The Economist's Digest23

Private equity
Get a grip
Originally from The Economist Nov.29th, 2008

Summary:
Many big companies buy bankrupting companies in a silly high price. Why? Since we know valuation is based on accounting system, its calculations involve subjective comparisons with quoted companies. Thus, conflicts of interest are possible.
How optimistic are these valuations? From1/1~9/31, developed-world shares dropped by about 1/4, consistent with a fall in private equity over 50%. Yet many companies report less of its fall.
Private-equity firms bought defensive firms which are being run better than quoted peers. However, low confidence in valuation makes these trades distressed. These firms are paid if they sell companies for a profit, not on the basis of current marks. Thus it doesn’t matter so much.
However, the pension funds and donation funds aren’t so. Many may choose to lower the absolute value of private-equity investments and concentrate on the best.
Pressure for conservative valuations must come from clients. There is a great need for experienced managers for this recession.

My opinion:
It’s difficult to evaluate a company as well as stock prices. In today’s chaos, many companies are put in a strict test about its real value. Which one can stand in this storm? Which one will go bankruptcy? All of the decisions will be made under the effect of accounting. Well, it’s uneasy to be an accountant in this period, but it’s also a great experience for young accountants to know the essence of equity.