Private equity refers to a type of investment aimed at gaining significant, or even complete, control of a company in the hopes of earning

a high return. As the name implies, private equity funds invest in assets that either are not owned publicly or that are publicly owned but the private equity buyer plans to take private. Though the money used to fund these investments comes from private markets, private equity firms invest in both privately and publicly held companies. The private equity industry has evolved substantially over the past decade or so. The basic principle has remained constant: a group of investors buy out a company and use that company's earnings to pay themselves back. What has changed are the sheer numbers of recent private equity deals. In the past ten years, the record for the most expensive buyout has been broken and re-broken several times. Private equity firms have been acquiring companies left and right, paying sometimes shockingly high premiums over these companies' market values. As a result, takeover targets are demanding exorbitant prices for their outstanding shares; with the massive buyouts that have made headlines around the world, companies now expect a certain premium over their current value. One example is Free-scale Semiconductor, who turned down a deal that paid a nearly 30% premium over its market value, holding out for a sweeter package, which it received. The sheer number of these high-priced deals that have occurred in recent years have led some to question whether this pace is sustainable in the long run. This could turn out to be a self-fulfilling prophecy; as concerns grow and people become less eager to invest in private equity deals, firms won't be able to raise the money to fund their acquisitions, essentially crippling the industry. Who Is Impacted by Private Equity? Commercial banks
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Bank of America (BAC), Citigroup (C), and J P Morgan Chase (JPM) are among the largest lenders to private equity firms. These are the main firms who have been stuck with the high-yield bonds that investors are increasingly reluctant to buy. A decline in private equity would lead to big losses for these lenders, since they're already sitting on over $40 billion in unsellable debt.[1]

Investment banks
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Goldman Sachs Group (GS), Merrill Lynch (MER), Morgan Stanley (MS), Lehman Brothers Fin SA (LEH), and other investment banks have been offering billions of dollars in bridge loans, which can be used to cover the costs of a private equity acquisition until permanent funding is found. These loans haven't been used that often in the past, but as private equity firms find it harder to raise capital by other methods, they could start drawing upon these loans, leaving investment banks with billions of dollars of loans. With the current state of the debt market, these banks could have trouble finding secondary buyers, meaning that they'd be stuck with heaps of unwanted loans. Also, investment banks are heavily involved with the underwriting of debt and securities for acquisitions and IPOs. These services bring in hefty fees for I-banks, and any decrease in demand for private equity-related services would negatively impact revenues.

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