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By Misty - Posted on 12 April 2012
The Magic of Private Equity in 8 Simple Steps
This is possibly one of the most misleading videos I have ever seen in my life. Where do I begin?
#1. Reich claims that private equity managers don't invest their own capital. Just because he says it I guess that makes it true? No it doesn't. P.E. managers often put up their own money for seed because their investors (we'll cover them in a moment) fully expect them to put their money where their mouths are.
1.b. The pool of investors who put their money into P.E. aren't exactly poor innocent unwitting investors. Private equity can only be offered to "accredited investors" - a Securities Act 1933 law. Per that law, P.E. can only be offered to individuals with a minimum net worth of $1 million, excluding their primary residence, and the minimum investment in a private equity fund is typically $250,000 - due to that, the usual investors in P.E. funds are more in the $5 million+ range of net worth. (Other accredited investors include trusts with $5 million, etc.)
#4. Private equity managers use the companies they buy as collateral and receive a tax deduction for the interest. Yep, that's true. And so do thousands of other private business owners. Why is it such a bad thing when P.E. firms do it?
#6. They sell the company for more than they bought it for. No! Say it isn't so!!! C'mon - isn't that what investors hope to do every time they buy a stock: sell it for more than they bought it for? Again, not sure why this is an evil concept when Romney did it.
I'm not going to vote for Romney as POTUS but my reasons are more because (1) I'm sticking with my Obama choice; (2) Romney will pander to anyone to get votes. The flip flopping has become ridiculous.
However, I've grown tired of the attacks regarding Bain Capital and private equity investments, and I've grown tired of the mis-information about how private equity investing works. It's not evil... Private equity as an asset class is an extremely attractive option for high net worth investors to further diversify their portfolio.
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