Private Equity Is a Force for Good

By Kevin Hassett and Steven J. Davis – Private equity firms make investments in a wide range of businesses. Most of the investments are in privately held companies, but some involve the acquisition of publicly traded companies. The goal in each case is to create a thriving business so the private equity firm can sell its investment stake at a profit. This simple fact undercuts the claim that private equity firms systematically destroy jobs and loot companies. It’s hard to take a company public or sell it at a profit when it’s been looted.

Labor costs are a large share of total costs for the typical firm, and are often at least ten times larger than the profit a firm makes on a given sale. That is, a firm might sell something for a dollar that cost 93 cents to make, and make a 7 cent profit. If most of the 93 cents is labor cost, then small errors in labor management can have an enormous impact on profits. more>


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