There's no denying that private equity firms represent a crucial component in the mergers and acquisition world, but how does that translate to the rest of the economy and is it a good thing?


While private equity can open up options for local firms and pump mega-dollars into the local economy, there are concerns that those dollars are not getting distributed widely enough and that the high amounts of debt used to finance these acquisitions eventually could threaten the region's economic health.


Background
Last week's reports that several private equity firms are considering a buyout of El Segundo-based Computer Sciences Corp. is only the latest example of private money being used to finance big transactions. Last month, Oaktree Capital Management announced that it was buying Sara Lee Corp.'s European operations. That followed Beverly Hills-based Platinum Equity's acquisition of computer modem maker U.S. Robotics Corp.


Actually, private equity has long played a role in the building of L.A.'s economy, stretching back more than 100 years to the fortunes amassed among many of the region's leading families, such as the Chandlers. But the concept of boutique firms really didn't take hold until the late 1980s. That's when Michael Milken and his Drexel Burnham Lambert operation in Beverly Hills popularized the use of high-yield or "junk" bonds as a source of funding for leveraged buyouts and corporate finance.


After Milken pleaded guilty to securities and disclosure violations in 1989, Drexel disbanded and Milken's prot & #233;g & #233;s branched off to form their own private equity firms, including Leonard Green & Partners LP and Freeman Spogli & Co.


In the late 1990s, as the stock market took off and the dot-com bubble grew, venture capital firms, which invest in emerging companies, dominated the headlines. But with the big players based up north, Los Angeles start-ups were often bypassed in favor of Silicon Valley and Orange County.


After the dot-com bubble burst and the stock market tanked, local private equity firms re-emerged as key players. They have been fueled by billions of dollars in investments from major pension funds such as Calpers, municipal investments and university endowments all seeking higher rates of return outside the capital markets.


Private Equity Fuels Growth
Many economists and industry players say private equity provides a crucial funding option for the small and mid-sized companies that now dominate the Los Angeles economy, allowing these companies to grow and the economy along with them.

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