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Private equity bought America's essential services

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Re: Private equity bought America's essential services

#261

Post by mmooss »

muddi900 wrote: post #240
dd36 wrote: post #2

End consolidation. Go back to pre-1980s antitrust policy. Encourage competition and bust the trusts.

The pre 1980s standards were ridiculous though. However, even if the US moves to some 3 quarters of the way towards now would be a huge improvement. The "consumer harm" standard is idiotic.

Would you share a more detailed argument? Right now we only have adjectives: "ridiculous", "idiotic".

The US economy generally did very well with those standards, maybe the best it ever did, especially considering distribution of benefits.

Re: Private equity bought America's essential services

#262

Post by NoboruWataya »

aaronharnly wrote: post #241
spyckie2 wrote: post #118

The irony is that PEs exist largely because of pension funds. So to sum it up (not so nicely) we are transferring value from our current standard of living to pay for retirement checks for our old folks. Pensions fund a significant part of PE and they do so because they need around a 7% return in order to look solvent. If they do not have the higher PE returns, they basically go out if cash in 10 years and everyone w…

I have no idea how reliable this source is, but it looks plausible - from the "American Investment Council", which appears to be some kind of private equity trade association ( https://www.investmentcouncil.org ) https://www.psprs.com/uploads/sites/1/AIC_PublicPensionRepor... Some interesting details: - "Nearly 50 percent of the private equity investment dollars that make their way into American businesses come from…

This isn't surprising. Public companies tend to be lower risk (and therefore offer lower returns) than PE investments and pension funds want a mix of both. They want the juicy returns of PE deals, but a portfolio invested completely or mostly in PE would be unacceptably risky. Most pension fund mandates will set % limits on how much can be invested in different asset classes, with lower limits for riskier asset classes.

Re: Private equity bought America's essential services

#263

Post by throw10920 »

thijson wrote: post #158
spyckie2 wrote: post #118

The irony is that PEs exist largely because of pension funds. So to sum it up (not so nicely) we are transferring value from our current standard of living to pay for retirement checks for our old folks. Pensions fund a significant part of PE and they do so because they need around a 7% return in order to look solvent. If they do not have the higher PE returns, they basically go out if cash in 10 years and everyone w…

I wonder if this creates opportunity for spinning up competitors to these PE owned companies. If they are underinvesting in their products in order to extract value eventually their offerings will not be competitive.

I think in theory it does, but in practice the customers of PE-bought companies don't update their priors fast enough.

If a company being purchased by PE meant that they lost the vast majority of their customers as soon as contractually possible, then the possible value extracted by PE would drop off a cliff.

This isn't necessarily the fault of the customers - we're all dealing with a lot of information to process.

And, up until recently, it was reasonable to attach reputation to brand instead of to owners.

And I think that's a lot of what PE exploits - the gap between people's belief about a brand's reliability/reputation, and the fact that the actual reliability has been a function of who the actual owners of the company are for many years - but people are still attached to the old mental model.

(there may also be some value for PE to extract from assets aside from customer relationships and the higher-order "brand value", but I suspect that that's secondary - if I'm wrong please correct me)

Re: Private equity bought America's essential services

#264

Post by no_wizard »

muddi900 wrote: post #240
dd36 wrote: post #2

End consolidation. Go back to pre-1980s antitrust policy. Encourage competition and bust the trusts.

The pre 1980s standards were ridiculous though. However, even if the US moves to some 3 quarters of the way towards now would be a huge improvement. The "consumer harm" standard is idiotic.

I don’t see how they were ridiculous on the face it. The economy during that regulatory period grew into a huge juggernaut.

Most of the R&D that laid the future of the world happened during that period. The middle class grew to its largest portion during that period.

I don’t think the economy was hamstrung in the least

Re: Private equity bought America's essential services

#265

Post by cameldrv »

spyckie2 wrote: post #118

The irony is that PEs exist largely because of pension funds. So to sum it up (not so nicely) we are transferring value from our current standard of living to pay for retirement checks for our old folks. Pensions fund a significant part of PE and they do so because they need around a 7% return in order to look solvent. If they do not have the higher PE returns, they basically go out if cash in 10 years and everyone w…

You often see them “monetizing the brand.” That’s a nice way of saying “betraying customer trust.” They buy a company that’s known for high quality and then cut the quality. They can keep charging the high prices for a while until people realize that it’s not what it once was. After a while, higher end customers realize what’s happened and stop buying. Then the brand typically becomes a mid market brand and they start selling on Amazon to a less affluent clientele who still associate the brand with quality but wasn’t in their price range before. They usually cut quality again at this stage.

