Introduction
Private equity is a source of investment capital, which is funded by individual investors or institutions. It's not listed on the stock market, thus unavailable to the general public. The main aim of private equity is to invest and acquire equity ownership in firms. The owners of private equity investments fund it by properly managing the raised money to ensure that its return on investment is high. The owners buy shares from private companies or from public firms, which have been delisted from the public stock exchange. Private equity is considered a high-risk form of investment with extended holding periods. Although it may seem like taking advantage of the unstable businesses and reaping a lot of money from them, I feel that private equity brings positive impacts to businesses and the society at large.
Through investment capital, Private equity help to revive almost dying companies, assist in refining products and organizing the management. In addition, it compensates all the shareholders for admitting to taking the risk. In terms of economy, private equity has contributed immensely to the economy in different ways; by investing a lot of resources into the emerging and high value-added companies. Through leveraged buyouts, private equity firms attempt to improve the financial status of a distressed company. The activities of private equity have a huge positive impact on the development of the stock market, which in turn boost the economy of a country. Private equity has helped in enhancing company's productivity by ensuring efficient use of resources.
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What would happen if an employee working in a company that is on its knee or almost collapsing if it finally comes to closure? Many people would lose their jobs and have difficulties supporting their families. Private equity helps to create job opportunities after a successful buyout by rehiring the employees that were fired and opening opportunities to others. The economy benefits from the sustainable employment via standard expenditure multiplier effects.
Private equity is a risky investment plan and can bring nightmares to you if not carefully thought. This is actually what happened to Simmons, the second largest manufacturer of the mattress in America. Due to its heavy debts, private equity firms showed their interest to buy it out and aggressively traded the company among themselves. Many private equity firms were interested to buy Simmons since they understand the steady cash flow that is generated from the industry. They would use the company's resources to ask for a loan to finance the business. All this is in the name of making a profit and not for the benefit of the company. In fact, Simmons went to court to seek protection from these firms since they have traded the company more than seven times in a span of two decades.
Overall, once a private equity firm invests in a company, almost all the activities are affected; especially the financial department, whereby most of the expenses are minimized and most of the resources directed on achieving short-term growths. The management of a company also benefits by being urged to implement business practices that are less entrenched and shun away from practices in widely owned public organizations or family-owned companies.
