Business Week just published an article on private equity where they quotes Harvard Economist Richard Jensen as saying that private equity succeeds because it allows companies to pare costs, reduce overhead, and not have to focus on the quarterly numbers The acquired company is forced to perform because if it doesn't, it will default on the massive debt that's been piled on top of it.
I think this is mostly rubbish. I know of several private equity investors and they go into a company to financially engineer it so that they can get their money out a year or two later via an IPO or some other liquidity event. Very rarely are they interested in helping grow the company. Indeed, in some cases a company with a solid balance sheet is suddenly laden with a massive amount of debt. The debt serves as a millstone around the company's neck reducing its flexibility and ability to invest and innovate in its business.
Look at Chrysler. The company is struggling not because of its financial situation, but because it's producing crappy cars that no one wants to buy. Does anyone really believe that saddling the company with additional debt and cutting its workforce is really going to help turn Chrysler around? Let's not be naïve. I predict the company will be chopped up and sold within two years.
In the same article, billionaire investor Kenneth Langone compared private equity deals to sex. Unfortunately, it's the one night stand kind.
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