Private equity should not be seen as evil
No matter your financial need, whether a startup looking for money or an established firm looking to expand, there are various methods of raising
capital available to you. One such form is private equity – an investment vehicle in which private investors take control of a failing or stagnating company in an attempt to restructure it and sell it at a profit. This article will highlight various success stories where private equity firms take over failed or stagnating businesses to turn them back profitable through strategic investments, operational improvements, and expansion strategies.
Private equity firms such as Blackstone, Apollo Global Management, Bain Capital, TPG and KKR generate billions every year from private equity deals. Though private equity deals can be highly profitable for these firms themselves, many can have serious repercussions for both companies they purchase and their employees – including bankruptcy risks in some instances. According to researchers, 20 percent of public companies taken private through leveraged buyouts (LBOs) end up bankrupt within 10 years, compared with 2 percent when not owned by one. When these deals involve $10 billion debt contracts then this failure rate rises further still.
PE firms have historically been criticized for their aggressive use of debt, focus on cash flow and margins, freedom from public company regulations and generous incentive packages for operating managers. This can create an environment of cut costs wherever possible while neglecting critical but non-revenue generating aspects of their businesses; or they could overconsolidate by purchasing multiple similar companies that compete against one another which then squeeze profits and cut jobs as a result of overconsolidation.
Private equity should not be seen as evil; indeed, those who understand its dynamics and make sound decisions may find great success with it. But this does mean that many have misconceptions about it and it’s essential that these misconceptions be clarified as soon as possible.
Dunkin’ Brands provides an outstanding example of how private equity firms can transform companies back to profitability through strategic investments, operational improvements and expansion strategies. The Carlyle Group acquired Dunkin’ Donuts and Baskin-Robbins for $2.4 billion in 2005; after several years of strategic expansion through acquisitions they resold it three times over, earning threefold returns on their investment.
