Private Equity – Is It Win Or Bust?

It is only a year ago that The Economist declared Private Equity (PE) the new "Kings of Capitalism". Now, doom mongers are predicting its rapid demise. As so often in life, the truth lies somewhere in-between.

PE funds buy underperforming companies from their existing shareholders - often by taking them private from the public markets, turn them around and sell them on - ideally at a hefty profit. PE transactions are typified by the fact that the target's management team is incentivised by being given a slice of the equity in the business. The typical PE deal is therefore a management buy out (MBO), where existing management buys the company with the help of the PE house. Also typical is PE investors' desire to leverage the deal, meaning that they will use third party funding to pay for as large a proportion of the purchase price as possible.