Private equity operates with cool detachment, with highly visible results.
The global value of private-equity buyouts larger than $1 billion totaled $502 billion last year, according to Dealogic LLC.
In the September issue of Harvard Business Review, Felix Barber and Michael Goold contend that U.S. public companies have ceded this financial "sweet spot" to private equity and should join in the buying and selling of firms.
Although private equity enjoys tax advantages that permit it to make deals more easily than a public company, the authors see opportunities for those public companies with the proper skills to turn around businesses that appear to have value.
Private equity is changing the way Americans invest.
Critics call it profiteering and asset stripping, while admirers see it as emphasizing efficiency and value. Shareholders see a quick payback, not an investment that merits continuous attention.
Acquisitions by public companies are presented as opportunities for some kind of synergy. This is based on a belief, right or wrong, that neither Wall Street nor average investors understand a company lacking an overall theme.
Private equity, on the other hand, generally buys companies to sell them. It takes care to make some improvements and then unloads them. The money was raised from institutions and wealthy individuals given no say about how it is to be spent. There seems to be no shortage of such folks.
The purchased companies generally keep on running, with their managers receiving rewards linked to profit, Barber and Goold note. Rarely does private equity become involved in day-to-day operations.
When stock prices and economic circumstances align properly, private equity profits from shrewd deal-making. But many experts hope public companies will retain their traditional desire to make a longer-term go of whatever businesses they acquire. Warren Buffett's Berkshire Hathaway owns several types of businesses, for example, but intends to keep them.
An environment in which investors, large and small, have quick profit on their minds is a risky and unstable environment. It turns stock investing into a game, and experience shows where that can lead.
Andrew Leckey is a Tribune Media Services columnist.