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Private equity bought America's essential services

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Re: Private equity bought America's essential services

#11

Post by bonsai_spool »

Setting aside the obviously LLM-generated headings (if not text), this is a serious problem. PE has purchased fire inspection companies in my city such that every company that needs these must contract with the same PE overlord no matter which of the previous 15 companies they used to work with.

The new PE overlord will do things like send you a bill for inspection after you inquire about their pricing ("Well, our guy was in the area so he took a look!") while billing you for gas from their home location.

This is disgusting on so many levels—no competition here at all, just oppression by those with a lot of money.

Re: Private equity bought America's essential services

#12

Post by [deleted] »

quickthrowman wrote: post #7
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 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.

[deleted]

Re: Private equity bought America's essential services

#13

Post by fredley »

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 just at one chain but everywhere. People stop going, the chain collapses, another empty unit, the fund moves on. It's easy to point at Amazon and internet shopping as having degraded the British high street, but there are several other factors, and PE is a big one.

Re: Private equity bought America's essential services

#14

Post by kokken »

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?

Because a sale for cash is a basic legal contract that predates modern society by millenia, whereas a LBO that PE uses to purchase companies is a weak spot in American Capitalism created at the intersection of:

1.Shareholder primacy. Under Delaware corporate law (which governs most large U.S. public companies), once a board decides to sell, directors have a fiduciary duty to maximize the price shareholders receive. A premium cash offer from a PE firm is hard to refuse without legal exposure.

2.Interest deductibility. The tax code lets companies deduct interest payments but not dividends, which makes debt-heavy capital structures more tax-efficient. LBOs exploit a feature of tax law that exists for many reasons unrelated to private equity.

3.Freedom of contract and limited liability. Sponsors can put a thin equity check into a holding company, have that company borrow on the target's assets, and walk away if it fails, because limited liability is the foundation of corporate law generally.

Re: Private equity bought America's essential services

#15

Post by DanielHB »

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.

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 turn increase interest even further. I guess the PE is always maxxing out the leverage on every deal at _just_ the projected break-even point for loan repayment? But that leaves no room for error or changing market conditions which also increase the rate of defaults and so on.

Re: Private equity bought America's essential services

#16

Post by skinfaxi »

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?

What would that attention look like? "Long-time pillar of the community local pediatrician retires and sells their practice"?

How would you know this attention is getting paid or not unless you are consuming local news from the places this is happening?

Re: Private equity bought America's essential services

#18

Post by energy123 »

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.

> so if the company goes to zero the PE parent company is not on the hook for a single penny.

Sounds like a problem for whoever is providing the financing. Not really my concern unless you're saying there's some systemic problem it causes like with mortgage securitization during 2007. The lender will charge a high interest rate if what you're saying is true.

Re: Private equity bought America's essential services

#19

Post by TheOtherHobbes »

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, it's using bankruptcy and limited liability to extract value from companies that may well be completely solvent and functional with little/no downside or risk to PE.

Pure parasitism.

Re: Private equity bought America's essential services

#20

Post by sokoloff »

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.

That varies by state. Twelve states are fully non-recourse states (lenders can’t go after borrowers beyond the loan security); in other states they may be able to, but borrowers who default on their mortgage may not be particularly asset-rich targets in the first place.

If the company wasn’t able to borrow money for itself, a wrapper company could which would still have very closely the same effect as being an asset-poor borrower.

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