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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?