|Weisbach: Understanding the Role of Private Equity|
Despite the negative perception of profit-centered private equity firms, this unregulated part of the U.S. finance system enabled the success of many of America’s most innovative companies in recent years, notes Michael Weisbach, PhD, professor and Ralph W. Kurtz Chair in Finance.
“They funded companies like Google and Netscape and Intel…that wouldn’t exist if the regulation (to regulate private equity firms like commercial banks) were in place at the time,” says Weisbach, who believes that to the extent that private equity firms can provide another source of financing in a tight credit market, they can help the economic recovery.
Unlike commercial banks, these firms stepped up and provided funding for venture capitalists and other innovators, as well as needed management to teach the innovators how to “convert their invention into a real company.”
In his second year at Fisher, Weisbach teaches private equity principles and corporate finance research. Recent research has explored why buyouts are leveraged and the financial structure of private equity firms. He says credit availability, which affected the pricing of deals, contributed to the financial crisis.
“Availability of credit drove the buyout market to very high heights and now that the credit has disappeared, the pricing has come down further,” he says, noting that firms borrowed as much as they could and when more financing became available, they had to pay higher prices.
Acknowledging that businesses and the public know little about private equity firms, Weisbach says that part of the problem is that the inner workings of Wall Street were “a bit of a mystery” to people outside of Wall Street, including the regulators and company executives who didn’t understand the implications of the risks being taken.
“Securitization and derivatives are actually quite simple things but the implementation of them can be complex,” he says.
He points to the role of mortgage-backed securities—something few knew anything about several years ago—in the financial crisis.
“One of the things I take from the financial crisis is that it’s really important for students to have a good understanding of these financial products because they’re not going away,” he says.
“One of the things I take from the financial crisis is that it’s really important for students to have a good understanding of these financial products because they’re not going away,”
Ralph W. Kurtz Chair in Finance