How It Works
Appelbaum is quick to note that for smaller companies—say, those with a value under a few hundred million dollars—private equity can be a useful partner. PE firms can provide those smaller, regional companies with financing when local banks aren’t available, and smaller companies tend to actually have the sorts of inefficiencies that PE firms can fix to legitimately make the company run better. But smaller companies mean smaller profits.
Private equity has a great business model—if you’re a private equity manager. First, a PE firm raises a fund using money from large investors, including pension funds investing the, many of them in unions. The firm puts in a small amount of money and borrows a large amount of money in order to purchase a big company. That debt is owed by the company itself. Now the PE firm owns a company, and the company has a huge amount of debt that it didn’t have before.
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