“Private equity” is a term that most people from around the world heard at least once. This is especially the case during the past few years since it has been gaining a lot of popularity. The problem is that few people actually know what the term means. With this in mind, it should be no surprise to see that people do not know how important private equity is for the modern economy.
Marc Leder says that a private equity firm simply looks for firms to buy, all with a medium or a long-term plan. The focus is to make these companies as profitable as possible. The idea is to identify a firm with a huge potential that was not yet fully realized. Then, the goal is to find a quick way to get profit. Eventually, companies are re-sold for a really high profit.
A private equity firm normally raises capital from various private sources. Such sources can be pension funds, wealthy people and so on. Profits are normally made really fast, with rewards that are highly enjoyed by the investors.
Governments really appreciate the work that is done by the private equity firms and the positive impact that they have on the country’s economy. This is mainly because of the fact that chosen companies are almost always made a lot more competitive. The entire market is practically improved. Statistics show that in the UK alone, since the year 1983, private equity firms invested over 100 million dollars in close to 30,000 businesses in the country. Numbers are a lot higher in the US.
Obviously, criticism also surrounds private equity firms. The most common negative mention made is that the process can be really harsh on the firms that are failing. There are cases in which companies are sold off fast, without thinking about what happens with the workforce. Redundancies can often appear, with many people being negatively affected. However, this is not something that always happens.
The goal of the private equity firm is to make as much money as possible. This is completely correct but it does not mean that the company will then be sold without taking into account the people working there. The focus is to simply help the firm to reach the true potential it has. Investors do this through the experience that they have, creating plans that work and helping firms to grow at the maximum rate possible.
While many say that after the takeover, it is the private equity firm that dictates everything, all behind closed doors, the truth is that this is not always the case. The decisions that are made are all about the current situation of the company. Those firms that do need strong management skills added will be more controlled than those that do not.
On the whole, modern economies are thankful for the work that is done by private equity firms. These commercial entities understand what it takes to make a company successful, so those chosen usually grow much faster than the competition.