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Private equity bought America's essential services

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Re: Private equity bought America's essential services

#21

Post by amazingamazing »

Seems strange to me:

1. No one forced these people to sell. Is the idea that you can’t sell to an entity with more money? If you block that good luck with the world economy.

2. If above is ok is the idea that the new owner is inherently worse because they have more money, whereas as the smaller would be OK then where are the new entrants?

3. Going to the article it is clear enough. These industries just are not lucrative to begin with. PE buys them and raises prices, but this only works because people complain instead of starting rival business.

4. Somehow leaving money on the table in the form of a backlog is bad? Why don’t others start a business and take those orders? Why don't they? Not profitable or worth the hassle.

Well there you go.

Separately, American manufacturing just seems very uncompetitive.

Re: Private equity bought America's essential services

#22

Post by magicalist »

Brushfire wrote: post #5

Why is there so much attention paid to the buyer (private equity) and no attention paid to the folks who sold the businesses to them?

> no attention paid to the folks who sold the businesses to them?

Why would the retiring dentist selling their practice be a trust or collusion problem?

Re: Private equity bought America's essential services

#23

Post by TheOtherHobbes »

fredley wrote: post #13

The people behind these funds are playing Monopoly IRL, and this in particular makes me very angry. The UK high street has been a notable victim. Gradually, over the past couple of decades, company after company has been snapped up by PE. Not just shops, but restaurants too. Suddenly you realise that the 5 or 6 high street chains that were competing are now owned by the same fund. Quality collapses, prices rise, not…

The combination of PE extraction and "property values = rent we want to change, even if the property is empty" has been economically catastrophic.

PE is often just legalised larceny.

Re: Private equity bought America's essential services

#24

Post by cj »

sokoloff wrote: post #8
sega_sai wrote: post #3

I simply don't understand why leveraged buy-out(LBO) is allowed in the first place. It is like paying for the company with the money from the company you are buying.

You understand mortgages, though, right? Even 3% or 0% down mortgages?

LBO's are like buying a rental property where the mortgage is approved based on expected future rental income from the property.

That's why the parent is saying "It is like paying for the company with the money from the company you are buying.".

Re: Private equity bought America's essential services

#25

Post by 1qaboutecs »

kokken wrote: post #9
quickthrowman wrote: post #7

Earlier quoted context omitted.

It is analogous to a mortgage, you put down X% and the house itself secures the loan, along with PMI if your equity is below 20%. The assets of the business secure the loans in the same way a house secures a mortgage.

It is not analogous because if you sell your house and the sale money is not enough to cover your mortgage you are still on the hook for what's left of the principal. A leveraged buyout is exclusively on the purchased company's books, so if the company goes to zero the PE parent company is not on the hook for a single penny.

Yes, this is the crucial distinction. (I wish that articles criticizing PE were framed in terms of LBOs + bankruptcy-law instead, because that's the root of the policy problem.) Corporations can go bankrupt without risk to the human beings who are owners/investors in the corporation.

Note that from the lender's perspective, the risk is the same and in a perfect-information universe could be mitigated by charging higher interest. The problem for society is the externality that the business's services get worse.

Re: Private equity bought America's essential services

#26

Post by dapperdrake »

bko wrote: post #10

The premise is that PE firms invest in companies, load them up with debt, and maximize profit. And it's especially nefarious in industries where people have "no choice but to pay" > The result is a backlog that reads like a financial opportunity in earnings calls and a crisis in every fire station in the country. As of 2025, REV Group’s backlog stands at $4.5 billion. Wait times for a custom fire truck run to four ye…

Learn how businesses are priced.

The buyer (who PE sells to) is "thinking about" collecting on the backlog.

Obviously, the backlog is "fake".

EDIT: The backlog is fake or worthless in the sense, that dollars worth of reputation (a.k.a. Brand) were given away to get pennies worth of backlog. Customer satisfaction is real, even in a business valuation sense.

Re: Private equity bought America's essential services

#27

Post by ses1984 »

bko wrote: post #10

The premise is that PE firms invest in companies, load them up with debt, and maximize profit. And it's especially nefarious in industries where people have "no choice but to pay" > The result is a backlog that reads like a financial opportunity in earnings calls and a crisis in every fire station in the country. As of 2025, REV Group’s backlog stands at $4.5 billion. Wait times for a custom fire truck run to four ye…

Let’s compare two hypothetical companies. They are equal in every way except one has a $4.5b backlog and one has a $0 backlog. Which company would you rather own?

Re: Private equity bought America's essential services

#29

Post by lumost »

sega_sai wrote: post #3

I simply don't understand why leveraged buy-out(LBO) is allowed in the first place. It is like paying for the company with the money from the company you are buying.

It provides liquidity to business owners.

As a business owner, if you want cash today because you are done with a business. You could go to a bank and get a loan to pay dividends. This is a bad deal for the bank as you have no incentive to operate the business after you cash out the loan. A private equity firm comes in and operates the business on the model that they still keep some of the profits after the loan value.

The crappy side comes in as a customer, the PE firm can do this to an arbitrary number of firms in the area and raise prices on each/cut services. PE firms can trivially build out monopolies. Many of these monopolies will be invisible as they leave the existing branding etc. in place.

Re: Private equity bought America's essential services

#30

Post by dapperdrake »

DanielHB wrote: post #15
kokken wrote: post #9

Earlier quoted context omitted.

It is not analogous because if you sell your house and the sale money is not enough to cover your mortgage you are still on the hook for what's left of the principal. A leveraged buyout is exclusively on the purchased company's books, so if the company goes to zero the PE parent company is not on the hook for a single penny.

What I don't understand is how the cost of banks repossessing these companies in case of default don't make the math unviable. Unless the company have a lot of fairly stable semi-liquid assets (like real estate) banks should be charging fairly high interest on these loans which would make most of these business unprofitable. Which would increase the rate of defaults (if they are authorized in the first place) and in…

Does "the bank" know that it is unviable?
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