Reply to this discussion post of at least 450 words. The reply must incorporate at least 2 scholarly citation(s) in APA format. Any sources cited must have been published within the last five years. A

Reply to this discussion post of at least 450 words.

The reply must incorporate at least 2 scholarly citation(s) in APA format. Any sources cited must have been published within the last five years. Acceptable sources include the textbook, scholarly peer-reviewed articles, and the Bible.

The Private Equity model is straight-forward and relatively simple. The goal of a Private Equity firm is to buy a target and sell it at a higher price than they purchased it for. Although it is a simple strategy, it is very difficult to accomplish. First, Private Equity buyers, the general partners (GPs), must have contacts with investors and the ability to convince them to provide capital into one of their funds. After the PE firm has secured capital, it must find an undervalued firm. The target company could be undervalued because of a cyclical downturn in the industry, poor management, or weak corporate governance. Regardless of the cause, the goal is to find a gap in the current value and future value that can be achieved with the PE firm’s ownership. Next, the acquisition price must be agreed upon. The PE firm is looking maximize their profits when they exit their position so, they will negotiate for the lowest price possible. After the price is determined, the GPs will secure debt capital from a bank or multiple depending on how large the acquisition is. Low interest rates are beneficial for the PE firm because it will increase their future returns. Once the target company is acquired, the GPs can have the target acquire more debt which can be used to pay themselves dividends. Once the value of the target increases whether that is due to the rising market or because of improved performance, the PE firm will sell their position at an opportune time that will provide the highest returns. These returns are then shared amongst the limited partners based the percentage agreed upon. While the GPs receive a majority of the profit due to their management of the fund.

The PE business model has multiple advantages. Since it is in the private sector, it does not receive as much scrutiny from the SEC as public firms do. This allows each limited partner to create their own agreement with the GPs based on their own expectations. This strategy has allowed PE investments to outperform the U.S. markets over the past few decades. GPs and LPs have a vested interest in the success of the business due to their own capital being used in the investment. (Harrison) This could involve the PE firm getting involved in the business operations which could provide expertise for future sustainable operations. From the investors’ perspective, there is no cap on the level of returns that they can make, and if the GPs are not meeting their expectations, they can pull their capital.

Unlike Activists, most PE firms are trying to “flip” the company. So, generally, they are not concerned with the long-term success of the company. An article on whether businesses should consider private equity states, “There can be a built-in friction between private equity investors and family owners because the parties’ objectives are not always 100% aligned.” (Milford) PE firms are simply finding a company with a gap in value and initiating the necessary changes to provide an acceptable return. This could lead to a company being left with additional debt that did not provide any real value to the company. Loses are not common in private equity, however, when it does happen, it is on a very large scale. This eats into the overall fund and places more pressure on other acquisitions in the portfolio to be highly successful.

Luke 14:13 reads, “But when you give a feast, invite the poor, the crippled, the lame, the blind.” (NIV) When PE firms get involved with companies, they must not only think of their own self interests. Even though they are responsible for the highest returns for their own investors, they must not leave the company in worse shape than they found it. Everyone should benefit from the partnership.