One type of investment which all the big banks are involved in is Private Equity. It is the buying of whole companies in order to sell at a later date at a profit. There are a number of problems with private equity buyouts.
1...Borrowed money: Usually 80% to 90% of full purchase price!
The majority of the money used for private equity buyouts is borrowed from banks.- Mortgaging the company obviously increases its costs until the loan is paid back. The dept could potentially put the company out of business.
2...Maintaining profits; Even with the added debt which has added to the costs?!
These companies are bought to be re-sold within a few years. For this to happen it is vital that profits are maintained if not increased. This can be a major challenge when you consider the costs have just gone up as a result of the interest and other costs of the borrowing to purchase the company. To achieve this there are customary redundancies and then an increase on the work load of the remaining staff. Also in the majority of cases there will be assets of the company sold off. The sold assets will generate cash to quickly pay off some of the debt, so helping stabilize the company, at least for the time being. A private equity management team may claim it is selling off loss making parts of a company to the media,but they will generally do this as a matter of course in order to recoup as much cash as possible shortly after the buyout. Loss making or not, there could be more job losses here if sections of a business are closed down. Often property owned by the company will be sold and rented back adding to future costs of the company.However the accounts will look more healthy though this is likely to be short term.
3...Banks only too willing to lend.- Its only too willing as long as there is a safety net!
The reason why banks are content to lend to what many people will seem like a pointless re-mortgaging of businesses is that the private equity company will have arranged an investment fund to pay the mortgage on the company. If the company was to go out of business, the outstanding mortgage would be paid by the investment funds investors. It is actually difficult for the bank to lose out here, and this is therefore a factor which affects the amount of money which has been lent by banks to this type of business.
4...Any gains from your pension plan or other investment are lost through rising prices of goods and services.
There are however important points which any one who pays into an investment fund should be aware of. This is because at some stage prices charged to the public for the product or service are going to increase as a result of the borrowing by private equity companies to purchase businesses. For this reason, you will notice that private equity companies will favour businesses that they know the public depend on, so there is more scope for price increases in the future. Of course, private equity will not be blamed for the increase in prices. This would be blamed on changing market conditions. If lots of companies face this same problem and inflation rises as a result, the Bank of England will have to think up some new ideas as just increasing interest rates will only make things worse for all the companies in debt resulting in more price hikes.
5...Business closures and job losses, as well as your pension reduced.
Closure of major companies are a result of private equity.This is not always because the private equity management company has made a mistake. It may be because the company has been bought in order to be closed down. A factory in Britain could be closed down by a private equity company which owns similar factories in Argentina and China, where costs are far less. It is then quite easy to run the factory in the U.K. 'out of business' as it has its prices undercut by the two over seas factories. The private equity management company can then up production at the other two factories and very probably the prices too. In the situation that the U.K. company has gone out of business, the private equity company may not even pay back the bank the borrowed money to buy the purchased U.K. company which is now in receivership. In this case the investment funds which were arranged by the private equity company to back the mortgage would foot the bill for the outstanding borrowing, leaving the private equity management company and the bank unscathed. Often a cartel of private equity management companies will work together to buy a number of similar companies, but with the same result, that one or more will be closed down.
6...The Public are held to ransom by companies supplying every day vital products and services!
Private equity companies tend to target vital products or services that we all need from day to day. It is inevitable that buyout after buyout certainly in the case of energy companies, is going to increase the costs of these services so that many people will just not be able to afford them in the future. Regulating bodies that are formed to protect the public from the rising prices of some of these companies are powerless as the criteria for restraining these companies is based on excessive profits rather than the reason for their rising prices which is their rising costs (The debt they are burdened with).
Private equity companies and banks take advantage of our need to save and invest for the future. Private equity companies also feed on our reliance on vital products and services. Unfortunately the interest on pension plans and other investments received by most investors will never off set the damage the banks and private equity companies do by creating unemployment and more expensive products and services as a result of borrowing and other costs associated with buying businesses. Any investment which involves the purchase of a company should have benefits to the product or service to be produced and to its customers and to the economy before any finance from a bank or investment fund should be authorised.
