Understanding Private Equity

Many of us have heard the term “private equity” a lot without understanding what it is. Here’s a quick overview. In a nutshell, private equity firms typically engage in the following activities: Raising money from private investors such as wealthy individuals and institutions; researching and buying companies; guiding and/or making cost-cutting improvements at those companies; selling those companies for a profit. At their best, private equity firms might be rescuing a company that’s on shaky financial ground and offering valuable guidance to help right the ship. There’s a darker side to private equity firms, though. For one thing, many don’t have a long-term view regarding the companies they buy: They want to boost their value and sell at a profit. Many times, thousands of workers will be laid off in the interest of cost-cutting. There are several different kinds of private equity organizations. Venture capital (VC) enterprises tend to make somewhat risky investments in young, growing companies before the companies have IPOs (initial public offerings) and issue stock to the public. Companies such as Apple and Microsoft once tapped venture capital. Leveraged buyout (LBO) outfits will buy big public companies with a lot of borrowed money. The LBO company will often take the company private and use much of its excess cash to pay off its debt, often while trying to improve the efficiency of the company. Eventually, the acquired company will be sold to another buyer or to the public, via an IPO. Private equity firms aren’t required to release quarterly performance reports or audited financial statements, as public companies must do. They enjoy some tax advantages as well. Money invested in private equity is often tied up for at least several years. Some of the biggest private equity firms today are The Blackstone Group, Kohlberg Kravis Roberts (KKR), Warburg Pincus, The Carlyle Group and Apollo Global Management. The biggest LBO deals have included KKR’s purchase of RJR Nabisco in 1989 and Blackstone’s purchase of Hilton in 2007.