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The Forum > Article Comments > So what exactly is private equity? > Comments

So what exactly is private equity? : Comments

By Jonathan J. Ariel, published 3/6/2008

Book review: 'Lessons from Private Equity Any Company Can Use (Memo to the CEO)'.

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In the UK back in the sixties, it was called asset-stripping, with Jim Slater as asset-stripper-in-chief.

The reason it managed to get such a bad name was because it was an inherently lazy and deceitful process.

It was simply a way for investors to enrich themselves by buying a company, flogging off the less-profitable bits, sacking as many as the business could stand without falling over, and then getting out before the husk collapsed under its own lack of weight

The late Lord Hanson refined the process in the eighties, having started in the Wiles Group, a Slater satellite. This is what the Wiles Group said they were about:

"our method . . . lies in using the most up-to-date systems of management structure and control. Strict financial supervision is instituted . . . to ensure prompt implementation of sound business methods, but individual management is given maximum opportunity to act on its own. Once the top executives of our companies have been appointed . . . they are given freedom to run their own organisations."

Sounds familiar. So, how did it all pan out?

Here's a comment from this gent's obituary - traditionally, a place where only the nice bits are aired.

"[there was] a continuing, and often justified, stream of criticism that all Hanson and White did was to "asset-strip", to sell off many or sometimes most of the subsidiaries of the firms they acquired, leaving themselves with a core of businesses which cost them very little. Their technique was only briefly fashionable in the heyday of Thatcherite entrepreneurialism in the mid-1980s but it did have unfortunate long-term consequences, not only because of the techniques themselves, but also because neither Hanson nor White encouraged, or indeed allowed, any long-term planning, especially if it involved fundamental or indeed any type of research or major capital investments."

http://www.independent.co.uk/news/obituaries/lord-hanson-531819.html

"Private Equity" is the current euphemism for this type of activity, which is slash-and-burn management under the pretext of "efficiency" and "effective asset utilisation".

But it's just a new shade of lipstick on an old, worn-out pig.
Posted by Pericles, Tuesday, 3 June 2008 9:53:11 AM
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great ADVERTISMENT
[are they paying to blog this?]

Private equity is the securitisation of public equity [govt assets] ,

so that what the public thought they ''all'' owned] gets sold for private proffit and finance company or 'trust' ownership of the legal title over former govt asset's

eg;
The-Public-Equity-Partnership (PEP) Schemes 1 and 2 are agreements between AMP and the Department of Housing.

AMP has bought legal_title of all_the_public_housing, and the nsw govt Department pays AMP an_annual_rental.
[a shareholder return]

But the-ownership of the ''public' assets is-held in-a 'private' fund , so tax-payers prop-up investers and the stock markettering annual_bonus ,

[and the people havnt a clue]

http://www.housing.nsw.gov.au/Policies+and+Fact+Sheets/Policies/Public+Equity+Partnership+EST0120A.htm

http://informationarbitrage.typepad.com/recent_press/2007.09%20-%20The%20Banker.pdf

As the company's stock price drops, the company is required to issue more stock under the terms of the PIPE transaction,

thus raising yet_more_money
[but watering-down the value of the private 'asset'].

These additional issuances cause further downward price pressure, and the price of the common-stock often enters a ‘death spiral.'
then the reciever [the bank holding the mortgauge over legal title ,gets it all]

But its how they make money now-adays [cause the govt sold the fed and HAS TO LEND its own currency from 12 bankers][who own the banks via their own select [elect] 'private'/fed-reserve banking fund.]

The effect of toxic financings is hastened by their unpopularity with institutional investors.
[and the lack of control of what is deemed a security

Problem being the underwriters only hold a fraction of assets to cover its eventual ...[who knows] re-nationalisation? when the_people find out.
[the plan is for the bankers to own-it-all].

Its all to get money out of the middle-class to turn us_all into lower-classes.

Institutional investors are wary of the extreme dilutive effect on the holders of common stock and the historically inevitable decline of their own_investments as a result of toxic-transactions

http://www.friedlandcapital.com/PDFs/White%20Paper%20-%20PIPEs.pdf
http://www.iht.com/articles/ap/2008/06/02/business/NA-FIN-US-Cerberus-Chrysler.php

http://www.guardian.co.uk/business/feedarticle/7558452
http://www.forbes.com/afxnewslimited/feeds/afx/2008/06/01/afx5067875.html

anyway in-the end the stock-'holders give up their_money
[and some multinational-banker holds the_assets]

Its how they cash in a countries wealth so the_people never_know ,
preferably by using our compusory_supper/contributions

http://www.caslon.com.au/equitynote.htm
but you_dont hold-the-asset [the_bank_does]

http://www.equitypartners.com.au/
http://www.macquarie.com.au/au/corporations/managed_funds/products/private_equity/overview.htm
http://www.hawkesbridge.com.au/
Posted by one under god, Wednesday, 4 June 2008 12:32:18 AM
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Pericles “In the UK back in the sixties, it was called asset-stripping,
The reason it managed to get such a bad name was because it was an inherently lazy and deceitful process.”

Only on the down side Pericles.

PE is a method of raising capital. Warren Buffet’s company Hathaway was founded on funding MBOs, in a similar manner to a PE operation.

PE is merely a useful method of dealing with the issue of funding an operation. Every method of funding which resolves a cash flow constraint invariably involves a risk to the lender of the cash.

Conventional wisdom says the return on a PE investment will need to be better than the same investment in a public quoted stock because of the “risk” surrounding a stock which cannot be sold on a public market
Likewise the PE stock which is not constrained by the reporting and compliance requirements had it been public quoted.

As a medium for capital generation, I think the PE business is as valid as its public quoted equivalents
.
The benefit of PE is less bureaucracy in decision making leading to quicker returns on decisions,

the risk of PE is less bureaucracy in decision making leading to greater risk of spectacular losses which cannot be absorbed by the entity.

Many years ago I was briefly (and too late) involved in a weekend course for the executive crew who did the MBO of McEwans hardware (the ones who eventually were required to sell to Bunnings). I saw first-hand how an MBO can go wrong. It was nothing to do with the lender but the over-inflated opinions and egos of the MBO operators.

However, not many MBO’s end up where the McEwans crew ended, most manage to survive and flourish and turn a mediocre operation into something profitable by better and faster operational decision making, until they may well sell off the improved operation to someone else who, through public listed benefits, can finance the same risks at a lower cost.
Posted by Col Rouge, Friday, 6 June 2008 11:11:42 PM
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