In an attempt to liberalize the economy and attract international funding, many developing countries have bought into the schemes of private equity firms. As the global economic downturn has taken its toll, there are many businesses which have either fallen or have decided to use their business equity in order to obtain funds that keep them afloat. Meanwhile private equity firms have acquired a reputation that is almost as bad as that of investment bankers today. Despite some outcry from the trade unions, many governments have given tax breaks and special privileges to private equity firms.
What are the debates that are going on?
The idea of asset stripping has particularly annoyed the general public. Some of these companies which fall into this trap were previously successful enterprises that employed people in the community. During the global downturn a lot of bankers made unwise decisions and brought the economy to a standstill. Now that they have finished receiving their bonuses, it is time to collect even more profits from the failing companies. Asset stripping is the mercenary practice of identifying failing firms and then making arrangements to buy them below market prices. The next stage is to gut them of any residual business equity. The firm is then sold into another purpose or retained as shelves.
The impact on the economy can be devastating if they continuously strip assets from the failing companies thus depleting the value of their business equity. There is simply no kinder way of putting it rather than saying that asset stripping is akin to removing the valuable things within the business cycle and then leaving the shells to fall by the wayside.
The impact of restricting costs also devastates the families involves when redundancies become a reality. Meanwhile the private equity funds continue to make obscene profits. This creates an atmosphere of resentment which is even greater than the one that the multinational companies faced at the height of their powers.
Is it all bad news?
The condemnation of private equity firms sometimes reaches irrational levels. It does not mean that because some rogue firms carry out asset stripping that everyone in the industry is corrupt and will carry out the same projects. The truth is that among the difficulties that are caused by private equity funds, there is quite a lot of good they do for failing organizations in terms of practical advice and the cash that they invest.
The trade unions will complain about everyone that threatens to change their ways of working no matter how inefficient those practices may be. The reasons that the firm is failing anyway is that it is unable to control some of its resource and income flows. The restructuring is an effort to reduce costs and these costs cutting exercises will enable the company to last for a longer time.
In conclusion it is quite clear that some private equity firms behave abominably. However this does not mean it completely negates some of the benefits of foreign investment into a firm arising out of the activities of private equity firms. Rather than gutting the economy of its assets, they sometimes help to preserve that same business equity.