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Private equity is sitting on $5T of existential dread

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Re: Private equity is sitting on $5T of existential dread

#31

Post by vannevar »

bfg_9k wrote: post #16
Apreche wrote: post #7

Private 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…

>I don't like PE firms but there's no doubt that they force businesses to operate better, and ultimately that benefits people like you and me...

They do not force businesses to "operate better." They force businesses to operate at a higher EBITDA, purely for their own benefit. Sometimes by chance this results in improvements for the employees or customers, but more often it ultimately results in a worse experience for both and the eventual demise of the business after the PE firm has taken sufficient profit to generate its target returns.

Re: Private equity is sitting on $5T of existential dread

#32

Post by matthewdgreen »

gruez wrote: post #22
matthewdgreen wrote: post #13

Earlier quoted context omitted.

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 inve…

I feel like it adds a huge layer of opacity. If you buy a private company, you have to monitor its financials and potentially report them. If you buy a private fund, you have to report the valuation of the fund. If the valuation of the fund just tends to go up (as many such funds do), you won’t necessarily know if this actually reflects the prospects of the underlying companies or just the impression of other investors. The impact of adding these layers is not necessarily efficiency (each layer of management adds more cost), but it is increasing distance from the messy short-term ups and downs of real businesses.

Re: Private equity is sitting on $5T of existential dread

#33

Post by vannevar »

bpt3 wrote: post #15
Apreche wrote: post #7

Private 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…

> Private equity is… private. Normal people have our savings invested in public markets. We can’t easily invest in private equity, and we shouldn’t because it’s too risky. Financial entities you rely on (pension funds, insurance companies, and universities among others) invest, and you may be getting access yourself thanks to Trump! > IMO any business over a certain size should be forced to be public and no option to…

Your tiny indirect share of the PE firm's profits will not match your direct loss of service as a customer and/or loss of compensation as an employee. Contrary to popular myth, wealth does not trickle down in any meaningful way. In an unregulated capitalist system, wealth flows toward the centers of wealth, just as surely as gravity pulls toward the centers of mass.

Re: Private equity is sitting on $5T of existential dread

#34

Post by toast0 »

Apreche wrote: post #7

Private 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…

> Private equity hoovers up existing businesses that are mostly well functioning.

There's many flavors of private equity, but the predatory ones tend to buy businesses that are slowly failing, and turn them into something that hits a brick wall and completely fails.

If it was a mostly well functioning business with good prospects, likely the current ownership would be less interested in selling or a sale to similar ownership could be made.

Dental clinics owned by a dentist sell to a new dentist all the time. If they're being sold to PE firms, it's because the business of being a dentist is changing and not in a good way. Dental insurance is a hassle and doesn't pay well, finding customers can be hard without accepting insurance, hiring staff is hard (at least in my area), young dentists may not have the capital to buy out retirees, new equipment is expensive but patients like being wowed.

Re: Private equity is sitting on $5T of existential dread

#35

Post by gruez »

BillSaysThis wrote: post #27
gruez wrote: post #24

Earlier quoted context omitted.

>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.

And you're assuming, or insinuating that lenders don't care that the collateral for their loans are getting drained by the PE company. It's like saying buying a house is a free money machine because you can demolish it and strip out the copper.

Re: Private equity is sitting on $5T of existential dread

#36

Post by bfg_9k »

nyc_data_geek wrote: post #30
bfg_9k wrote: post #16

Earlier 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…

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.

That was Broadcom and not a PE fund?

Re: Private equity is sitting on $5T of existential dread

#37

Post by bfg_9k »

SNosTrAnDbLe wrote: post #26
bfg_9k wrote: post #16

Earlier 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

Read Matt Levine's newsletter, it's a VERY simple business model built on financial engineering (it's rare they do something "novel"). But broadly, if you've got money in any sort of mutual fund, pension or retirement asset, the people managing your money WILL have some sort of allocation into PE funds. Even if you own a stock standard ETF like SPDR, PE funds like KKR are publicly listed.

Re: Private equity is sitting on $5T of existential dread

#38

Post by bfg_9k »

vannevar wrote: post #31
bfg_9k wrote: post #16

Earlier 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…

>I don't like PE firms but there's no doubt that they force businesses to operate better, and ultimately that benefits people like you and me... They do not force businesses to "operate better." They force businesses to operate at a higher EBITDA, purely for their own benefit. Sometimes by chance this results in improvements for the employees or customers, but more often it ultimately results in a worse experience fo…

Believe it or not, businesses don't exist to provide you a "good service" they exist to make money. So yes, they do in fact force firms to operate better when they attain a higher EBITDA.

Until the definition of why a business exists changes, you can purely measure a business success over how much money it makes for the owner, legally.

Should that be the case? No, I don't agree. But as it currently stands, that's how things are.

Re: Private equity is sitting on $5T of existential dread

#39

Post by bfg_9k »

arresin wrote: post #20
bfg_9k wrote: post #16

Earlier 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?

For the owners? Yeah, they do typically. For the service they provide stakeholders other than the owners? Probably not.

Re: Private equity is sitting on $5T of existential dread

#40

Post by bfg_9k »

sa46 wrote: post #25
bfg_9k wrote: post #16

Earlier 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…

> 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.…

Right, which implies that the business was not run well, or at the least didn't reach its full potential.
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