Most people from around the world already heard the term “private equity” but this does not mean they actually know what it means. This is a term that is causing a lot of confusion at the moment. Matias Campiani mentions that the real problem with private equity is that it is controversial. Everything controversial leads to debates and associated misconceptions.
The private equity firm is basically looking for other firms to buy for the medium or long-term in order to make them profitable or more profitable. Many describe this as being an art because of the fact that the goal is to identify the firms that have the highest possible potential, one that was not yet realized. Then, the firm is looking for the fastest route towards profitability, all before the company is sold for substantial profits.
A private equity firm is raising its working capital from sources that are private, as opposed to those firms that do so from public sources. These sources are often wealthy individuals and pension funds. Everything is practically focused on a simple idea: profits are to be made as fast as possible and rewards would be enjoyed in a short time.
What is interesting is that governments from all around the world have stated that the private equity firms are highly beneficial to the economy because of what they contribute. Market discipline is improved and companies that they invest in become increasingly competitive. Ever since 1983, private equity companies in the UK actually invested over 80 billion pounds in close to 30,000 businesses.
Obviously, because of the fact that we are dealing with a lot of money, criticism did appear and in some quarters we do see this as everything being too harsh on the firms that are failing. Company assets often end up being sold off without any regards to how the workforce is affected. The process known as “asset stripping” can result in various redundancies. Much hardship appears for families.
The second criticism we can highlight is that really important decisions are going to be made by a group of people behind closed doors. There is normally little to no dialogue that happens between involved parties.
The good news is that although there is the possibility that jobs will be lost and that companies are not going to make a huge profit, when being chosen by a private equity firm it practically means there is a high possibility that the business can be taken to a whole new level. Every single business manager out there is interested in business growth. Private equity companies manage to do exactly that.
Private equity firms cannot possibly survive without really large investments. Some will say that this can simply lead to speeding up ill-effects that are present in a firm, making it reach profitability before they are ready. In the long-term this can turn out to be problematic. When the business reaches a specific profitability level, the private equity firm can simply end up losing interest and want to remove the investment that was done.