MainStreet: Private Equity Investment Boosts The Economy: Here’s How Your Retirement’s At Play

By Scott Gamm

Friday, July 11, 2014

Private equity firms poured billions of dollars into companies last year, a new survey says.

According to the Private Equity Growth Capital Council, private equity firms invested $443 billion in some 2,300 U.S. companies in 2013, representing a 27% increase from 2012.

The crux of what private equity companies do surrounds investing in and improving various companies. Typically, private equity firms will take public companies private, take on debt and make a slew of changes to the company with the hopes of selling its stake in the future. One common theme among private equity investments is the time involved in the process. It’s not unusual for a private equity firm to acquire a company and then sell it ten years later. This is by no means an overnight process.

“The injection of capital can help companies build new factories, which not only creates jobs, but helps spur economic growth,” says Bronwyn Bailey, vice president of research at the Private Equity Growth Capital Council.

Private equity investment also helps regional companies expand throughout the country, allowing consumers to enjoy new forms of products from new companies, Bailey says. Not to mention, the added tax revenue municipalities gain from companies that expand into new geographic regions.

Private equity investment differs from venture capital firms, which get plenty attention for investing in flashy social media and tech start-ups. “Private equity invests in more adolescent, mid-life and aging companies,” Bailey adds.

Some well-known companies that consumers use on a daily basis have been impacted by private equity. For example, in 2006, Dunkin’ Brands, the parent company of the popular Dunkin’ Donuts stores, was sold to private equity giants The Carlyle Group, Bain Capital and Thomas H. Lee Partners for $2.425 billion. The private equity companies have since exited the company soon after its 2011 IPO. According to the company’s Form S-1 filed with the Securities and Exchange Commission, the company operated at a net loss of $13.4 million toward the end of 2006. By 2010, the company generated profits of $26.8 million.

In 2007, private equity firm Blackstone Group acquired Hilton Hotels Corporation for $26 billion. In December 2013, Blackstone took Hilton Hotels public after expanding the company.

You may not realize that some of your investments are tied up in private equity deals.

“The private equity firm creates a fund and asks for contributions and commitments from outside investors, including corporate pension funds, foundations and endowments,” Bailey adds.

Instead of throwing money toward one project, the funds are more diversified. As with any investment, including private equity, there is no guarantee the firm will be able to exit the company for a profit years down the line.

In fact, according to additional research from the Private Equity Growth Capital Council shared with MainStreet, 43% of capital committed in last ten years came from pension funds.

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