Are private-equity firms job-destroying monsters? Or are they knights in shining armor, riding in to fix troubled companies and make the economy work better?

When you have a presidential candidate who used to run a private-equity firm, the arguments tend to shed more heat than light.

Category: Venture Capital, Video

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One Response to “What Do Private Equity Firms Actually Do?”

  1. dr dre says:

    Disclosure: I am a partner in a small private equity firm so I am speaking from experience. Also I worked in a family owned company for nearly 2 decades As an executive, so I have non private equity experience. These two positions give me perspective on the business.

    There are all sorts of private equity styles and approaches – some, like the LBO model to me are more of a technique than a value add to the underlying business. Here you buy a firm that is stable or growing, use a lot of leverage, cut costs where you can and/or grow revenues. Over time debt is repaid, equity builds and the company is resold. the result is there is a meaningful gain in the investment equity in the firm. The private equiy shop gets a nice carried interest in this equity gain when realized. There is nothing wrong with this – in fact value has been created for the shareholder. But often no value has been created for the company.

    Our firm’s style is classified as ‘growth equity’ – here businesses who are profitable nd growing require capital and expertise to go from sophomores to seniors. We provide advice, connections, capital and patiently work with management tomorrow their businesses over the years. These tend to be job creating opportunities at the same time they grow shareholder value. M

    So there are two extremes of private equity illustrated. Not casting judgements on either one but some may be perceived as less honorable than others as some may eliminate jobs and others create jobs

    As for Romney, I believe the practice of private equity is less important than what he actually did with Bain capital – being an executive and an entrepreneur (he was responsible for developing the private equity practice). To me these traits are very important for the nations chief executive.

    Finally I think we need to look at his track record as a family man to understand his ethics and honor. A friend once told me I don’t do busieness with people who cheat on their wives – chances are they will cheat me, as there are less consequences to it. Conversely, a man who a loyal husband and ather for so many years is likely to be of solid character – the guy who tends to do the right thing.