FEATURE - EQUITY
Private o Sinners
MICHELLE P. TONNESEN
Few business have been more vilified over the last decade than the banking sector; but when a certain Mr Romney ran for US presidential candidate in 2012, the world’s scrutinising eyes were suddenly on the private equity industry. Now, what is the bone people have to pick with these guys – and what is it all about?
Here are the brief facts…Private equity is finance provided in return for an equity stake in potentially high growth companies. Instead of going to the stock market and selling shares to raise capital, private equity firms raise funds from institutional investors such as pension funds, insurance companies and high net worth individuals. Private equity firms generally take the shape of partnerships in which a group of managers use these funds, along with borrowed money and their own commercial acumen, to help build and invest in companies to nurture expansion, new product development, or restructuring of the company’s operations, management or ownership. The firms typically acquire companies and seek to increase their value over the course of several years in the hopes of realising a profit by selling them or through public stock offering. According to the British Private Equity & Venture Capital Association (BVCA), there are around 500 private equity funds managed in the UK. These currently back around 3,800 companies, employing approximately 1.2 million people across the world. The UK is the largest European centre for the management of private equity investments and funds.
Not only are a number of private equity funds located on the Isle of Man, as one would expect, but in fact a wide range of local companies are, or have at some point been, owned by private equity firms – from health and elderly care to transport and telecommunications businesses. Private equity is simply one method of corporate ownership alongside publicly traded companies. Now what’s wrong with that? In principle nothing – if you believe in capitalism, of course. Nevertheless, overall coverage of the industry has tended towards the extremes – either blasting the field for cutting jobs and killing workplace cultures, or defending it as vital to turning around ailing firms and boosting the economy in general. The bad reputation stems from the undeniable cases of aggressive, debtfuelled deals with the sole objective of turning around quick profits while spreading any losses to employees and other stakeholders in the companies they take over, thus generating high returns for its investors. Some critics argue that the nature of private equity nurtures a culture which normalises
Published on Feb 28, 2014
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