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Private equity: A fee too far [pdf]

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Re: Private equity: A fee too far [pdf]

#21

Post by LatteLazy »

throwawayqqq11 wrote: post #17
LatteLazy wrote: post #8

Earlier quoted context omitted.

The value is in the resources of the company being liquidated. Right now, those resources are being used to produce $X per year in profit. But if we sold them all, and just put the cash in a bank we could get $Y in interest. Make sense? If Y>X then the best thing to do is liquidate the company. An example might help: imagine you have a steel mill, and it makes just $1000 a year. Someone from Canada comes to you and s…

What you say makes sense, but it still misses the main point: Market mechanism fail because of conflicting interests. Your example describes a functioning market, the article describes only one symptom (!) of the opposite. It's true, resource allocation is very important. But is the free market more important than for example the declining life expectancy in the US? I don't think, you will find a solution besides reg…

>It's true, resource allocation is very important. But is the free market more important than for example the declining life expectancy in the US?

The free market does not know or care. It takes the preferences of all the people and the government they elected and combines them. If people choose health they get it. If they choose the opposite they get it. That's sort of the point here.

It might be surprising that people prefer being fat and watching TV to long, educated, lives. But it does seem to be their preference.

I am all for trying to change that. But people were lazy and gluttonous long before Private equity (a tiny part of the wider system) ever reared it's head...

Re: Private equity: A fee too far [pdf]

#22

Post by UncleMeat »

LatteLazy wrote: post #8
throwawayqqq11 wrote: post #7

Earlier quoted context omitted.

The main point of this article is the conflicting interests of greedy managers. > If they make a profit then they're actually adding value. Martin Skrelli. [0] Please tell me what and where his added value is. And please no fear mongering about the rich getting poorer. [0] https://en.m.wikipedia.org/wiki/Martin_Shkreli

The value is in the resources of the company being liquidated. Right now, those resources are being used to produce $X per year in profit. But if we sold them all, and just put the cash in a bank we could get $Y in interest. Make sense? If Y>X then the best thing to do is liquidate the company. An example might help: imagine you have a steel mill, and it makes just $1000 a year. Someone from Canada comes to you and s…

> If Y>X then the best thing to do is liquidate the company.

Only if you use a particular definition of "best thing."

Consider a nonprofit. It raises funds and buys meals for people who are food insecure. No money is created for its investors. It has a brand that people like and feel good about. Now imagine the board of this nonprofit decides that making $0 is not their favorite thing so they halt all of their programs and sell their brand to Kraft, who uses the brand on some of their products to capitalize on the popular brand without giving any food to the poor.

Kraft's stock goes up because they are selling more stuff.

Is the world really more valuable now?

Or an even simpler example. Consider a pharma company that sells some lifesaving medication. They charge $X for it. They do some math and determine that if they charge $10X for it, that half of their customers will no longer be able to afford the product and half will continue purchasing it to stay alive. Their revenue increases by 5X. Stacks on stacks for their investors.

Is the world really more valuable now? This company has more money but only half as many people are protected from their life threatening disease.

Re: Private equity: A fee too far [pdf]

#23

Post by boppo1 »

LatteLazy wrote: post #19
boppo1 wrote: post #14

Earlier quoted context omitted.

Yeah, but this fell apart when the FOMC killed price discovery for 15 odd years. 'Profit' is not helpful to society, the goods and services it reflects is. When you tilt the pinball table so companies that make nothing and promise the future are valuable (theranos, wework, TSLA for a long time, anything Kathy Wood buys) while under-valuing companies that make and do stuff now, you wind up hollowing out the use of res…

I don't necessarily disagree with a lot of what you say. I think it just fails to see the wider system. For instance when you said "profit is not helpful to society" you were correct. But profit is the reward people get for doing things useful to society. It's the signal that the things they are doing ARE useful. And profit pays to continue and expand those actions. A more general theme is your distinction between "r…

>That's people wanting the "wrong" things. That won't change under any other system...

Do you know what the FOMC is/does?

