Understanding Private Equity: Leveraged Buyouts
Private equity is absolutely huge in the business world. If you are new to business and are looking for guidance on why exactly private equity is such a big thing, then please read this overview on private equity, leveraged buyouts and how they are done.
What is Private Equity?
Private equity is a much-used term in the business world. When you are not sure what it means and entails, it’s a pretty empty term. Private equity refers to the capital that is not listed on public exchange. Private equity consists of funds and investors who want to engage in buyouts of companies.
So, what then are leveraged buyouts? In this set-up, capital contribution and borrowed money areused to buy both private and public companies. This set-up is often used by investors when they want to buy the entire company, rather than just a few shares of a company. Buying the entire company means you ensure no one else can buy it, plus it gives the company funds to use for business enhancement purposes.
How do leveraged buyouts work?
Private equity deals and set-ups are usually managed by private equity firms with experienced counsel to secure deals. These firms pool together borrowed money and commercial acumen to buy companies for later resale.
They adopt various strategies for buying out established public or private companies. Usually, private equity can be a helpful for companies that have been around for a while and whichmight be struggling to keep up.
Private equity firms and investors can then buy out the company, injecting the company with new cash flow to use on expansion, or new product development for example.
What happens to the existing work force?
Depending on the deal, private equity does not automatically equal a loss of jobs or a severe change of direction for a company.
Although some companies will see a restructure of the workforce, it could also create jobs when a company is taken into a new direction. It’s all dependent on the type of business as well as the plans for the company.
Why is it so popular?
Leveraged buyouts might sound like an odd set-up, but when done successfully and properly, the money generated from managing private equity can involve millions of dollars.
Not to mention, it can secure a company’s future. It’s no surprise then that private equity firms are cropping up all over the globe! With stiff competition, it’s extremely important for these firms to build-up a good reputation.
This will then attract more high value business, thus basically ensuring the success of the management firm.
Are leveraged buyouts legal?
When done correctly, leveraged buyouts are legal and are an often-used business practise across the world. However, recently in the US concerns arose after the incline of so-called special dividends.
It emerged that many private equity funds encouraged companies to borrow even more money. This money then went directly into the private equity’s pockets.
This unethical set-up redistributes the additional money to the private equity investors, without adding new capital to a business.
Is private equity a bad thing?
Private equity and leveraged buyouts have two sides: it is seen by some people as a mechanism that destroys companies to make a bit of cash, whilst others view it as a method of creating value and jobs.
One of the main concerns is that private equity can force monopolies in the market, but many countries have rules, regulations and laws in place to stop this from happening too easily.
There will always be the shark in the private equity world, trying to make some quick cash, whilst respected firms are working hard to develop a successful client portfolio.