Private-equity firms have been lulled into a cheap borrowing trap to magnify their portfolio returns. The downside of all of this - their strategy will also magnify their losses.

The huge trend away from public equity towards private-equity has been exciting to watch.  According to most business financial consultants, taking a company public has become so cumbersome and costly that most are deterred from those capital markets. Private-equity came in at a perfect time and used some aggressive leveraged buy-out (LBO) tactics. In essence, they would buy the majority stake of an emerging or medium-sized company by using their own equity to pay-off the shareholders, and then they would use a combination of the newly acquired business' and the private-equity firm's capacity to obtain financing to fund the growth and value-added strategies.

Leverage works great when your firm value is on the rise, but it can make life a lot more painful if the company is struggling. With a slow-down in the economy, many private-equity acquired firms are seeing their top-line fall and are having a challenge meeting their highly-leveraged debt obligations.  If you are considering an exit strategy of a sale of your business to a private-equity firm, than make sure you understand their plans for funding growth.