Private equity explained

hi it's Patty H at Marketplace so what is a private Equity Fund well it's a collection of investors who get together to buy a company and actually to flip a company using a process called a leverage buyout so a private Equity or PE as they like to be called a PE fund all right here we are so a PE fund is actually the same as an lbo Fund in fact they used to be called lbo funds back in the 80s but then they kind of fell out of favor and so they changed their name anyway so this actually works using a process this this leverage buyout thing use Works using a process that's very similar to kind of flip this house all right so say we have um we've got a house all right it's it's worth $10 million it's a big house in the country okay it's actually got um it's got like servants quarters and all the rest of it it's actually got a bunch of Staff in there Butler you know cook all the rest of it and a bunch of investors see this place this $10 million home they think yeah we could we could buy this and flip it right so the investors all get together okay they all there's like 10 of them they all get together these guys and they uh they club together and they get a million dollars okay but obviously that's not enough because if they it's $10 million so what do they do they go to the bank all right and they say to the bank look Bank can we can we borrow $9 million and the banker says okay yeah here's n here's 9 million for you because I can see that you're putting some money up yourself I'll lend you the money want it back in 5 years off you go so we've got 1 million plus 9 million equals 10 million that's great they go and buy the place out next thing they do is they say well in order to make this happen we're going to have to S sell some assets so they sell a bunch of the land off okay they sell half the land off and then they knock down all of the uh the staff Quarters here all the staff quarters go and then they they sack all the staff except for the Butler and then they renovate they put in hardwood floors and granite countertops and all the rest of it and 5 years later they flip it and they sell it for $20 million yay of course this is great because all they then have to do is to pay the bank back and then they can divide the spoils amongst themselves so like $1 million probably like $10 million after they paid all the interest they can divide amongst themselves so that's how flip this house works that's exactly how private Equity Works say these private Equity Guys these investors are things like Venture Capital companies hedge funds they're also Pension funds so they might even hold some of your uh your pension or your 401k they Pony up the million dollars which is the the private Equity that's the equity state that they hold they then get the leverage okay they go to the bank and they say let's lever up let's borrow a bunch of money in order to buy a company that we like the look of they get a bunch of Leverage here's a leverage and then they do the buyout where they find they look for a company that they think is maybe underperforming or they can they can they can strip it down and make it better so they buy out a company all right they then strip that company down maybe sack a bunch of Staff maybe sell off a bunch of assets streamline it and then 5 years later they turn it around and they sell it for more money and then pay back the bank and pocket the money themselves that's how leverage buy it works that's what private Equity Funds do that's the kind of core of their business and as I say you can be invested in this indirectly because you might be uh your pension fund might be one of these private Equity investors might be invested in the fund itself you might also be involved in the lending site because the bank okay doesn't hold on to this loan it actually P it can actually sell it off to a bunch of other investors which can include perhaps your pension fund or your uh or the the the company that holds your retirement account so you can be invested at two stages of this process even indirectly now private Equity Funds do work they do a lot of good business they create companies that are streamlined and go on to make money and to hire more people but of course they also invest in companies that go completely bust and they sack off a lot of they lay off a lot of people sell off a lot of assets and can actually end up killing a company that happens as well and if that happens that leaves them obviously the private Equity people and the banks who've lent them a bunch of money and us because we're indirectly invested in these very badly needing a think

Channel: Marketplace APM

Views: 493,451

Keywords: investments, private equity, Whiteboard, business, finance, NPR, Paddy Hirsch, investors, explainer, stock market, economy, Borrow, Spend, Cost, Supply, Demand, Big banks, Put up dough, Stake, Trust fund, Exchange, Barter, Vend, Offer, Auction, Traffic, Unload, Deal, Dump, Hustle, Recession, Austerity, Financial crisis, Thrift, Layoff, Field, Trade, Work, Career, Livelihood, Occupation, Vocation, Commerce, Financial affairs, Money, Accounts, Economy, Analysis, News, regulation

Id: yca0A3B7Pqc

Length: 4min 6sec (246 seconds)

Published: Sat Jan 14 2012