Private equity is a type of investment capital where a firm or group of high-net-worth individuals invest in a company in return for an equity stake. This allows them 𒈔to own part of the company and make decisions about the future of the company in m🍷any cases.

澳洲幸运5开奖号码历史查询:Private equity is limited to priva🌞te companies as the name implies. It doesn't apply to publicly traded companies whose stock is listed on an exchange. Those companies have already raised investment capital by going public and listing their shares.

How Private Equity Works

Private equity also refers to firms or individuals that purchase large amounts of a 澳洲幸运5开奖号码历史查询:public company's shares to achieve majority ownership. They then take that public company private. It's delisted from a stock exchange when a puܫblic company becomes🔴 private.

The goal is always to gain influence and control over a company and make adjustments whether they're managerial or operational to improve the company's performance. This potentially results in stronger profits and high returns for the investors.

How Dividends Work

The receipt of 澳洲幸运5开奖号码历史查询:dividends is part of the returns fo🐈r private equity investors much as it is for shareholders of a public company. This process is referred to as dividend recapitalization.

Dividend recapitalization involves raising debt to pay private equity shareholders a dividend. It's a way for investors to receive a return without having to sell their shares but it can often be detrimental to the firm. Taking on more debt is a risky maneuver if the company doesn't have a strategy to pay it back.

Petco was taken private for the first time by Texas Pacific Group for $600 million in 2000. It previously had $89 million in long-term debt. It was saddled with about $360 million in long-term debt two years later when it went public again. The company then went private again in 2006. Iꦺt all begged the question of how its debt level could ha🥃ve grown so significantly in only two years.

Dividend Recapitalization

Dividend🦹 recapitalizations are very popular. The problem is that they only benefit a select few while adding debt to a company. This can lead to ꦬdangerous territory because capital is being used to pay this special dividend rather than to grow the business.

The increased debt will be nearly impossible to pay off if the economy goes into 澳洲幸运5开奖号码历史查询:recession or worse. This could potentially lead a company to 澳洲幸运5开奖号码历史查询:bankruptcy. A company would have to lay off employees, cut pay, close underperforming locations, or find other ways to free up cash to pay off the debt if creditors must be repaid and rampant growth isn’t a factor. The company would be headed in the wrong direction ev☂en if it wasn't faced with bankruptcy.

Unfortunately, there's no way of knowing which private companies are overleveraged. Bankruptcies can come out of nowhere. It’s easy to see which public companies are overleveraged, however, due to required transparency by the 澳洲幸运5开奖号码历史查询:Securities and 🍃Exchange Commission (SEC). You can also see which companies are likely to h🅺ave a sustainable dividend or dividend capable of growing.

Real World Examples

BJ’s Wholesale Club was taken private by Leonard Green and CVC Capital for $2.8 billion in 2011. Leonard Green and CVC Capital demanded $643 million for a dividend payment. BJ’s didn’t have $643 million available so it had to take out a loan.

Bankrate was taken private by Apax Partners for $570 million in 2009. Bankrat🐼e had no long-term debt before this event. It reportedly had more than $290 million in long-term debt one year after going private.

The Bottom Line

Private equity isn’t always what it’s cracked up to be unless you’re one of the select few who's being rewarded. There’s sometimes a moral issue related to what’s best for the company even if you fit into that category.

Dividend recapitalizations are a form of private equity dividend that's achieved by taking on additional loans just to pay select shareholders so they can earn a pre-sale profit. This can lead to an overleveraged situation and increased potential for bankruptcy.