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Private Equity and Private Debt I


"Private equity" refers to the entity in any privately owned business that is NOT traded on a stock market.  

Your neighborhood pizza establishment, if it is not part of a chain but is simply the result and destination for some local family's sweat, is a bearer of private equity. How much?  That can at best be guesstimated, until such time as they try to sell it. The guesstimation would depend on similar businesses that have been sold recently in similar places.

More specifically, "private equity" can refer to a private equity investment fund, like Mitt Romney's Bain Capital. This is a fund that focuses chiefly on operating businesses that are not exchange traded. A PE fund might buy the pizza place we have in mind. Ma and Pa might be thrilled by this, and take off to Florida for a well-earned and now well-financed retirement. Then Bain or a similar operation, might bring in new management, improve the profit margins, and then start shopping it around to the chains.

In this way your local place can turn into just another Dominoes. PE funds are perfectly happy to sell their portfolio companies to exchange traded companies ("public companies") in the same business. That is i fact often their exit strategy. 

"Private debt" refers to the debt a company owes to any financier other than a traditional bank. It can be a loan shark affiliated with the Soprano family. Or it can be a private debt investment fund, which stays within the existing laws and regulations, pursues debtors by means that don't involve breaking bones, and charges somewhat less than the sharks, though more than those trad banks. 

I mention all this because of a trend that I am chronicling in my professional capacity as a finance writer. Of late, there has been a notable trend toward consolidation, in which the PE funds are buying up, or at the least forming alliances with, the PD funds. On one day last week, PE fund Nuveen acquired a controlling share of credit manager Arcmont, AND General Atlantic agreed to buy private creditor Iron Park. 

Does this consolidation matter?  I think it does and I will say something about it next week. 

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