Effectively it’s burning all of the trust built up with consumers as firewood by tricking them into buying mediocre products at high prices.

Re: Private equity bought America's essential services

#266

Post by AlexandrB »

AndrewKemendo wrote: post #53
magicalist wrote: post #22

Earlier quoted context omitted.

> 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?

Because their customers, who they built a trusting relationship with, get hosed when the owner wants to cash out. That’s the whole math of it. That cash out comes from the future business increasing profit, which is over the longest term cutting service quality. Start small biz > be successful > want to retire > find someone to buy biz There’s a lot of pathways with a giant c corp, almost none for the local successfu…

> Because their customers, who they built a trusting relationship with, get hosed when the owner wants to cash out.

Unfortunately people are mortal and everything ends. Even if a someone didn't sell their business to PE, the trusting relationship is over once they retire. There's no guarantee that someone new - even if vetted - is going to be as good as the previous owner.

Re: Private equity bought America's essential services

#267

Post by trevithick »

Aurornis wrote: post #198
randusername wrote: post #98

Article doesn't really dig into the angle I personally find most horrifying, strip-mining social capital. In my area PE is gobbling up mom-and-pop apartment complexes, plumbing companies, restaurants, and generally making customers and employees alike pretty miserable. Hard-working founders should be able to cash out, but there has to be a better system than this one. Succession, maybe. Not that we should push an unm…

> Hard-working founders should be able to cash out, but there has to be a better system than this one. Succession, maybe. The large PE buyouts that came from the ridiculous ZIRP period could deliver better financial stability than handing the business down. I know two families with businesses that attracted huge PE offers in the past few years. One of them took the buyout and the family members slowly left their jobs…

Companies need to brand as "Not owned by PE" the same way health food has prominent labels on the packaging.

Re: Private equity bought America's essential services

#268

Post by _DeadFred_ »

basisword wrote: post #78
b3lvedere wrote: post #17

[flagged]

You don't understand! It's because it's not a truly free market. If it was truly free of regulation and government oversight it would be incredible.

I get this is sarcasm but... meanwhile the founders/great thinkers on free markets wrote extensively on how free markets REQUIRED strong government and strong government oversight.

Re: Private equity bought America's essential services

#269

Post by mcphage »

cameronh90 wrote: post #236
yardie wrote: post #195

Earlier quoted context omitted.

One of the tools we use was bought by PE last summer. When it was time to renew our support contract had tripled in price. I use it across 10 projects so our costs went from $200k to $500k. I let our account manager know this was unacceptable but even his hands were tied. Cancelled those contracts and let them know we were retooling with a competing tool and opensource to fill those gaps. The impression I got was we…

This is just the design of a PE fund. They run on a fixed cycle, so early on they heavily invest into their portfolio with the aim of resolving that risk and maximising the sale value by the end of the cycle. In principle, I don't think there's anything wrong with this. All investment expects a ROI over some time horizon. Public companies do the same thing. Anyone who founds a start-up is doing it too. The only real…

> how successful they have become at aggressively optimising for market value

They use money to turn value into money, which they then use to turn more value, into more money. And in the end, they have a lot of money, and all of the value is gone.

Re: Private equity bought America's essential services

#270

Post by mcphage »

thijson wrote: post #158
spyckie2 wrote: post #118

The irony is that PEs exist largely because of pension funds. So to sum it up (not so nicely) we are transferring value from our current standard of living to pay for retirement checks for our old folks. Pensions fund a significant part of PE and they do so because they need around a 7% return in order to look solvent. If they do not have the higher PE returns, they basically go out if cash in 10 years and everyone w…

I wonder if this creates opportunity for spinning up competitors to these PE owned companies. If they are underinvesting in their products in order to extract value eventually their offerings will not be competitive.

> eventually their offerings will not be competitive.

How so?

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