Our class read the 2014 book by Eileen Appelbaum and Rosemary Batt, Private Equity at Work. Private equity and activist investors use other people’s money–usually pension funds or hedge funds or sovereign wealth funds–to buy up companies. The intent is to make the asset value of the firm increase and then sell it off–within three years. If that doesn’t look possible, private equity extracts as much cash as possible from the firm before selling it so as to avoid a loss.
Here is what the students had to say about private equity:
Financial engineering is acting like termites for the industries in the United States and it cannot be overlooked. Private equity firms appear to be saviors for dying companies externally. However, like termites weaken the furniture, private equity firms internally disable companies that are in need of help.Puja Thapa
How the private equity firms go about actually buying and selling the companies is by putting down very little of their own money and borrowing the rest from investors and banks, then the private equity firm will do anything to make it look like their companies are doing well. They are out to lie and deceive people to manipulate the market, then sell the portfolio company for a larger amount than what they had purchased it for. In other words, the private equity firms try to increase asset value while removing cash to sell the firm for a larger profit. The return on equity is the most impressive thing to me, how they can always make a gain as long as they sell it for just a little more than what they paid…The private equity firm will always make profit in today’s economy if no regulations are made to stop this.Jesse labarre
During the process of increasing asset value, many PE firms will hire their own consultants to change the management of their newly acquired portfolio company. This process will usually increase the selling price of the firm but can wreak havoc on the company’s product quality and operations. The PE firm most often has no interest in the acquired firm’s long term success.. During this process, the PE firm may also acquire debt for the company. If the investment goes awry and is not successful, then the PE firm is not responsible for this debt, this is facilitated by a loophole in the legal system.Virginia van zandt