Private equity firms are gobbling up companies and winning over the market

Private equity firms are popping up everywhere, but are investors ignoring that warning signs in favor of potential gains?


October 4, 2019

Smith Collection/Gado/Getty Images

In the decade since the financial crash, big banks and hedge funds have buckled under new regulations and public ire. Meanwhile, private equity (PE) — a younger industry that operates largely under the radar — has emerged as the uncontested winner. 

PE funds are now behind all kinds of businesses, from pet stores to real estate to dermatology. Talk about a diverse portfolio. 

It’s like HGTV for private business

PE firms’ MO is to buy up companies, slash their costs, then flip them for a profit… minus the tears and cameras. There are a couple things to know about how this kind of investing works: 

  • Debts “R” Us: Like a kid with their first credit card, PE firms finance all these buyouts with debt. The company getting bought out usually gets saddled with most of it — which maximizes profits for the funds and their investors… but can suck the life out of already struggling acquisitions, like Toys “R” Us.
  • An invisibility cloak: The law doesn’t require the same transparency from private companies as it does from public ones. Since PE operates in the shadows, investing experts like Warren Buffett suspect funds have been less than “honest” with some of their calculations.

But… the pay’s good. For now. 

While once-safe investments are struggling, PE funds have consistently brought in above-average returns. The success of the industry has inspired an uptick in the number of firms gambling with debt — and many investors are ignoring the warning signs in favor of possible gains… sound familiar?

Daily briefings, straight to your inbox

Business and tech news in 5 minutes or less

Join over 1 million people who read The Hustle

Psst

How'd Bezos build a billion dollar empire?

In 1994, Jeff Bezos discovered a shocking stat: Internet usage grew 2,300% per year.

Data shows where markets are headed.

And that’s why we built Trends — to show you up-and-coming market opportunities about to explode. Interested?

Join us, it's free.

Look, you came to this site because you saw something cool. But here’s the deal. This site is actually a daily email that covers the important news in business, tech, and culture.

So, if you like what you’re reading, give the email a try.