Re: Private equity: A fee too far [pdf]

#24

Post by bigbillheck »

LatteLazy wrote: post #5

If someone wants to buy a company and liquidate it, that's up to them. If they make a profit then they're actually adding value. If they don't they will soon stop. Doing it via fees and loans is no different to just a straight liquidation as far as I can see. And since all the owners/investors are willingly taking part of they lose their money, that's on them. It's sad that people's jobs get eliminated. But we have a…

> If someone wants to buy a company and liquidate it, that's up to them.

Maybe it shouldn't be.

Re: Private equity: A fee too far [pdf]

#25

Post by mistrial9 »

LatteLazy wrote: post #20
ceejayoz wrote: post #15

Earlier quoted context omitted.

> An example might help: imagine you have a steel mill, and it makes just $1000 a year. Someone from Canada comes to you and says "I'll give you 50m for the mill, I want to take all the equipment to Canada where there is a shortage of steel". He will fulfil more demand at a better price by doing that (hence he will offer 50m for a steel mill that only makes a pittance in the USA). And you can't ake the 50mil and buil…

No, actually. The fact people won't pay for X is exactly how you know that people don't want X. So a prolonged, less than cost of production, price for something DOES mean you should stop making it. That's sort of the whole point of prices... This sometimes forces us to confront hard truths (people want perfume and hamburgers and NFTs, not ever larger amounts of steel). But that's actually the big strength of capital…

> won't pay for X is exactly how you know that people don't want X

this is not true in many cases -- a commodification of ordinary (and valuable) things drives a price down, with motivated agents seeking "bargains" or plunder. Secondly, kindness is mistaken for weakness. Abundance with a gift economy and manners is replaced with rent seeking with punishment for offenders, and constant constraints imposed to increase price.

The market is not making the most public goods, it is making the most effective jails and most addictive products as a natural result of profit maximization and command-and-control exchanges.

Re: Private equity: A fee too far [pdf]

#26

Post by lmeyerov »

LatteLazy wrote: post #8
throwawayqqq11 wrote: post #7

Earlier quoted context omitted.

The main point of this article is the conflicting interests of greedy managers. > If they make a profit then they're actually adding value. Martin Skrelli. [0] Please tell me what and where his added value is. And please no fear mongering about the rich getting poorer. [0] https://en.m.wikipedia.org/wiki/Martin_Shkreli

The value is in the resources of the company being liquidated. Right now, those resources are being used to produce $X per year in profit. But if we sold them all, and just put the cash in a bank we could get $Y in interest. Make sense? If Y>X then the best thing to do is liquidate the company. An example might help: imagine you have a steel mill, and it makes just $1000 a year. Someone from Canada comes to you and s…

PE & profitability is tricky because of its short-term nature. PE in tech often comes in as post-VC money to gut everything, including r&d, as part of reselling/bundling/etc as a more efficient thing at the expense of a growing & innovating thing, and often worse for jobs in the primary host country. When I hear about a PE buyout, my thought is generally not, "oh great, this makes me want to finally work at X, they're serious about growing again!" but "oh no..".

As easy early-stage growth tapers, which is typical, the more r&d is needed to figure that out. The company likely still has that in their DNA. But... that also makes it easy to flip the books on margin & profitability by firing all those seasoned product, dev, r&d, etc people, which can easily be 20-40% of the company. Likewise, replace much of the remaining expensive staff with folks not from the home company country. Founders cashing out and PE & replacement CEOs taking over changes a lot.

I'm not sure that kind of profitability is all that great from a taxpayer and economics perspective. Replacing cultures of excess and immature management does sound like value... but that is a fig leaf over what is going on in reality. There are similar questions about VC pump-and-dumps also not being good for society, despite similar reasoning. It's a hard topic - I couldn't find it, but Matt Stoller's newsletter on modern anti-monopoly economics & legislation news touches on these areas periodically.

Re: Private equity: A fee too far [pdf]

#27

Post by RoseRose »

boppo1 wrote: post #12
DarkNova6 wrote: post #4

Earlier quoted context omitted.

Some people even claim that this is a natural process. But this phenomenon is most visible in the US and UK. It is the logical result of privatization and market liberalization from past decades. Power and wealth has shifted from the commons to private ownership and this is only going to continue. Of course this would be a different story if private actors had to play by the same rules, but if you amass enough capita…

>you are „too big to fail“ for capitalism Isn't market intervention more like corporate socialism though? I mean that's literally not capitalism.

