Why does private equity have a bad reputation?
They are often seen as ruthless cost-cutters who gut companies and lay off workers in order to make a quick profit. And while it is true that some private equity firms do engage in these practices, it is important to remember that not all private equity firms are evil.
What are the cons of private equity investing? Private equity investments are illiquid: Investor's funds are locked for a certain period. As such, investors in private equity must have a long-term investment horizon and be willing to hold their investments for a few years, if not more.
Private equity funds are illiquid and are risky because of their high use of debt; furthermore, once investors have turned their money over to the fund, they have no say in how it's managed. In compensation for these terms, investors should expect a high rate of return.
The basic idea is simple: Private equity firms make their money by buying companies, transforming them and selling them — hopefully for a profit. But what sounds simple often leads to disaster. Companies bought by private equity firms are far more likely to go bankrupt than companies that aren't.
It's known as the “winner's curse.” In private equity investing, it's when a winning bid to acquire a company exceeds its intrinsic value or worth.
There is also a risk that private equity firms may be tempted to engage in actions that are unethical or socially irresponsible in order to boost short term returns. This can include actions such as layoffs, cutting employee benefits, and engaging in environmental practices that harm communities.
These companies now manage more than $6 trillion in assets in the United States alone. On paper, private equity is a paragon of capitalism. Yet the companies that these firms purchase and the customers they serve do not necessarily reap the same benefits.
It's no secret that private equity firms have a bad reputation. They're often seen as ruthless vultures that swoop in to buy up struggling companies, slash costs, and then sell them off for a profit.
Here are some reasons why some people view private equity in a negative light: Job Losses and Cost-Cutting:One common criticism is that private equity firms may focus on cost-cutting measures to boost short-term profitability, which can lead to layoffs and job losses.
Skeptics contend that some private equity firms prioritize short-term gains over long-term value creation, leading to cost-cutting measures, layoffs, and divestitures that may erode the long-term viability of portfolio companies and harm employees and communities.
What is the dark side of private equity?
Private equity firms could inadvertently impose an externality on the economy by reducing citizen-investors' exposure to corporate profits and thus undermining popular support for business-friendly policies. This can lead to long-term reductions in aggregate investment, productivity, and employment.
Private equity owners make money by buying companies they think have value and can be improved. They improve the company or break it up and sell its parts, which can generate even more profits.
There is also evidence that private equity acquisitions are affecting patient care. A study published in JAMA examined more than 50 hospitals that had been bought out and found that they saw a 25 percent increase in adverse events, such as hospital-acquired infections or falls, than non-private-equity-owned hospitals.
The 2 and 20 is a hedge fund compensation structure consisting of a management fee and a performance fee. 2% represents a management fee which is applied to the total assets under management. A 20% performance fee is charged on the profits that the hedge fund generates, beyond a specified minimum threshold.
Private equity exits were even more impacted in 2023. Private equity aggregate exit value of $234.1 billion in 2023 was down 23.5 percent from $306.0 billion in 2022, and down 72.0 percent from $836.1 billion in 20211.
You may be aware of the longstanding question about whether private equity returns have historically outperformed public equity. The simple answer is: yes, by a significant margin.
Private equity is a critical driver of societal wealth, far exceeding its role as a mere financial tool. It fosters efficiency and innovation, contributing significantly to overall economic prosperity.
Large private equity firms, she said, don't ultimately create wealth, but tend to extract it from companies through the use of leverage and other means. When selling companies, private equity firms frequently sell them to other private equity firms, often without full transparency.
Integrating a newly acquired business into a PE portfolio is a major transformation, requiring professionals who can align teams to a common vision, establish a strategic direction, manage diverse stakeholders, and guide employees to achieve the company's goals, even if some employees are skeptical or uncertain.
| Rank | Firm Name | AUM (in billions, approximate) |
|---|---|---|
| 1 | Blackstone Group | $881 |
| 2 | Apollo Global Management | $481 |
| 3 | Carlyle Group | $325 |
| 4 | KKR & Co. | $252 |
How does private equity make money?
Private equity firms buy companies and overhaul them to earn a profit when the business is sold again. Capital for the acquisitions comes from outside investors in the private equity funds the firms establish and manage, usually supplemented by debt.
Growth in the private markets over the past decade coincided with a period of exceedingly low interest rates. Low financing costs made more private equity take-private deals viable, and borrowers could more easily meet interest expenses when their cost of debt was low.
Private equity investing is done in private companies, which are not listed on public exchanges like the companies you can invest in via the stock market. While it has the potential for high returns, it also comes with risk.
Risk of loss: Overall, private equity investments involve a high degree of risk and may result in partial or total loss of capital.
Blackstone was also embroiled in a recent child labor scandal after a sanitation company it owns paid $1.5 million in fines to the Department of Labor for employing over a hundred child workers at meatpacking plants across the country.
