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Are private buyouts good for the economy?

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The new birth of Burger King Corp. this year delivered the beef to the investing public: Under private management, the long-struggling company turned a corner and then made shares available on the New York Stock Exchange.

But the managers kept some major side orders to themselves. They took out a big loan and paid themselves a $367 million dividend and other fees as well. In all, they extracted cash worth about one-sixth of Burger King's market value.

That's one whopper of a payout, and it's not unusual these days.

Increasingly, investors with deep pockets are banding together to form "private equity funds." Just as the leveraged buyout firms did in the 1980s, they are buying up companies, restructuring them, and then selling them back on public stock exchanges – often for a supersized profit.

The practice isn't new, but it remains controversial. And the scale of the trend far exceeds what it was back when Henry Kravis and Michael Milken made their magazine cover debuts.

Hardly a week goes by without more major deals being announced. Meanwhile, the very success of these buyout funds is attracting billions more dollars from investors – raising the prospect of many more buyouts in coming months. In essence, the wealthy are deciding that if you want to make money in stocks, the stock market isn't the place to do it.

"Private equity is a very big deal. It has moved from the periphery of the capital markets 20 years ago much closer toward the center," says Robert Bruner, dean of the University of Virginia's Darden Graduate Business School.

With money pouring in from pension funds and other deep pockets, the trend shows no signs of stopping. It could end up engulfing companies as diverse as the Los Angeles Times newspaper and ailing automotive supplier Delphi Corp. Just last week, Bill Gates and a Saudi prince were among the investors backing a private buyout of Four Seasons hotels, while another buyout fund announced its plan to acquire the Outback Steakhouse.


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