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Private equity

Private equity funds invest in companies equities in order to take control of them. The shares held by these funds are not traded on financial markets. Their influence is moderate : According to Bain & Company, the global assets they hold is up to 3% of the value of listed companies assets.

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Their method is simple : take control of the companies, Focus them on the heart of their business, reduce costs, manage effectively their assets, and remunerating managers based on their performance - ensuring that they act in the company interests. After a three to five years restructuring period, they generally (re)introduce the company on the stock market. Improvements to the company during this period increase its market value in principle, and generate the compensation for the private equity funds.

These funds act as the assets owners. Not only they do provide capital but also advice. Their expertise enables them to understand the company. Their large financial interest regarding its success led them to get involved. Their control of the company gives them the means. Shareholders of listed companies do not generally meet these essential roles.

Private equity funds are more patient than shareholders with few information on short-horizon in which the investment is liquid. They maintain a close relationship, of medium to long-term, with the company and its management. They care about the strategy, not quarterly results.

Their performance shows that their approach works. They generate a financial return often superior to the shares of listed companies [1], proof that they create value and have a beneficial influence on the companies they bought. In terms of job creation, a recurrent initial reduction in positions is more than compensated by massive hiring once the restructuring is paying off. thus, in recent years in the UK, companies owned by private equity funds have seen their numbers increase by 9% per year, compared to 1% for companies in the FTSE 100. [2]

Private equity funds primarily finance SMEs, companies that often cannot have access to other funds for their development, poorly managed firms or firms in difficulty close to bankruptcy. in the latter case, they will often inject the capital needed to save them, and take the necessary steps for their revival. This sometimes results in painful restructuring accompanied by layoffs. But again, do not blame the doctor putting the patient back on his feet after a period of transition, without him he would remain in trouble.

EE , Pierre Chaigneau , July 2011

Article also available in : English EN | français FR

P.S.

Private equity and industry performance, http://hbswk.hbs.edu/item/6348.html

Footnotes

[1] The performances depend on the skill of the fund managers. In the U.S., from 1969 to 2006, the top 25% of private equity funds generated an average return of 39% per year, according to Bain & Company.

[2] Source : Mervyn E. King, The Financial Times, april 4, 2007.

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