A Beginner’s Guide to Private Equity


The business of private equity is one that has been in the headlines for some time now – coming under the public spotlight even more since the beginning of the recession. In this article we shall discuss how these firms operate, and how they make their rather substantial profits.

Let’s begin by outlining what exactly private equity is. These companies are in essence investment companies. Their actual name relates to the methods they use to accrue enough money to invest. They do not go to the stock market and sell shares; instead they obtain their monies from private individuals – these sources are often funds for pensions or individuals with a substantial amount of wealth.

With the money they have borrowed and obtained, they buy firms that have previously been identified as not performing as well as they might. The aim is to turn these firms around and generate a profit. Once the company has started being profitable, the company will in all likelihood be sold on to another investor/buyer. It is thought that nearly 30,000 companies have been invested in by the private equity industry – amounting to around 80 billion pounds in all – since 1983.

Some people might ask – are these buy outs actually a positive thing? As far as the government is concerned, the process of private equity is a very positive thing, as it arguably helps to create jobs with speed and contributes high tax revenues to the treasury’s coffers. The private equity firms themselves point out that they improve the performance of UK companies with stronger management and market discipline.

On the downside, these investment firms sometimes have to make difficult decisions – such as laying workers off; there might be a profitable part of a business, and an unprofitable part – the one losing money might see job losses. These eventualities can make these kinds of firms unpopular in the eyes of the powerful press and therefore the population at large.

This asset stripping is not popular – but the firms say they need to make drastic decisions in order to make the given company profitable again. People in opposition to private equity say that the business has unfair perks in terms of taxation – the central focus of this concern if the taxation process termed ‘carry’.

Overall, private equity businesses are a central part of the UK economy and are unlikely to disappear. In the current economic climate they are likely to be a growing feature of the nation’s economy.

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