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Private equity has become increasingly popular recently, as investors have been searching for higher returns than public markets have offered. Overall, private equity plays an important role in the economy by providing capital to businesses that need it and driving economic growth. While there are some risks associated with private equity investing, done correctly, it can be a powerful force for good.

What is Private Equity?

Private equity is a type of investment typically made by institutional investors, such as banks, insurance companies, and pension funds, or by wealthy individuals. The money that is invested in private equity is used to buy stakes in privately held companies or to finance leveraged buyouts of public companies. Private equity has become an increasingly important source of financing for businesses in the United States and other developed countries over the past few decades.

How Does Private Equity Work?

Private equity investments are typically made through a private equity firm, which raises money from investors and then invests it in companies. The firms make money by selling the companies they have invested in or by selling shares of those companies to the public through an initial public offering (IPO).

Private equity firms usually invest in companies that are struggling and need help turning around their business. The firms provide the companies with capital, management expertise, and access to networks of potential customers and suppliers. The goal of private equity firms is to make the companies they invest in more valuable so they can sell them for a profit.

The Pros and Cons of Private Equity

There are pros and cons to private equity. On the one hand, private equity can provide much- needed funding for companies that are struggling to find financing. This can help these companies to turn things around and become profitable. On the other hand, private equity firms often have a lot of control over the companies they invest in, and this can lead to problems such as job cuts and downsizing.

Pros include:

• Increased financial returns
• More control over investments
• Avoids conventional financing
• Greater flexibility and freedom for growth
• Ability to invest in smaller companies
• Customized investment strategies
• Lower fees

Cons include:

• Private equity can be risky
• Requires upfront funding
• Investors generally have less control
• Private equity can be leveraged

A Short History of Private Equity

The history of private equity can be traced back to the early 1900s when J.P. Morgan engineered the first leveraged buyout (LBO) of the Carnegie Steel Corporation, the largest producer of steel in the United States, for $480 million, merging it with Federal Steel Company and National Tube to create United States Steel, the largest company in the world. The Glass- Steagall Act of 1933 ended such mega-consolidations engineered by banks.

World War II marked the period in which American Research and Development Corp. (ARD) and J.H. Whitney & Co., two of the earliest venture capitalist firms, were established. These ventures set the standard for later venture capitalists. ARD's founder Georges Doriot made his largest investment in Digital Equipment Corporation, purchasing a company for $70,000 and selling it for $37 million, an increase of more than 52,757 percent.

Then, in the 1960s, IPOs were all the rage on Wall Street. Digital Equipment Corporation (an ARD startup) achieved massive success in the early 1970s. However, that was only a part of a larger wave, and in 1964 Kohlberg Kravis Roberts & Co. ushered in the first generation of leveraged buyouts, known as “bootstrap” transactions.

In the 1980s, leveraged buyouts were favored by numerous business magnates and exemplified ruthless capitalism. One conspicuous example comes to mind, the 1989 $31.1 billion buyout of RJR Nabisco by KKR. It set a precedent as the biggest leveraged buyout of all time.

There have been booms and busts in the private equity industry over the years. The 1980s were characterized by an LBO boom. In the late 1990s, with the dot-com bubble and bust, many private equity firms suffered large losses due to their over-leveraging assets. By 2006, the “mega buyout” era arrived, in which huge buyouts set records across the United States, Europe, and the Asia-Pacific region. Some of the largest acquisitions during the mega buyout period included Georgia-Pacific Corp, Albertson's (2006), Ally Financial GMAC (2006), and Harrah's Entertainment.

Private Equity Today

Today, the evolution of private equity continues. Firms like Cordor Equity have emerged to invest in companies that generate dividends for shareholders while improving the local economies where they operate. Private equity firms are also expanding their geographic reach to Africa, Latin America, the Middle East, and Asia.

Private equity has been a major force in the economy for decades, playing a key role in the growth of many companies. Though private equity has had its boom and bust cycles, there is no doubt that it continues to be a major player in the economy.