Introduction
Private equity means the investment made in private
companies or buying out public companies by taking them out of stock exchange. According
to Peng, "The market for private equity focuses on using funds borrowed
from private sources to buy out existing shareholders and make a firm private."
Private equity has been controversial due to its advantage and disadvantages.
Critics from developed countries have been against private equity since they
argue it brings income equalities, exploit the resources and cut down the job
opportunities. But in emerging markets like China, it is well accepted due to
value-adding technique and value-added resources.
The private equity ensures the investment and its return on
investment creating higher values for the shareholders. They work on maximizing
the profit with skilled and experienced investor and appointment of the employees
of highly qualified candidates. They create a financial discipline in the
system to increase the profit and decrease the unnecessary expenses. Private
equity work for long-term basis so that the investor gets more secured returns
with less risk and capital preservation techniques.
Discussion
1. If you were a private equity specialist, what kind of
target firms would you look for?
Private equity means the investment made in private
companies or buying out public companies by taking them out of stock exchange
and to have control over to make out more profit. As a private equity
specialist, I would examine both internal and external environment of the firm
regarding its competitive advantages through institutional, industry and
resource-based view. The organization with the products or services that will
be competitive in the market. The product or services should have potential
market growth and should be expandable and innovative. The past performance of
the industry, maturity, and new entrants in the industry should be considered.
There should be an accounting of the customer base and the suppliers of the
firm. The capital requirements if the business is acquired considering the
manufacturing capacity the company is running currently and the reason for the
downsizing of the firm. The prior management team should have all the
managerial procedure should have been recorded in a magnificent manner. The company's
legal procedures and financial transactions should be transparent. The organization
should have to cooperate with all the government rules and regulations
properly.
2. If you were CEO of a publicly traded firm and were
approached by a private equity firm, how would you proceed?
The reason to accept or decline as a CEO depends upon the
economic and operational condition of the firm. There is numerous advantage to
be taken by a private equity firm. The private ownership can work for
maximization of shareholders value, financing can be increased through private
sources, and from the public if the firm trades publicly. There will be the possibility
of an increase in pay and compensation of the employees and the employees can
benefit more growth opportunity in private equity.
Though there is an opportunity to grow at the end, the full
control will be on private equity firm who is taking over and ultimately
diminish of CEO is certain. So rather be fully acquired, I can give them the option
of the partial stake so that I can continue with my vision for the firm with
sharing of a new business partner. Bringing a new partner will also bring equal
control in the business to keep an eye on the investment by the new partner. But
the risk of giving partial share is that the private equity after few years
will try to take investment back either by selling the company or by selling
their stake.
If I am to deny the proposal, I need to
enhance my business and work for innovative products to attract more
stakeholders to invest in the firm. I need to improve my workforce by
exploiting the current employees and recruiting more qualified candidates for
the purpose of market and product development. So if a company is doing well
enough and making a profit, there is no point in selling the business. Working
on the management skill and innovating the product line will be the best option
as a CEO of the publicly traded firm.
3. If you were Chinese regulator, how concerned should you
be after you have learned about the criticisms against private equity in the
United States, Germany, South Korea, and elsewhere?
As of criticisms, private equity has increased the income
inequality between the financers and managers, has been exploiting high profit
and returning a low profit to the host nation, and resulting in job cuts.
Though private equity has been always in controversy, it has higher benefits
than the public firms. Private owners are very much concerned about their
investment so they work on returning optimal results. They appoint a high level
of qualified candidates who are expert on their fields to operate the firm to
maximize the profit. A great level of financial discipline is maintained to
ensure the control in expenses and maximization of capacity. Private equity
pays higher to its employees and makes them work more efficiently and
effectively boosting the average performance as compared to public firms.
Private equity investors will provide high value of shares
to the stakeholders since their own investment is in the firm so a good deal is
expected as shareholders. It also brings long term investment, long-term
investment means a strong strategy to minimize the risk and preserve the
capital. Private equity can grow faster than other business since the investors
are expert and experienced. So we can say that private equity firms want the
business to do well in order to generate a good return.
Conclusion
We can conclude that private equity firms have been more
accepted in emerging markets like China and has been criticized in a developed
market like USA, Germany. Private equity firms bring more strength and
transparency in the firm in comparison to public firms. The investor closely
with the firm, monitor the operation and brings up strong strategies to ensure
the return on their investment which ultimately benefits its stakeholders. The
private equity brings on stronger management with skill and experiences. It
brings up discipline in management, operation, and finance which ensures lesser
risks and increases the value with stable growth and impressive returns. The
private equity investors are skilled and experienced enough to provide benefits
for the company by extracting final value at the right time. Since the private
equity firm is not bounded by the state, they can bring up large investments
and active involvement. They also equally provide high compensation for its
employees.
References
Peng, Mark W. (2014). Business Strategy, Governing the
corporation around the world. Retrieved May 24, 2019, from
Unknown. (Unknown). Private Equity Investment Criteria.
Retrieved May 24, 2019, from
Schleckser Jim. (2016, July 19). Is Selling to Private
Equity a Victory or a Defeat? Retrieved May 24, 2019, from
Unknown. (Unknown). Five benefits of private equity
investment. Retrieved May 24, 2019, from
