My issue with most PE deals is that the PE firm doesn’t have enough skin in the deal. Look at, say, the EA deal where almost all of the purchase price is coming from debt on EA. This to me is wrong because the new owners have almost no incentive to build the business for the long term—EA is a strong operator but face layoffs and LOB closures just to service the new debt.
Private equity is sitting on $5T of existential dread
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Re: Private equity is sitting on $5T of existential dread
#22Earlier quoted context omitted.
Not directly. But pension funds, investment groups, insurance companies — organizations who everyday investors rely on — give them money. And thanks to the current administration you will soon be able to direct 401k money to them.
The real problem here is the lack of accountability. We invented a huge pile of regulations forcing public firms to be transparent, largely because the lack of transparency was easy to abuse and small investors don’t have the resources to do their own investigatory work. Now those regulations are being undermined by this new backdoor approach, and so even public and regulated investments are becoming more risky. It’s…
>Now those regulations are being undermined by this new backdoor approach, and so even public and regulated investments are becoming more risky. It’s a bad trend and it will only reverse when people inevitably follow the incentives and there’s a big crisis.
It's hardly "backdoor" when pension funds and other institutions could always have bought private companies. If anything the recent shift to ETFs and passive investing is a move in the opposite direction. In the past such institutions would have managed their portfolios in-house, ie. private equity.
Re: Private equity is sitting on $5T of existential dread
#23Earlier quoted context omitted.
> But imagine a world where every strong business goes private and only failing businesses are public. That's the opposite of what happens with PE. PE firms don't buy fairly priced, well run businesses. They (typically) buy underpriced, poorly performing but cash flow heavy businesses that would benefit from leveraging up and making operations more lean. Think about it, if a business is fairly priced and well run, PE…
Do PE hospitals and veterinary clinics perform better?
Depends how you define "better" doesn't it?
Better ROI: yes!
Better Customer Prices: No!
Better Business Operations: Yes.
Better Customer Experience: No.
Better Profit Margins: Yes.
Better Care: No.
Better Shareholder Returns: Yes.
Better Employee Compensation: No.
Re: Private equity is sitting on $5T of existential dread
#24My issue with most PE deals is that the PE firm doesn’t have enough skin in the deal. Look at, say, the EA deal where almost all of the purchase price is coming from debt on EA. This to me is wrong because the new owners have almost no incentive to build the business for the long term—EA is a strong operator but face layoffs and LOB closures just to service the new debt.
>This to me is wrong because the new owners have almost no incentive to build the business for the long term—EA is a strong operator but face layoffs and LOB closures just to service the new debt.
They have very strong incentive because debt holders have first dibs on the assets if EA goes belly up. Equity owners (ie. PE) are the last to get paid, so it's very much in their best interest that EA doesn't even lose a tiny bit of money, because such losses are magnified through leverage.
Re: Private equity is sitting on $5T of existential dread
#25Private equity hoovers up existing businesses that are mostly well functioning. If they fail, we suffer as those businesses we depend upon fail and disappear. Everything from big national chains to your local doctors office can be destroyed in this way. But if private equity succeeds, we also suffer. Private equity is… private. Normal people have our savings invested in public markets. We can’t easily invest in priva…
> But imagine a world where every strong business goes private and only failing businesses are public. That's the opposite of what happens with PE. PE firms don't buy fairly priced, well run businesses. They (typically) buy underpriced, poorly performing but cash flow heavy businesses that would benefit from leveraging up and making operations more lean. Think about it, if a business is fairly priced and well run, PE…
> Think about it, if a business is fairly priced and well run, PE firms have no incentive to buy it because where do they generate returns?
PE has access to business models unavailable to the original owner.
- Buy all local dentist clinics at an enticing markup then increase rates.
- Buy businesses and migrate them to tech where the PE firm holds an advantage. For example, a PE firm that runs its own payment gateway.
- Buy a business that complements a larger business to reduce churn or increase sales.
Re: Private equity is sitting on $5T of existential dread
#26Private equity hoovers up existing businesses that are mostly well functioning. If they fail, we suffer as those businesses we depend upon fail and disappear. Everything from big national chains to your local doctors office can be destroyed in this way. But if private equity succeeds, we also suffer. Private equity is… private. Normal people have our savings invested in public markets. We can’t easily invest in priva…
> But imagine a world where every strong business goes private and only failing businesses are public. That's the opposite of what happens with PE. PE firms don't buy fairly priced, well run businesses. They (typically) buy underpriced, poorly performing but cash flow heavy businesses that would benefit from leveraging up and making operations more lean. Think about it, if a business is fairly priced and well run, PE…
How does private equity businesses operating better improve our retirement savings? Wont they just improve the PE fund performance and benefit only the investors ?I am genuinely curious as its very difficult to find public information on how they actually function
Re: Private equity is sitting on $5T of existential dread
#27My issue with most PE deals is that the PE firm doesn’t have enough skin in the deal. Look at, say, the EA deal where almost all of the purchase price is coming from debt on EA. This to me is wrong because the new owners have almost no incentive to build the business for the long term—EA is a strong operator but face layoffs and LOB closures just to service the new debt.
>This to me is wrong because the new owners have almost no incentive to build the business for the long term—EA is a strong operator but face layoffs and LOB closures just to service the new debt. They have very strong incentive because debt holders have first dibs on the assets if EA goes belly up. Equity owners (ie. PE) are the last to get paid, so it's very much in their best interest that EA doesn't even lose a t…
You’re assuming, or insinuating, the PE firms don’t immediately start paying themselves outsized management fees, bonuses, and the like.
Re: Private equity is sitting on $5T of existential dread
#28Earlier quoted context omitted.
Seems like that’s literally not true considering that most people can only invest in public exchange tradeable funds.
Not directly. But pension funds, investment groups, insurance companies — organizations who everyday investors rely on — give them money. And thanks to the current administration you will soon be able to direct 401k money to them.
Also banks. The second order effects of a mass collapse of PE market will ensure the public securities market will also see negative effects.
Re: Private equity is sitting on $5T of existential dread
#29Earlier quoted context omitted.
> But imagine a world where every strong business goes private and only failing businesses are public. That's the opposite of what happens with PE. PE firms don't buy fairly priced, well run businesses. They (typically) buy underpriced, poorly performing but cash flow heavy businesses that would benefit from leveraging up and making operations more lean. Think about it, if a business is fairly priced and well run, PE…
How does private equity businesses operating better improve our retirement savings? Wont they just improve the PE fund performance and benefit only the investors ?I am genuinely curious as its very difficult to find public information on how they actually function
PE firms are heavily funded by pensions, sovereign wealth, university endowments, and insurance companies.
Re: Private equity is sitting on $5T of existential dread
#30Private equity hoovers up existing businesses that are mostly well functioning. If they fail, we suffer as those businesses we depend upon fail and disappear. Everything from big national chains to your local doctors office can be destroyed in this way. But if private equity succeeds, we also suffer. Private equity is… private. Normal people have our savings invested in public markets. We can’t easily invest in priva…
> But imagine a world where every strong business goes private and only failing businesses are public. That's the opposite of what happens with PE. PE firms don't buy fairly priced, well run businesses. They (typically) buy underpriced, poorly performing but cash flow heavy businesses that would benefit from leveraging up and making operations more lean. Think about it, if a business is fairly priced and well run, PE…
Or they can do things like buy VMWare, gut the support/engineering/sales staff, hound and threaten their install base, and ultimatley profit greatly by stripping down and destroying a perfectly healthy if relatively late stage business.