The end of the 20th century was characterized by the rapid development of the private equity market. Numerous funds were created by private equity firms to privatize giant corporations and improve profits (Demaria 10). The rise of this tendency can be associated with the appearance of potent actors who concentrated significant sums of money in their hands and looked for an opportunity to invest them to generate revenue (Burmester 34). However, this very motif preconditioned the ambiguous nature of the phenomena of private equity and gave rise to numerous debates about its impact on the development of the economy.
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There are diverse definitions of the given notion. Thus, private equity can be determined as specific not publicly traded investment funds organized by large institutional investors, university endowments, and wealthy individuals (Demaria 11). In other words, this sort of capital comes from accredited investors who can offer significant sums of money for extended periods hoping to derive benefit from this sort of deal (Burmester 23).
The majority of private equity firms engage in so-called leveraged buyouts when substantial sums are utilized with the primary aim to finance large purchases and own particular companies (Gadiesh and Hugh 65). Having conducted these transactions, private equity firms try to improve their states and revenues using a newly bought organization.
Another fact is that money invested in companies regarding private equity is not presented on the stock exchange. The given fact triggers numerous debates about the issue as it can also be associated with the lack of transparency and control. For instance, in 2015, claims to assess the functioning of the private equity industry emerged (Zeisberger et al. 56). To a greater degree, these were preconditioned by the high level of incomes and unprecedentedly giant salaries earned by employees working in the sphere (Burmester 45). At the same time, the use of money and assets that are not traded on a stock exchange complicates the monitoring of these firms functioning and results in their increased power to interfere with the work of other companies.
Moreover, private equity firms demand a majority stake to ensure that their funds will be secured. In such a way, even getting much more money, companies might experience losses because of the lack of ownership and control over their finances (Kelly 70).
Participation of private actors means a significant loss of control as they set new strategies and approaches to team management (Kelly 78). Under these conditions, organizations become deprived of an opportunity to impact their development and become observers. The case of Simmons Mattress evidences the given problem. Having experienced a buyout, the company lost its ability to control the situation and turned into a source of cash for the private equity firm (Creswell).
Altogether, private equity is one of the topical aspects of the modern business world. However, it should be considered a dangerous practice that lacks transparency. Moreover, it deprives other companies of an opportunity to control their functioning and finances which has a pernicious impact on their rise.
Burmester, Daniel. Private Equity: How the Business of Private Equity Funds Works. CreateSpace Independent Publishing Platform, 2018.
Creswell, Julie. “Profits for Buyout Firms as Company Debt Soared.” The New York Times. 2009. Web.
Demaria, Cyril. Introduction to Private Equity: Venture, Growth, LBO and Turn-Around Capital. Wiley, 2013.
Gadiesh, Orit, and Hugh MacArthur. Lessons from Private Equity Any Company Can Use. Harvard Business Press, 2008.
Kelly, Jason. The New Tycoons: Inside the Trillion Dollar Private Equity Industry That Owns Everything. Bloomberg Press, 2012.
Zeisberger, Claudia, et al. Mastering Private Equity: Transformation via Venture Capital, Minority Investments and Buyouts. Wiley, 2017.