You said PE firms add debt to the balance sheets of companies they own. Don’t higher levels of debt create real risk that the company will go bankrupt?
A. Higher levels of debt can create more risk. But debt at sound levels often helps focus management on the right goals: increasing revenue to meet all their obligations. Spending on wasteful practices such as corporate jets, lavish corporate headquarters, and other outlays that have little to do with improving the bottom line are difficult to justify. Rather, every action is predicated on the question: Will it grow the business and overall value? In a sense, the mindset in a PE firm is more like the homeowner with a mortgage who makes sure they can meet their monthly mortgage payments before spending on non-essential, luxury items.
Related Questions
- You said PE firms add debt to the balance sheets of companies they own. Don’t higher levels of debt create real risk that the company will go bankrupt?
- Is there something permanently broken about investing in little companies with good operations and strong balance sheets?
- Do cash flows reported by firms articulate with their income statements and balance sheets?
