Earlier quoted context omitted.
> the fund loses a lot of money This isn't equivocally true. It all depends on how levered the investment is and how much debt they pulled off the books to pay back the banks (or their fund). The stereotypical PE fund looks like this: buy company for $100M with 50% debt and 50% equity. Meaning, investment banks give them $50M to buy the company at market rates and the PE firm spends the other $50M from their fund. Lo…
> The LPs are super diversified, so that's irrelevant Losing a dollar is losing a dollar, diversified or not. The investors in these PE funds lost money. Where they net out against other investments is irrelevant. > GPs make their base salary from management fees and their bonus from carry on the return of the fund Salary, yes. But good luck earning any carry on this fund. (They'll be lucky if DPI crosses 1x with a h…
Again, depends on who's left with the debt...the typical large cap PE playbook is to hand the debt off to the company, while the PE firm and the senior debt have been paid off by the time the company gets liquidated. I haven't reviewed all of the financials and the SEC filings, but normally if you're levered at 63%, then it's likely they were able to pay off the equity in short order.
See case study here: https://d1ge0kk1l5kms0.cloudfront.net/images/G/01/books/stec...
Another trend that was gaining popularity in the private equity industry involved rapidly accessing the capital markets after closing a deal to raise cash to pay a large dividend to the private equity owners. Firms typically used the debt markets to finance these dividends, creating more highly levered, riskier companies. In some cases, dividends paid to private equity firms within one year of their original investment equaled the original equity commitment. In the Hertz LBO transaction, Clayton, Dubilier & Rice, Carlyle Group, and Merrill Lynch collected $1 billion in bank-funded dividends six months after buying rental car company Hertz for $15 billion.6 About four months later, Hertz issued an IPO to pay off the debt and to fund an additional dividend, resulting in total dividends paid to the owners that equaled 54 percent of their original investment of $2.3 billion (still leaving them with 71 percent ownership). Private equity funds also took cash out of their portfolio companies to pay large “advisory” fees to themselves. These fees exceeded $50 million on large transactions during the buyout phase and annual fees often continued throughout their ownership.
In that same article they mention Toyr R Us had ~$600M in EBITDA in 2005 in which they could have easily paid off at the initial $1.3B that the PE firms put up in equity financing. They also paid 9x (!!!!) EBITDA for a Retailer....that's a ridiculous multiple with highly unlikely outcomes for multiple expansion. So you only have three options (1) debt pump and dump (2) consolidate the back-office (3) buy add-ons.
This is all leads me to believe that the real suckers in this whole thing are the current debtors. Pure speculation on my side, but I really believe that Toys R Us was already on it's way out (e.g. Amazon). Bain/KKR trying to find deal flow where none could be found, figured they had two viable intertwined paths (1) try to sell it to Amazon (2) load it up with so much debt that if they couldn't sell it to Amazon, they wouldn't lose money if they paid themselves back before it went into bankruptcy.
Capitalists place bets in things that go down too.
PS - 1x DPI ain't terrible in a seller's market (which it has been for large cap in the last 10 years). I'm not sure what KKR or Bain fund this deal came out of, but the real truth will be in there.