This assignment concerns the idea of \"private equity,\" a notion that is very i

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. would you please elaborate and elucidate it thanks.

Explanation / Answer

A private equity investment could be beneficial or risky. If taken proper care and invested after a thorough analysis, it has a potential for numerous benefits for the customers. There are numerous benefits associated with a private equity.

Customer perspective

Private fund managers have a key role in giving out better returns than mutual fund managers. Choosing a right manager who would generate more returns by improving the operational efficiencies of the portfolio companies is very important. Such managers deliver excellent returns by reducing the risk factor and with cautious and prudent use of the leverage. Identify the strategies of the manager and how he utilizes his skills to maximize the returns will help to choose the right manager.

In a nutshell, a private equity has numerous benefits but everything has both good and bad sides. It is all depends on the judicious evaluation of the investors with regard to managers and the firm.

Business perspective

Another basic existence of the private equity firms is to increase the financial value of the firms in which they invest, so that they can be sold at a high value thereby generating more profit. It will increase the value of the firm in the years to come. This is the underlying principle of any organization. Therefore, in the perspective of a sold out business, a private equity investment will improve its value which is in terms of financial value. But a drawback is that the definition of value is limited for a private equity investment. It is short and time-bound financial value for a private equity business.

But a business has broad terms with regard to a value. For the firm, it is a holistic approach comprising of values on reputation and good will, customer satisfaction, ethical compliances etc.

Loss of control of the organization is another negative side of an acquisition through private equity. This could be seen in the case of companies like Dell where it is known as a private company now. The key management decisions with regard to hiring, recruitment are decided by the acquired company which affects the customers and existing employees, mostly contract employees. However, as discussed if it brings value, if the pros outweigh the cons in terms of long—term benefits, it could be considered as a judicious decision.

Family businesses

The case is advocating for family businesses to go for public funding rather than a private equity. However, it has drawbacks where all the business dealing, strategies have to be made public which can have a risk associate with regard to confidentiality compared to private funding.

The management decisions will have to be approved by a large number of shareholders rather than a board in case of a private equity acquisition.

Returns on investment is to be paid for the private investors which drive the company for more revenue generation, it is like an obligation for the company towards the private equity investors. But for going public, the money doesn’t have to be repaid. This can cause management to consider short-term goals rather than long-terms goals.

Therefore, considering the implications on long-term goals which is essential for a long run, a private equity funding is much better than a public funded company.

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