Private Equity Deals Can Destroy Companies, Communities and Countries

NEW YORK (TheStreet) -- A previous article in TheStreet detailed how highly paid CEOs at companies such as Cheniere Energy (LNG), Sandridge Energy (SD), Oracle (ORCL) and others can potentially damage their firms as funds that go to their compensation might have been better spent on sales and business development. This is still better than private equity in many cases as CEOs at least seek to augment the balance sheet and grow their companies. But for private equity, the pursuit of profits can many times result in larding on debt and selling off valuable corporate assets to increase the payout.

While there is much to admire about private equity firms such as KKR (KKR) and Carlyle (CG) as reviewed in TheStreet last week, the pursuit of outlandish returns has many times brought out the absolute worst in these transactions.

In a private equity deal, the firm will buy a company that is viewed as undervalued. The private equity group will then do what it can to make as much money as possible. This can include many admirable actions, such as making the business run more efficiently, and many not so endearing practices, such as borrowing as much money as possible and laying off workers to pay the private equity group a "dividend" simply for being the new owner. In 2013, private equity firms extracted a record $66.2 billion in these payments.

Many times the deals are driven by the desire to make money rather than to improve the business model of the company.

If you liked this article you might like

Broad Gains Push Wall Street Higher, S&P 500 on Track for Fifth Day of Gains

A Rebound in Crude and Energy Stocks Drives S&P 500 Higher for a Fifth Day

These Stocks Are Ready to Reverse Course

Buy on the Dips; Have to Love a Good Old-Fashioned Rally: Jim Cramer's View