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PRIVATE EQUITY: A Contributing Factor to the Crisis or a Way to Resolve It?

Dr. Tamir Agmon is the  Associate Dean for Research and Development at the School of Management and Economics, Academic College Tel Aviv Yaffo in Israel. He is also  a Professor of Financial Economics at the School of Business, Economics  and Law at Gothenburg University in Sweden.

The economic ocean is comprised of a large number of small drops of water: a micro approach to the crisis

   The efforts of the Treasury and the Federal Reserve Board to deal with the current financial and economic crisis are focused on the “large picture”. Hundreds of billions of dollars are given to major financial institutions and to major manufacturers. This is clearly necessary and important. Yet, thousands of firms find themselves in financial and economic distress as a result of the crisis and as a result of their business policy in the boom period preceding the crisis. Firms that based their business policy on the assumption that American and other consumers will continue to buy more every year and financed this policy by borrowing ever increasing sums of money find themselves today in financial distress. Many of these firms have good business foundations.  They have the capabilities to design, produce and sell good products and useful services. They do have problems today in selling a particular product or a service to a particular industry, and they do have problems servicing the accumulated debt from the boom period. If they fail and disappear the cost to their employees, their suppliers, and to society as a whole is high. These small and medium size firms, often unknown to the public and below the radar of the media contribute substantially to the general welfare. It is impossible to address the needs and the potential of these firms at the macro, federal level. Fortunately, there is a private sector solution motivated by interests of investors, managers, employees and other stakeholders of the corporation. The solution is turnaround private equity investment by specialized companies and funds. Turnaround private equity is motivated by profit like any other investment activities. It is based on reframing the activities (assets) of a distressed firm, rearranging the liabilities to fit the new direction of the firm and manage the process of the turnaround. If successful, the private equity investors make an exit and leave the firm to continue and grow with other owners.

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