it can include leverage buyouts (LBOs) as well as venture capital, mezzanine capital, distressed investments and growth capital among other.

The basic idea behind any private equity deal is to find funds to buy a company that is not doing well, but one that the private equity firm believes could do well if it was managed properly. These deals are often based on being short term, and therefore with a view to producing a short term profit. Management teams are drafted in to take control of the given business and do the necessary things in order for the business to cut costs and return to growth.

Controversy

Many sections of society believe that that private equity can cause damage to people's lives, particularly in the way that it reduces workforces in a sudden and dramatic manner. This obviously affects the workers and their families as they no longer have the same income as they did. In the UK, for example, it might be thought that such sudden reductions in the workforce are possible because of employment laws that are in the favour of the employer. Others disagree with this, saying that a lean, modern economy needs to be able to adapt quickly in this way, and that means having a lean adaptable workforce that can be hired and laid off when required.

It is undeniable that in many cases private equity can actually save a business from disappearing. Many argue that at least this saves some of the jobs, if not all of them.

Private equity can be a complex business, but the overall aim is to make profit quickly. It needs to be quick because the money invested is often made up largely of loans.

by: Anna Stenning

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