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Private equity bought America's essential services

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Re: Private equity bought America's essential services

#381

Post by xboxnolifes »

alexpotato wrote: post #376
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…

> By year 3 they start the squeeze, layoffs, asset selloffs (stripping), and lowering quality, raising prices. That is where the real teeth of wolf are shown. To play devil's advocate: Doesn't this also open the market to new entrants? e.g. young person looking to start a HVAC company in the old days couldn't compete with the established firm that already had contracts and the local market wasn't big enough for two p…

Unless the new company ends up more competitive than the pre-PE company, does it matter? Thats not a good outcome, thats just a period of bad time between 2 good times.

Re: Private equity bought America's essential services

#383

Post by ses1984 »

bko wrote: post #308
ses1984 wrote: post #145

Earlier quoted context omitted.

Have you ever heard the phrase ceteris paribus? It means all other things being equal. It's a phrase economists use to discuss things in the ideal, sort of like, "imagine a spherical cow in a vacuum" but for economics. The point of the exercise is not to suppose what other things could have been different to allow these two hypothetical companies to end up in the described state. The point is to actually freeze every…

The all things being equal makes no sense in this regard. It's like me saying "all things being equal except you're a duck" You can't be a duck and have all things equal. Same way a company can't be equal to another company and have a $4bn backlog. This isn't an independent variable like the color of your logo. > PE would probably be satisfied to make half the profit and double the margin, especially if it also happe…

Because they don’t want to have to work that hard for their money. They get more value for their effort by focusing on something else instead of trying to maximize profit for a single business.

The demand curve for a business could be such that you sell 100 widgets and get $100 profit, sell 200 widgets get $101 profit. Why bother trying to sell more than 100 widgets?

Maybe you can sell 50 widgets and make $90, that sounds like a pretty good deal. Instead of making 50 more widgets you could do something else and make more than $10 profit in the same time.

Re: Private equity bought America's essential services

#384

Post by floatrock »

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…

> Unless the company have a lot of fairly stable semi-liquid assets (like real estate)...

That's exactly what happened famously with Red Lobster. PE sold off all the underlying real-estate to get the initial sugar-high and replaced it with a leasebacks. Those leases had escalating costs and fixed terms, which made it difficult to adapt to changing trends, and was a big contributor in what ultimately sunk it all.

Re: Private equity bought America's essential services

#385

Post by the_sleaze_ »

alexpotato wrote: post #376
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…

> By year 3 they start the squeeze, layoffs, asset selloffs (stripping), and lowering quality, raising prices. That is where the real teeth of wolf are shown. To play devil's advocate: Doesn't this also open the market to new entrants? e.g. young person looking to start a HVAC company in the old days couldn't compete with the established firm that already had contracts and the local market wasn't big enough for two p…

As long as customers choose services based on quality.

The HVAC for example - the large firms around you do not run HVAC/plumbing/electrical, they run marketing companies that happen to schedule and bill H+P+E service appointments.

That being said I've never heard or encountered a single services company in the US that can't find business, in fact it's the opposite. They're trying not to drown themselves in front of a fire hose.

Re: Private equity bought America's essential services

#386

Post by jandrewrogers »

bombcar wrote: post #304
Aurornis wrote: post #198

Earlier quoted context omitted.

> 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…

I knew of a family-run hoagie shop that sold to "investors" (not sure if it was PE, probably was) three times, each time they ran it to shit amazingly quickly, and they were able to buy it back for a song and fix the damage.

This is surprisingly common. I know a few people that recycle their businesses through PE, getting a payout each time.

The trick is that the business owner has a good relationship with his customers. After the PE investors run it into the ground, they can credibly reach out to customers directly, assure them that the adults are back in charge, and basically be a hero to the old customers who hate what the business became.

Re: Private equity bought America's essential services

#387

Post by pphysch »

bondarchuk wrote: post #379
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 don't get it. If pensions stopped existing, would people stop doing PE even though it's profitable? If it is possible to get outsized returns "because pensions need them" then isn't somebody gonna notice and get those returns anyway, pensions or not?

Yeah, it's like blaming drug users primarily for the violence of the drug trade. Sorry, but the drugs came first.

Re: Private equity bought America's essential services

#388

Post by throwforfeds »

iboisvert wrote: post #375
ryukoposting wrote: post #332

Earlier quoted context omitted.

> many jobs... millions upon millions ...no. It doesn't even matter what the rest of the words in the question are. Just no, lol. > They need to be paid out somehow. No they don't. Lots of pensions, especially the not-gilded ones, go bankrupt. In fact, that's precisely what happens to pensions of companies that are acquired by PE. The company gets stripped for parts, it goes bankrupt, and PBGC covers a fraction of th…

> bloated pensions I find this characterization offensive. Who is to judge if the defined benefit pension if a primary school teacher or fireman, for example, is bloated? It's part of the negotiated pay package, nothing more or less.

At least here in NYC, a large part of a NYPD officer's pension is calculated based on a 3-year look back from their retirement date, so there is a huge incentive to work as much overtime as possible in order to bump that number in your last few years of service. There are lots of stories of NYPD handing out easy overtime in massive numbers for each other, particularly when they are about to retire.

Teachers are the easy ones to point to, it is hard to be mad at an underpaid teacher who receives a reasonable pension for life. We certainly can be mad at NYPD scamming the system to get $100-200k/year for life.

[1] https://www.bloomberg.com/graphics/2021-nyc-police-overtime-...

[2] https://www.empirecenter.org/publications/newly-retired-nypd...

Re: Private equity bought America's essential services

#389

Post by airstrike »

strgcmc wrote: post #319
airstrike wrote: post #96

Earlier quoted context omitted.

Do you think losing the equity portion of the investment means no risk? It's not fully debt financed. And that debt financing bears an interest proportional to the riskiness of the asset's cashflows. There are lots to hate about LBOs but they aren't entirely devoid of value

The risks are asymmetric in real world terms. For the PE side, the worst-case outcome is bankruptcy of the company they bought via LBO, but because it was an LBO their own exposure is relatively minimal (the lender is the one with the one most capital at risk). At the end of the day, it's a balance sheet item, a cost of doing business, a few digits on a spreadsheet. But for the company that was bought? Those are peop…

In general, the company that was bought was likely being outcompeted or soon to become outcompeted. There's a reason the PE bought it: to turn it around into something that is better than the previous owner could achieve.

You can only make money in an LBO if you meaningfully improve margins or you grow massively such that the debt portion of enterprise value becomes smaller. In both cases, the company is better off than it was before.

I do think there are limits to the value that PE can bring and there are many bottom feeders going into businesses they shouldn't, like fire trucks. But not all of PE is bad.

The better solution is to tax PE capital gains as income so they pay their fair share of taxes, making good deals harder to find, drying up some appetite for that highly saturated part of finance, and returning more value to communities when they do succeed.

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