Why are private-equity firms buying listed firms at a record rate?

The Economist TodayHand-picked stories, in your inboxA daily email with the best of our journalismSign upA private-equity firm is an investment fund that owns companies not listed on a stock exchange, or seeks to take those that are listed into private ownership. Having only one owner can help firms make more money. Without so many quarrelsome shareholders it becomes easier to reorganise a company to leaven margins and to invest for the long term, argue supporters of such deals. But critics say they rarely live up to the hype.

Some private-equity firms make money through asset-stripping or by piling debt on their target’s balance sheet. They also benefit from tax breaks that other investors do not get. Debt-interest payments due on the money borrowed to buy firms can be set against tax bills. And private-equity managers structure their firms to pay as little income tax as possible using an accounting technique called “carried interest”. This enables them to pay capital-gains tax on their slice of profit rather than income tax, which is usually levied at a higher rate.

So why are they now spending so much? One cause is interest rates, which are at historic lows. These make debt cheaper to take on and service, swelling potential profits. They also mean that big institutional investors, such as insurers and pension funds, are searching for better returns than those available on safe assets, such as rich-world government bonds, which are almost zero.

Over the past decade, the returns from private equity have beaten those from other forms of investment, with significantly less variability. Money is flowing in. The industry now sits on $1.7trn in cash—and is under pressure from investors to spend it. Britain’s relatively cheap shares and laissez-faire takeover rules make its companies appealing. headtopics.com

Source: The Economist