private equity

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Is a fund of money accumulated for investment in private companies. Such private equity funds are controlled by a fund manager or management company, which uses the fund to generate a higher rate of return for investors than can be obtained by investing in the stock market. The investors themselves are a mix of institutional investors, such as pension funds, and wealthy individuals. The prime activity of private equity funds is taking over companies through debt-leveraged buyouts—shares in the targeted company are bought with funds raised against the same company's assets. Where the targeted firm is publicly listed the objective is to ‘take the company private’; to buy sufficient shares to remove the company from the stock exchange so that its shares are no longer publicly traded. Once a firm has been taken over, it is typically restructured to generate a very high rate of return on investment—from 20 to 40 per cent—with additional management fees being charged to the firm for the service provided by the private equity fund. After a three to five year period, the firm is then sold on and the fund seeks a fresh target for its activity. The activities of private equity funds have proved controversial in recent years. To their defenders, the funds are effective in unlocking value and the high rates of return are deserved because of the high risks investors take. For their critics, which include the international trade union movement, private equity investors intensify the pressure towards short-termism in the management of business assets. Private equity funds, it is argued, saddle the firms they buy with high levels of debt and management fees, and high profits are often generated at the expense of redundancies, the loss or reduction of occupational pension entitlements, and work intensification. Private equity has also been attacked because of the very favourable tax regime it enjoys, particularly in the United Kingdom, and for the secrecy of its operations, which reduce the scope for public scrutiny of fund activities. Notwithstanding criticism, private equity is a growing and significant force within the global economy that is shaping the process of human resource management in large parts of the private sector. In 2006, private equity funds invested more than US$725 billion in buying out companies. [See also shareholder value.]

Subjects: Human Resource Management.

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