Private equity
Charlie Sparkes
Introduction
Private equity firms - those that leverage the buyout of struggling companies, (supposedly) make them class leaders and then sell them for profit – have long been looked upon unfavourably by the general public of the UK. The typical view of these companies normally is founded upon the notion that private equity firms are run by the self-centred fat-cats of the city whose vast remuneration stems from firing honest workers then selling the company in question for a profit on the basis that it is more efficient/productive. I will embark on my investigation by looking into the relative merits of private equity firms for businesses owned by private equity firms (which I will call target businesses), and for the general public too iii . One of the main questions I will be answering is therefore: are private equity firms the catalysts hard at work in Schumpeter’s theory of ‘creative destruction’ (Coy, 2012) or do they needlessly harm an innocent worker in their quest to make profit? It is worth noting too that there is no debate regarding whether private equity companies themselves reap enough rewards to justify their practices. On the 24 th January 2007, many of the City’s top private equity partners (otherwise known as general partners or ‘GPs’) gathered at The Roundhouse in a celebration of all the is good about the industry. They launched the Private Equity Foundation which was funded by the leading firms of the city in a bid to improve the image of these ultra-capitalist plutocrats (Peston, 2008). The start-up fund totalled £5.1 million that evening which seems like a lot, however the total net worth of the individuals there was in excess of £10bn, in other words they gave 0.051% of their net worth to charity. Put into context, that same measure of generosity translates to a normal person on an average UK salary giving £1.13 to charity every month, or around 2 first class stamps, which is borderline rude given the objective of this charity and lavish ball in which it was conceived. Whilst these facts aren’t crucial to the debate here, it is worth considering how and why private equity is currently viewed in a rather unsavoury light in the UK. Nevertheless, how the public perceive private equity GPs shouldn’t sway our judgement when deciding on whether their work benefits society or not. You only need to acknowledge one of Thomas Piketty’s conclusions in his new bestseller ‘Capital in the Twenty First Century’ to assert that the talent and management expertise at a target company’s disposal could act as an egalitarian force in an economy; ‘over a long period of time, the main force in favour of greater equality has been the diffusion of knowledge and skills’ (Piketty, 2013). This is perhaps a paradoxical concept given the astronomical profits taken home by leading GPs at the UK’s leading private equity firms. Before I begin to make conclusions regarding the expected outcome of a target business, I will examine the structure and details of a typical leveraged buyout of an undervalued firm by a private equity company. First of all, a private equity (PE) firm will assemble an extensive list of a hundred or so potential companies that they are looking to invest in. Analysts and economists are then employed to whittle the list down to one or two companies that they believe have the largest potential for improvement whilst being undervalued. After selecting the final target company, the PE firm would invest money from the LPs (limited partners who invest in PE fundraising pools) and also some of their own capital in order to execute the leverage buyout (Private Equity Growth Capital Council, 2007). In the words of the Private Equity Growth Capital Council; ‘the essence of private equity is the alignment How Do Leveraged Buyout Deals Work?
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