> Isn't market intervention more like corporate socialism though? I mean that's literally not capitalism.

I mean I'd argue the "too big to fail bailots" are a particularly ineffective bit of market intervention in the long term, but generally speaking "market intervention to save the health of the economy" is bog-standard neoliberal, capitalist ideology. The only whiff of socialism comes from recognizing that without guardrails the fully freed economy will destabilize, possibly from angry with pitchforks, angry they can't afford food, shelter, and the basics. So—it is still serving the ultimate needs of the capitalists who run society by not ousting them when they do destabilizing things.

Plus, if this weren't capitalism, no society in history would have been capitalist making it a bit of a useless word for sticking to extant political movements.

Re: Private equity: A fee too far [pdf]

#28

Post by throwawayqqq11 »

LatteLazy wrote: post #21
throwawayqqq11 wrote: post #17

Earlier quoted context omitted.

What you say makes sense, but it still misses the main point: Market mechanism fail because of conflicting interests. Your example describes a functioning market, the article describes only one symptom (!) of the opposite. It's true, resource allocation is very important. But is the free market more important than for example the declining life expectancy in the US? I don't think, you will find a solution besides reg…

>It's true, resource allocation is very important. But is the free market more important than for example the declining life expectancy in the US? The free market does not know or care. It takes the preferences of all the people and the government they elected and combines them. If people choose health they get it. If they choose the opposite they get it. That's sort of the point here. It might be surprising that peo…

> The free market [...] takes the preferences of all the people and the government they elected and combines them.

Incomplete picture. The missing part is imbalance of power of the agents.

The case of the greedy manager or the price driving steel trader again...

Im out now. Have nothing more to say.

Re: Private equity: A fee too far [pdf]

#29

Post by dfxm12 »

boppo1 wrote: post #12
DarkNova6 wrote: post #4

Earlier quoted context omitted.

Some people even claim that this is a natural process. But this phenomenon is most visible in the US and UK. It is the logical result of privatization and market liberalization from past decades. Power and wealth has shifted from the commons to private ownership and this is only going to continue. Of course this would be a different story if private actors had to play by the same rules, but if you amass enough capita…

>you are „too big to fail“ for capitalism Isn't market intervention more like corporate socialism though? I mean that's literally not capitalism.

"Corporate socialism" is the privatization of the profits and socializing the risks. Who owns the banks that were bailed out by the US government in 08? hint: they weren't nationalized; they're still private. Capitalism comes in many forms. If market intervention enforces private ownership of capital, it is still a feature of Captialism.

Re: Private equity: A fee too far [pdf]

#30

Post by BlandDuck »

refurb wrote: post #6

I'm not sure I understand the concern: - company is bought in a LBO by a PE company - PE company has onerous fees as a part of the buyout agree (which the target company agrees to) - the victim are institutional investors who pay these high fees, but were willing partners to the LBO I mean it sounds like one group of people from Wall Street trying to rip off another group from Wall Street. Can't the institutional inv…

You are absolutely right.

A few comments:

- The target company doesn't "agree" to the fees. The PE fund owns the target company outright, so they can manage it however they like. It would be like saying that when you cut the grass on your own lawn (even if you cut it in onerous ways, to stretch the metaphor), the lawn doesn't have to "agree" to be cut. Of course not. You own it, you can do with it as you please.

- You are correct that the victims were the institutional investors (LPs), because the extra fees reduced the profits in the fund (less money was distributed from the portfolio companies to the fund, which the LPs would get, because some of the money was paid in fees directly to the managing PE firm). I say "were" because LPs have absolutely become aware of this problem. This is old news. The article is from 2014. Today, all partnership agreements state that the fee charged to the portfolio companies enter into the fund's waterfall. Problem solved.

- "Do we need to somehow protect institutional investors who manage tens of billions of dollars? Are they a victim that needs protection?" This is a super important point, and something that is often overlooked in PE discussions. It's like all the hand-wringing about the "poor creditors" who lose out when PE deals go bad. Guess what, these "creditors" are investment banks, like Goldman Sachs. However you otherwise feel about GS, there is no reason to ever feel sorry for them.

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