Why do private equity firms have a worse reputation than VC, Banks, or other investment firms? Is it deserved or unwarranted?

Question

Why do private equity firms have a worse reputation than VC, Banks, or other investment firms? Is it deserved or unwarranted?

In: Economics

Answer 1

It’s deserved. The main reason is differences motivations.

See, private equity firms get BONUSES based on hitting certain profit goals (I am oversimplifying how these deals are structured but that’s the basics). Big bonuses to the tunes of millions of dollars.

So, for private equity firms they are actually more motivated financially to make profits skyrocket as much as the can in the short term, because that’s how they get the highest bonus payouts. And are not really motivated by the long term sustainability of a company because if the company does go under, they don’t care, they’ve already made their money from it.

As opposed to other relational investments that only make money really if the company is in fact successful long term.

Wendover Productions on YouTube made a great video detailing Private Equity called “how private equity ruined America”