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LostInParadise's avatar

Is there anything nice to say about private equity funds?

Asked by LostInParadise (17718 points ) April 15th, 2012

Robert Reich gives this scathing criticism of private equity funds. What can be said in their defense? There must be cases where they end up increasing the net efficiency of a company. Suppose the profits were not treated as capital gains. Would they still be profitable? It is true that they work with other people’s money, but people are only going to use them if they show a good track record. As a liberal, it is too easy for me to just nod my head at what Reich says. I am trying to get a broader perspective.

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4 Answers

elbanditoroso's avatar

The only ‘good’ thing to say is that – if you are in them, you can go from moderately rich to VERY rich without doing a damn thing.

Jaxk's avatar

What a distorted view of private equity. First you must realize that private equity firms are in the business of taking a failing company and turning it around. Do they sometimes fail and dissolve the company, of course. No profitable company goes after private equity because it is too expensive. There are many other means of acquiring capital if you are profitable. Likewise private equity firms charge a lot (usually ownership) because they are failing or undervalued companies.

Private equity is the avenue of last resort. If your company is failing, labor costs are the first place to look. That is true when ever you are looking to cut costs because labor is almost always one of (if not THE) the biggest expenses. It’s not uncommon for poorly managed companies to let their labor costs get out of control.

The idea that it’s not thier money is ridiculous. When a bank loans money, it’s not thier money either, it’s someone else’s savings. That’s a red herring.

Private equity firms average somewhere between 10%-20% return. That’s because most of the investments fail. The ones you hear about generate huge returns to make up for the failures. There’s an interesting article about the different funds and strategies here

LostInParadise's avatar

@Jaxk , Thanks for presenting a different view. I did not realize that most of the ventures fail. I also did not realize that leveraged buyouts are involved. That means that the investors use profits and loans on the company to pay for their initial investment. That kind of thing always seems a bit shady to me.

YARNLADY's avatar

Private Equity Funds are a very useful tool that can jump-start the economy in bad times. It is not a good investment for the faint-hearted.

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