Private equity

According to The Economist magazine there was a 60% growth in the use of the words private equity in the financial media between April 2003 and April 2005. Looking back over the past decade the phrase has seen a 1,000% increase in useage. So what’s going on? The answer, in a nutshell, is that short-term institutional thinking (pension companies and such like) is undervaluing assets. More specifically, certain public companies need to be re-structured but senior executives are afraid of making any substantial decisions that will pay back over the longer term because the share price of their company will suffer in the short-term. In many cases things have also become very comfortable which is the last thing you need for innovation and change and public companies are being strangled by legislation and compliance. In other words, there is a significant disconnect between what a company is theoretically worth and how much it is being valued at by public equity markets. A solution, and a very profitable one, is private equity that taps into what is effectively the almost unlimited amount of low-cost credit that is currently available. Of course, for people with long memories this is essentially the same as asset stripping, which was in vogue in the 1970s and early 1980s. The difference is that the asset-strippers came a cropper due to high interest rates which, of course, we don’t have — yet. So for the moment private equity has its place in the sun, along with financial engineers some of whom have built empires on foundations of sand.

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