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Jan 31

What is Private Equity? Part 1

Private equity (PE) deals, specifically leveraged buyouts (LBOs), have been in the news quite a bit recently. We can thank Mitt Romney’s presidential campaign: rivals like Newt Gingrich, as well as newshounds, have been scrutinizing his experience at Bain Capital, a PE firm. This has cast the PE industry in the (harsh) spotlight.

For an industry very accustomed to flying under the public radar, this level of attention has presented a challenge. Why? For those unfamiliar with finance, the fundamentals of PE can be difficult concepts to grasp. Information is easily misunderstood. Successes and failures are often misallocated.

In simplest terms: PE firms supply equity capital to companies who can not, or would rather not, issue public stock in order to raise equity capital on their own (a la on the NYSE or NASDAQ). There is a lot more to PE than just that, but that’s the easiest way to think about it. I will get into more depth in a later post.

By the way, for a brief tutorial on “What is equity capital”, stay tuned to my blog!

A good example of PE just popped up yesterday. PepBoys, a popular, national chain of auto parts and service centers, agreed to be “taken private” by a veteran PE firm named The Gores Group. What does this mean? PepBoys will no longer be a public company. They will be privately owned. In other words, their equity will be owned by a small group of people, rather than by anyone with a brokerage account.

Why would they want to do this? We the public don’t know for sure, but there are many possible reasons.

  1. Being private can give companies flexibility, as they only have to answer to a handful of shareholders, and not hundreds of public shareholders, when performing acquisitions, divestitures, business expansions, product extensions, etc. Having to answer to the public for your every move can make a company feel hamstrung.
  2. SEC scrutiny for public companies is intense, and being private means you are subjected to (somewhat) less stringent reporting rules. This applies to scrutiny in (1), as well!
  3. Believe it or not, private companies and PE firms often have easier access to the debt markets, in large part because of the tight relationships between PE firms and lenders.
  4. A CEO might believe that her or his company is undervalued by the public, and therefore may seek to go private in order to achieve a more fair value for the company.

Whatever their reason, it’s clear that PepBoys would rather not continue to use the public markets to raise capital.

So you see, there is a lot to think about when considering Private Equity. By no stretch of the imagination is it solely vulture capitalism, nor is it all success and roses. The answer lies in between, and hopefully by paying attention to my stream, I might be able to teach you a little bit about it.
Note: All opinions contained herein are my own, and not necessarily representative of my employer(s).

1 comment

1 ping

  1. Jonathan

    Awesome details! I have already been looking for something such as this for some time now. Appreciate it!

  1. What is Private Equity, Part 2 » Allan Petersen

    [...] « What is Private Equity? Part 1 [...]

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