What's the point of private equity?

What is the ideal objective of private equity in the American economy?

To improve companies by enlisting the help of more experienced management and board members. Improving companies includes creating jobs, cutting excess costs, increasing value added etc. In many cases, synergies are created through strategic M&A of portfolio companies.

How is private equity designed to meet that objective?

Carried Interest is a large part of compensation and directly encourages profitable investments. Investors screen managing partners for competency based on their background and track record.

Please give examples of both how it has lived up to and failed to meet that objective.

Lived up to:More experienced professionals are able to improve companies in most cases. M&A of portfolio companies allows for leaner organizations and increased efficiency. Attempt to create ideal capital structure so that the firm can benefit from tax shields.

Failed: Levered up some companies to the point of insolvency. PE firms were still able to garner a positive return in some cases (e.g. dividend recaps). Some PE firms have too many portfolio companies to the point where they may have difficulty making meaningful contributions. Some strategic M&A activities could potentially result in fewer jobs as a result of synergies.

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