1...Borrowed money: Usually 80% to 90% of full purchase price!
The majority of the money used for private equity buyouts is borrowed from banks.- Mortgaging the company obviously increases its costs until the loan is paid back. The dept could potentially put the company out of business.
2...Maintaining profits; Even with the added debt which has added to the costs?!
These companies are bought to be re-sold within a few years. For this to happen it is vital that profits are maintained if not increased. This can be a major challenge when you consider the costs have just gone up as a result of the interest and other costs of the borrowing to purchase the company. To achieve this there are customary redundancies and then an increase on the work load of the remaining staff. Also in the majority of cases there will be assets of the company sold off. The sold assets will generate cash to quickly pay off some of the debt, so helping stabilize the company, at least for the time being. A private equity management team may claim it is selling off loss making parts of a company to the media,but they will generally do this as a matter of course in order to recoup as much cash as possible shortly after the buyout. Loss making or not, there could be more job losses here if sections of a business are closed down. Often property owned by the company will be sold and rented back adding to future costs of the company.However the accounts will look more healthy though this is likely to be short term.
3...Banks only too willing to lend.- Its only too willing as long as there is a safety net!
The reason why banks are content to lend to what many people will seem like a pointless re-mortgaging of businesses is that the private equity company will have arranged an investment fund to pay the mortgage on the company. If the company was to go out of business, the outstanding mortgage would be paid by the investment funds investors. It is actually difficult for the bank to lose out here, and this is therefore a factor which affects the amount of money which has been lent by banks to this type of business.
4...Any gains from your pension plan or other investment are lost through rising prices of goods and services.
There are however important points which any one who pays into an investment fund should be aware of. This is because at some stage prices charged to the public for the product or service are going to increase as a result of the borrowing by private equity companies to purchase businesses. For this reason, you will notice that private equity companies will favour businesses that they know the public depend on, so there is more scope for price increases in the future. Of course, private equity will not be blamed for the increase in prices. This would be blamed on changing market conditions. If lots of companies face this same problem and inflation rises as a result, the Bank of England will have to think up some new ideas as just increasing interest rates will only make things worse for all the companies in debt resulting in more price hikes.
5...Business closures and job losses, as well as your pension reduced.
Closure of major companies are a result of private equity.This is not always because the private equity management company has made a mistake. It may be because the company has been bought in order to be closed down. A factory in Britain could be closed down by a private equity company which owns similar factories in Argentina and China, where costs are far less. It is then quite easy to run the factory in the U.K. 'out of business' as it has its prices undercut by the two over seas factories. The private equity management company can then up production at the other two factories and very probably the prices too. In the situation that the U.K. company has gone out of business, the private equity company may not even pay back the bank the borrowed money to buy the purchased U.K. company which is now in receivership. In this case the investment funds which were arranged by the private equity company to back the mortgage would foot the bill for the outstanding borrowing, leaving the private equity management company and the bank unscathed. Often a cartel of private equity management companies will work together to buy a number of similar companies, but with the same result, that one or more will be closed down.
6...The Public are held to ransom by companies supplying every day vital products and services!
Private equity companies tend to target vital products or services that we all need from day to day. It is inevitable that buyout after buyout certainly in the case of energy companies, is going to increase the costs of these services so that many people will just not be able to afford them in the future. Regulating bodies that are formed to protect the public from the rising prices of some of these companies are powerless as the criteria for restraining these companies is based on excessive profits rather than the reason for their rising prices which is their rising costs (The debt they are burdened with).
Private equity companies and banks take advantage of our need to save and invest for the future. Private equity companies also feed on our reliance on vital products and services. Unfortunately the interest on pension plans and other investments received by most investors will never off set the damage the banks and private equity companies do by creating unemployment and more expensive products and services as a result of borrowing and other costs associated with buying businesses. Any investment which involves the purchase of a company should have benefits to the product or service to be produced and to its customers and to the economy before any finance from a bank or investment fund should be authorised.
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