Private Equity Is Just Another Tool Chest

There has been a lot of discussion recently about private equity and whether private equity is a good thing or a bad thing.  Like most things in life, it can be both, and it really depends on how it is used and who is using it.

First, there are several kinds of private equity as not all private equity is the same.  Private equity that invests in start ups, sometimes referred to as seed money, is one form of private equity.  Other forms of private equity take a small company to its next level with an infusion of cash and managerial talent.

One thing about private equity is that there is always an exit strategy.  This exit strategy can be selling the company to a bigger company that can use the smaller company to build the bigger company into a still larger corporation.  Some exit strategies call for an IPO, initial public offering, like in the case of Facebook's recent IPO last week.

Private equity for the most part uses other people's money such as wealthy investors or institutions that invest such as public pension funds or state insurance funds.  The private equity management receives a fee for their management skills and a nice slice of the profits when the exit strategy is concluded.

Some private equity firms are good at marketing themselves and building huge private equity funds, but marketing well and managing well are two very different sets of skills.  I have seen private equity funds that are filled with talented and educated people do very well for their clients and themselves, and I have seen private equity people that invest in a hardware store chain that don't know the difference between a claw and a ball peen hammer.

For the most part, private equity is a good thing because private equity invests where commercial banks don't want to risk their capital.  At least that is the way it used to be in the old days. Now commercial banks are investment banks and they risk their capital everyday on derivative bets few people in the organization understand.

So, in conclusion, let me say private equity like any other tool in finance is only as good as the people using that tool.  As my father used to say, just because you have a big tool chest doesn't make you a craftsman. It just makes you a person with a lot of tools.  Knowing how to use them skillfully is a whole other ball game.