Dont copy from the past post write about private equity and

Don\'t copy from the past post write about private equity and summary from the article 500 words total

This assignment concerns the idea of \"private equity,\" a notion that is very important to the financial strategy of firms. 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.

https://www.nytimes.com/2009/10/05/business/economy/05simmons.html {Please read the report on Simmons mattress carefully} I

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.

Solution

Solution:

Title:- Private equity: A curse or a boon

What is private equity?

It is a form of a capital that is not listed on any public exchange platform. In another words money invested by private investors in the running private or public companies to make it private property that can be later used to generate more profit.

How private equity works?

Private equity is consist of private equity firms which is comprise of some private investors. They usually buy the whole company, so that they can gain full control of it and can take appropriate decisions without any restrictions to make it more profitable. For this purpose they choose Distress Company or extra-large public companies. These companies often feel liquidity crunch and in the event of lack of liquidity they usually don’t grow to their full potential. Private equity firms borrowed funds and buy these type of company completely. Private equity firms obtain their investment funds

from wealthy individuals, investment banks, endowments, pension funds, insurance companies and from various financial institutions.

After gaining the full control of the company they do everything in their power to make it more valuable. For this purpose they borrowed more funds and invest in technology, mergers and working capital of these companies. The main goal of theses activity of private equity firms is to increase the valuation of these distress companies or large public companies so that they can make profit by sell it to another investor or raise money through IPO’s.

Is Private equity a boon?

Many companies which are either distress or very large in size are often feel liquidity crunch. They are not capable enough to generate money by itself. This lack of liquidity makes them unable to invest in new technology, fulfil their working capital, etc. Also, due to diversification of ownership they are not able to take proper or hard decisions to make the company profitable.

Private equity firms generate lots of money through pools of investment. These investment can be used for buying new technology, advancement and other necessary mergers & acquisition. Also due to limited ownership they can use decision freely to make the company more profitable. This also create more new jobs and employment for the economy

Is Private equity a Curse?

Private equity firm’s main goal is to make the bought company more valuable. So that, they can sell it to other investors to make more profits. But making a company’s more valuable doesn’t make it necessarily make it healthier and profitable. After buying the company these private equity firms borrowed more funds for its further investment in these company. They used to show these loans or debts in the balance sheet of the company. It increases the debt of the company. Financial institution and banks are also not bothered to see whether the loan given to private equity firms, in the name of these companies are good or bad. Because they know that this debt will be transferred to the next investor. Private equity firms also make profits in the name of managements fees and commission to running theses companies. In this whole process these companies becomes overvalued. Although the new investments make them more valuable but due to increased debts their financial health becomes very poor. Which ultimately makes them bankrupt. The private equity firms make profit by selling it to another investor. When they sell the companies a huge amount of workforce are laid down by new investor which creates unemployment. On the other hand the investor suffers huge losses in case the company goes bankrupt.

Conclusion:

Private equity is very important in terms of investment as it promotes entrepreneurship and fulfil the liquidity crunch. It also creates employment when invest in new ventures, technology and advancement. But it is also full of risk. The most important part to pay attention is their exit. They usually sell out or exit from the company in 0 – 10 years and there is no obligation or restriction on it. It should be carefully monitored. Also they take major part of profit of the company to pay themselves without any monitoring. Which makes companies go bankrupt as they are not left with enough money. So, these thing should be regularise and should be more transparent.