7 things to know about the private equity industry

Matthew Yglesias in Vox:

Emily has written at length about private equity’s role in recent bankruptcies of major retailers and about Elizabeth Warren’s plan to reform and re-regulate the industry. Those are great long reads if you want to go deep, and, of course, the episode itself is chock-full of details.

But here are seven main takeaways:

  • The private equity business model doesn’t have a technical or legal definition, but it normally refers to leveraged buyouts — a private equity firm offers to buy a business with cash that’s mostly borrowed and the debt that accrues to the books of the acquired company rather than the private equity firm itself.
  • Because companies bought through the LBO process are now indebted, the business inherently becomes riskier and more fragile than it was before the acquisition — a small downturn might make them unable to cover interest costs and force them into bankruptcy.
  • At its best, private equity provides a new infusion of energy, money, and outside expertise that can help improve a company’s operational performance and set the stage for expansion.
  • At other times, the debt burden induced by the LBO simply makes it harder to raise capital for needed investments, making it even more difficult for the acquired company to survive and thrive in a changing business environment.

More here.