May 31, 2012
In a recent column posted to Reuters.com, Jack and Suzy Welch weigh in on political rhetoric about private equity coming out of the presidential election and provide a great explanation of how private equity works:
Let’s start with what private equity firms do, which is actually very simple. They buy troubled companies with the intention of fixing them up. In time, they hope, that will result in a big payday when the new-and-improved business goes public or gets sold to an eager strategic acquirer. Yes, sometimes these turnaround efforts fail, and companies and jobs are lost…
The key point here is that PE firms virtually never buy jewels – happy, fast-growing companies with glistening profits. After all, such companies have access to other kinds of capital; they don’t need private equity. And frankly, private equity is generally not in the business of polishing things up for a low-multiple return. It’s in the business of reinvention and rebirth, with fireworks at the end.
So what do private equity firms bring to the table? The Welch’s point out that private equity investors bring operational and managerial expertise to the companies they buy, strengthening the companies over the long-term:
Top private equity leaders also are typically very good at talent management. You never hear that, but it’s true, and here’s why. Everything about a successful turnaround depends on people – picking the right ones to resurrect the broken company and placing them in the right jobs from top to bottom to get it all done. Think about it. In a well-run company, people make all the difference. Imagine how much more important they are in a rescue scenario. Which is why private equity people end up being smart about building great teams – and doing so quickly.
To read the full article on Reuters.com, click here.
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