An Introduction to Private Equity

An Introduction to Private Equity

Largely unknown outside the financial world, an industry called “private equity” is reshaping the American economy, with huge new deals announced almost daily.

“Private equity” is a broad term that encompasses a range of strategies for investing in industrial and service companies whose common stock is not traded on public stock exchanges. While private equity runs the gamut from small venture capital investments in brand-new start-up companies to multibillion-dollar buyouts of well-known public companies, the focus of this report is on corporate buyouts.

With ownership of brand name companies such as Burger King, AMC movie theaters, Dunkin’ Donuts, Michaels Arts and Crafts, Hertz, and Linens n’ Things, the private equity industry controls a large and growing swath of U.S. industry, including the market leaders in major industries. In the last year alone, private equity buyout firms have taken ownership of the nation’s largest office building landlord, Equity Office Properties, the nation’s largest hospital chain, HCA, the world’s largest casino company, Harrah’s Entertainment, and one of the nation’s largest providers of cleaning and food services, Aramark.

Consider these facts:

• The biggest five private equity deals together are larger than the annual budgets of all but 16 of the world’s largest nations. The five biggest deals involved more money than the annual budgets of Russia and India.
• The annual revenue of the largest private equity firms and their portfolio companies would give private equity four of the top 25 spots in the Fortune 500. One firm, Kohlberg Kravis Roberts & Co. would crack the top 10. These private equity firms have more annual revenue than companies such as Bank of America, JP Morgan Chase, and Berkshire Hathaway.
• The top 20 private equity firms alone control companies that employ nearly 4 million workers.
• There were a record $197 billion worth of private equity mergers in first quarter of 2007 alone.
• Industry analysts say a $100 billion private equity buyout deal is not out of the question—putting huge companies such as Dell, Boeing, and Apple Computer within range of the buyout industry.

This financial juggernaut is generating hefty returns to investors, and extraordinary riches for the top executives of private equity firms.

And while the industry is not a new one, private equity’s acquisitions and influence are growing exponentially, raising newly relevant questions about the impact of its business practices on American workers, businesses, communities, and the nation.


Incredible Wealth, Incredible Disparity

Though exact figures are hard to come by, the hallmark of the private equity industry is the incredible wealth being created for the small number of individuals who drive the buyout business.

The key principals at the largest private equity firms are billionaires. Using money from banks, insurance companies, pension funds, and other wealthy individual investors, they continue to launch corporate buyouts worth billions, even tens of billions of dollars, extracting fees of hundreds of millions of dollars from the companies they buy and often generating profits of 20 percent or more.

These profits come during a period of historic income inequality in America, at a time when millions of Americans are working harder and harder for less, with less health care, less retirement security, and less time to spend with their children. According to a report released in March 2007 by two leading economists, the top 1 percent of Americans—those with incomes above $350,000—received the largest share of national income since 1928.

The top 300,000 Americans enjoyed almost as much income as the bottom 150 million Americans combined. The top group received 440 times as much as people in the bottom half, doubling the gap from the 80s. And experts say the data may actually understate the income disparity.

The American public and leading experts alike are voicing concerns over the rising inequality. In a December 2006 Los Angeles Times/Bloomberg national poll, 75 percent of respondents said the income gap is a “serious problem.” And former Federal Reserve Chairman Alan Greenspan recently said, “ This (growing inequality) is not the type of thing which a democratic society can really accept without addressing .”

There is no doubt the income being accumulated in the buyout business is a major contributor to the concentration of wealth among the top one percent of Americans. Yet questions about the role the private equity industry could play in addressing this national challenge remain—until now—unasked, and unanswered.

Limited Public Information

Unlike publicly traded companies that are subject to federal securities laws and regulations as well as to daily scrutiny by financial analysts and the business media, private equity buyout firms operate virtually free of oversight and public accountability, their profits and practices largely hidden from view. Far from a coincidence, this lack of transparency is built into their business model, providing buyout firms with investment advantages that publicly traded companies do not enjoy.

Utilizing the limited information available to the public, this report provides a snapshot for everyday investors, workers, community members, and the public about the private equity buyout industry and its practices, spotlighting the leading firms, and examining the inner workings of five private equity buyout deals for their impact on workers. The report is provided as a resource for people and organizations who may not be business or financial experts, but whose lives, jobs, investments, or communities are or could be affected by private equity buyouts.