What is Private Equity?

Private equity firms have established a bad reputation for ruining companies, as they habitually buy companies with borrowed money while using very little of their own cash.  They later borrow even more money using the purchased company’s assets as collateral. 

Many times private equity companies will use part of that money to pay itself dividends to recoup the cash that they put down, so they can buy even more companies using the same scheme.  They pocket the purchased company’s profits instead of reinvesting. They collect millions of dollars from the purchased company in the form of special dividends and pay themselves fees for buying the purchased company, and then pay themselves fees for managing it. 

During all of this time, the Executives grant themselves pay raises.  Because of this investment scheme, private equity companies have been guaranteed a profit regardless of how the purchased company performs.  Wall Street investment bankers also cash in by collecting millions for arranging the takeovers and for selling the bonds that make the deals possible. 

The problem is that it plunges an otherwise health company into debt, leveraging the company to the maximum.  However, the private equity companies did not factor in the economy falling into recession in 2008 and the credit markets freezing.  During 2009, more than half of the 220+ companies that have defaulted on their debt were either owed at one time or still owned by private equity firms. (Standard & Poor’s)

With sales slowing due to the recession, burdened with debt, and unable to get credit, the private equity company’s next tactic is to take concessions from the workers employed by the company that they bought.  Generally, the first move the private equity owner makes is to hire an expensive, full-time, on-site union buster (if there is a union contract) so the company can gut the employees’ wages and benefits without any negotiations.  Generally, their first goal is to stop making contributions to the employee’s pension plan.  Later come wage concessions and workplace benefit concessions and eventual layoffs.

With the present economic recession, caused by Wall Street malfeasance and deregulation, the Golden Age of private equity is over for now; but many private equity companies are in desperate financial shape.