Is Private Equity Investing Bad for The Economy?
Whether Private Equity investing has a positive effect or a negative effect on the economy is a big topic of debate right now. There are many who can point out all the positives that occur in the economic structure due to private equity; and there are others who can offer examples of ways the economy has been harmed because of this type of investing.
Positive Effects of Private Equity
If you are working at a very disorganized company which is looking at going belly up, having a private equity firm come in and save it may just save your job. For those whose jobs are saved it certainly looks like a good impact on at least the local economy. Many also suppose that companies which are run privately will perform better than those which are publically owned; largely due to the higher level of accountability which is required. When a Private Equity group or firm invests in a company they will sit on the board as a general rule to ensure that the company upholds a high ethical standard. Many officials cannot let some things slide by when your investors are sitting on the board watching every move.
When a private equity firm invests in a company it is usually one in which they already have a high level of expertise and experience in handling. They are more likely to be able to bring in consultants which can enhance the business and help it be more productive or efficient. They have a vested interest and want a good return for themselves as well as their shareholders. These are also long-term investment teams such as those at Effi Enterprises. They are in it for the long haul and are determined to gain long term profitability. The type of patience required can help them stay with a company for 4 or 5 years or longer until there are higher returns in sight. Private Equity can be very good for every size investor.
When greed gets involved, Private Equity can get ugly. Many times a private equity firm can be bad for a company especially if they try to urge the company to incur much debt. This can be disastrous for an already struggling company. Handling funds this way can be very risky especially for smaller companies.
Another negative effect a private equity firm can have is if they lay of lots of workers trying to make the company more efficient. This does not happen a lot – but it does happen and it yields a negative effect on the economy. And if there are negative effects you will likely never hear about it unless there is something that goes terribly wrong. Private companies do not have to share financial reports; public companies do and must remain very transparent.
Private Equity is said to have created a group of super wealthy people. And the troubling part to many is that they do not pay taxes on this income like most of us do. This is because when money is made through investing you get a much lower tax rate called long term capital gains. A lot of times managers are paid by being allotted a certain percentage from set profits. Since their income comes from a type of interest it is considered investment monies; and therefore taxed at the lower rates.
What do you think?
Is private equity hard on the economy? It seems it works with a small or struggling business to help them become more established and this can be a great boost to the economy and save many jobs. Whether or not it is bad for a particular company may be determined by the firm’s perspective and procedures for improving the company they are investing in. But saving a company and keeping it afloat in a troubled economy is certainly a good thing for all persons involved.
Posted on July 9, 2012, in Business financing, investing, private equity, Private Equity Financing and tagged business, Private Equity Financing, private funding, VC, Venture Capital. Bookmark the permalink. 2 Comments.