Private Equity: Past, Present, and Future

A distinguished financial economist and longtime observer of private equity markets offers his thoughts on the following questions: How does the current wave of private equity deals compare to the first wave of LBOs back in the 1980s? Why is private equity so controversial? What do private equity transactions really accomplish-that is, how do they affect corporate performance, and are they good for the economy? How will the recent changes in credit markets affect the future of private equity? And how will companies and the economy fare in a downturn or market correction? Are there lessons for publicly traded companies in the successes of private equity? A look back at the first wave of U.S. private equity deals in the 1980s shows that, although debtholders experienced considerable losses in many deals transacted in the last years of the decade, the general effects of such losses turned out to be relatively small, especially when set against the gains to (selling as well as buying) equityholders and the remarkable productivity increases by U.S. companies. And despite the current trouble in credit markets, economists' verdict on the most recent wave of deals is likely to prove equally positive.