Private equity firms are very similar to hedge funds. However, you only hear about hedge funds when they fail and private equity firms you hear about much more often when they buy a new company. What happened with all the secrecy?
Hedge funds and private equity bolts share a similar tax structure.
Until recently, private equity firms were relatively unknown. Hedge
funds only made news when one failed, and rarely did you see, a
hedge fund manager in a magazine headlines.
Today, however, we see that many private equity firms make magazine
headlines and are even featured in television shows such as Charlie
Rose.
The reason for the rise in private equity firms most likely stems
from the reduction in the capital gains rate tax that occured under
George Bush's administration. Private equity firms pay for taxes as
pass thru or "passive" tax which is much lower than the typical 35%
that corporations pay. Long term capital gains rates can be as low as
10%. This increase in the tax rate gap led to this industry taking off.
They are essentially taking advantage of the tax laws in place today.
The reason that most private equity firms do buy-outs is that they get
their tax benefits if they are considered "passive" investors. If they
create a new business, this would most likely not be the case.
Whether they are "passive investors" is debatable because they are
often buying majority share in a company which gives them voting rights
to make decisions regarding management. Whether they are "actively"
managing these companies or not isn't entirely clear but they certainly
have the power to influence or change managment which many may consider
to be "active." This is one reason why US lawmakers have considered
changing the tax laws for this purpose.
Private Equity firms are said to borrow heavily in order to do these
buyouts then turn around and sell the company to others later. Some
have speculated that one strategy being used by private equity is to strip
the assets from the firm then sell it back to the public or another
entity.
Another strategy is to bundle or unbundle specific goups within the
company then sell it back to the public. Since private equity firms
borrow large amounts of money, they have to generate money in order to
pay the interest on their debt. The companies have to be sold within a
few years generally or assets have to be sold by then to generate cash.
Hedge funds borrow heavily also, but usually deal with only
market-based activity, and rarely control 100% of the company. Hedge
fund managers typically keep a low profile also. The only funds that
most of the public is aware of is the success of George Soros's
Quantum fund, and the failure of Long Term Capital and the
Bearn Stearns Fund.
It seems quite possible that hedge funds may get involved in private
equity just like private equity firms may get involved in derivatives
and other complicated financial speculation.
Many well known american companies are now owned by private equity
firms such as Chrysler, Hertz, Hilton Hotels and
ClearChannel.
With the instability in the credit market, the huge debts that private
equity firms have may eventually lead to the mining of company assets
to pay debt and or huge layoffs. It may effect the level of service you
get or the quality or pricing of the product. Add this to the fact that
the the tax law that brought them to life is in question and may change
soon.
A failure from one private equity firm or a failure to pay debt on
time could lead to fears througout the private equity industry making
it harder to continue to get financing for new deals or lead to a
financial failure.
The Bush administration is largely responsible for the rise of this
private equity industry. They were responsible for the tax laws that
made it favorable for private equity and for lax monitoring of
takeovers and buyouts. Generally the administration has let large
businesses decide the best interest of the US when it comes to
takeovers and buyouts. Investigations of takeovers are at 20yr lows
during the Bush administration. However, his term is nearing its end
and so this lax policy may change with the next president.
The fact is it seems that these private equity firms are using a
short term plan to run companies that are long term entities. This
won't last for long.
Private Equity Power List
Taxation of private equity and hedge funds
Where are the trustbusters?
|
