Private Equity is Like Cheap Sex

Some try to make private equity out to be the noble knight, who frees the damsel from distress and ensures a bright future. I think it's more like the hormone raging gigolo who is looking to love 'em and dump 'em.

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.

Sol Nasisi
Sol Nasisi: Sol Nasisi is the co-founder and a past president of BestCashCow, an online resource for comprehensive bank rate information. In this capacity, he closely followed rate trends for all savings-related and loan products and the impact of rate fluctuations on the economy. He specifically focused on how rates impact consumers' ability to borrow and save. He also has authored a wee

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Comments

  • Tabor23

    August 09, 2007

    I think private equity has its place. There are some companies that need to be shaken and stirred.

  • JRodgers

    August 10, 2007

    Ken Langone also had a organism from trying to defend Richard Grasso's pay package.

  • BradS

    August 10, 2007

    That's pretty funny, a organism. Ha!

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