A company has assets and liabilities. Shareholder equity is the difference between the assets and the liabilities. Where companies are listed on the stock market, this ‘shareholder equity’ is owned by the ‘public’, and anyone can buy and sell shares in the company. With companies owned by private equity firms, those shares are privately held by, and only available to, one or more private investors/partnerships.
Firstly, whenever private equity firms buy a company they tend to start off by reducing inefficiencies, including the number of staff, which tends to be unpopular and grabs headlines. Secondly, they tend to make more use of debt to enhance the returns on the ‘equity’ they inject into the business. On occasion this goes wrong and results in the company going out of business.
Yes and no. As noted above they do tend to cut jobs initially but research shows that the measures they put in place tend to drive stronger growth of the company and in the longer-term they create far more employment. Essentially, they try and take underperforming companies and make them perform better and more often than not, they succeed.
A company’s shareholders, whether public or private, should want a situation where the return on the capital being employed in the company is greater than the costs attached to raising the capital: interest on borrowing and the cost of equity - the return required by the investors. For a variety of reasons the cost of debt is lower than the cost of equity and often quite a lot lower. Using more debt results in a lower overall cost of capital which should be to the benefit of shareholders; the trick is to ensure that the company is not carrying more debt than it can manage. Whilst this is a balancing act that private equity owners sometimes get wrong, more often than not they get it right.
In a word, ‘no’. Whilst the use of debt is in aggregate helpful, research into the performance of thousands of private equity investments during recent decades suggests that it is more likely simply down to better operational performance of the firms they own.