When you think of opportunities that directly benefit society, private equity (PE) might not come to mind—but perhaps it should. While some private equity firms have made questionable decisions over the years, PE is necessary for the business industry’s success. Private equity firms purchase and manage public companies, oversee private investments, and work in other areas the public may not know about. The guidance and management these firms provide is crucial to companies’ success.
Ken Mehlman, Global Head of Public Affairs at private equity firm KKR, says that private equity is good for society in a number of ways. PE began as solutions to problems companies faced, particularly in management and leadership. Mehlman says that when KKR invests in and takes over a company, KKR gets management to think like company owners. “If you’re the CEO, you’re not going to be jetting around the country in a company plane, regardless of whether the company is doing well, because that’s your money,” Mehlman says.
He also adds that PE is good for companies because it helps streamline their management and make them more effective. By getting good managers to think long-term about their company, rather than short-term, their leadership improves significantly. And if a company is run well with long-term goals in mind, the company can then offer sustainable jobs and make companies better in general.
Private equity companies often get a bad rap in pop culture, but they are not the enemy. They often swoop in to help ailing companies do and be better. PE firms do stand to make a lot of money, but they do this through two percent annual fees on the total fund with retention of twenty percent of a company’s profits. Considering a lot of the work that PE firms do, these percentages are fairly modest. The incentives for helping companies do well certainly exist: any loss the company suffers hurts the PE firm, too.
Without PE firms, many companies in existence today would have crumpled or become prey to corporate greed or poor management. PE firms are sometimes necessary to make a company fruitful and efficient, so an investment from one is often a gesture that is as helpful as it is lucrative.