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Private Equity Wants in on the Bailout? Spare Me

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Re: Private Equity Wants in on the Bailout? Spare Me

#71

Post by dcolkitt »

cs702 wrote: post #46

Buffett on private equity:[a] > For some years, these purchasers accurately called themselves “leveraged buyout firms.” When that term got a bad name in the early 1990s – remember RJR and Barbarians at the Gate? – these buyers hastily relabeled themselves “private-equity.” The name may have changed but that was all: Equity is dramatically reduced and debt is piled on in virtually all private-equity purchases. Indeed,…

> Saddled with as much debt as possible, the business by design has been put in a position such that it cannot survive even a modest decline in revenue without raising significant additional capital.

I agree, but I think it's important to qualify what you mean when you say the "business can't survive". Because this implies that if a company can't meet its debt obligations that it will cease operations.

As long as operational cash flow is positive, then no amount of leverage or debt distress will halt the continued operations. The business might "fail" in the sense that the entity is legally re-structured and the equity owners, or even junior debt owners, are zeroed. But there's no reason in a country with well-developed bankruptcy law for this to have any impact on the employees, customers or operations of the business.

The issue with coronavirus and failing businesses is that it's causing many businesses to have negative operational cash flow. In this sense the business may fail and the operations discontinued simply because revenue is no longer exceeding expenses. But if the operations are cash flow negative (and capital markets are unwilling to extend financing in the hope of future cash flow) then the business will fail regardless of its capital structure or leverage.

Re: Private Equity Wants in on the Bailout? Spare Me

#72

Post by perpetualpatzer »

cmrdporcupine wrote: post #63
lotsofpulp wrote: post #61

Earlier quoted context omitted.

step 1: get sufficient voters invested in equities via index funds and ETFs, meaning pension fund investments, 401k, personal investments, etc. Step 2: bail out market each time as it’s politically untenable to let the broader market prices decline Socialism, but the higher % of total equity you own, the better the socialism works for you. Bonus if you have connections to people who can help you finance purchases, es…

It's only "socialism" in the bizarre American definition where "socialism" = "anything government." Socialism is social ownership of the economy, what you're describing the opposite. There's another word for what you're describing, which is the extreme capture of the state by corporate entities: corporatism. The extreme form of which is fascism.

>Socialism is social ownership of the economy

Having a large portion of the population with fractional ownership over a broad portion of the economy (via ETFs, etc.) sounds a lot like "social ownership of the economy" to me.

Unless, by social, you mean "equal" ownership (as GP points out).

Re: Private Equity Wants in on the Bailout? Spare Me

#73

Post by aliston »

TomMckenny wrote: post #40
Havoc wrote: post #4

>But do they really deserve any part in a bailout? Do any of these companies? The whole concept of bailouts create bad incentives - to me that's more the crux of the issue. But if you're gonna do them anyway then I see little justification for including/excl some just because they're listed vs private. Plus it makes way more sense to "save" the economy at grass roots level anyway. I'd prefer more of a suddenly expand…

These two options for saving the economy: corporate bailout vs social safety net essentially correspond with belief in trickle down vs Keynesian stimulus. Stated even more bluntly, it is essentially whether you believe customers or assets are most important for business. It is why the current path begins to resemble 1929 where consumer buying power spiraled downward. If the social isolation period ends with millions…

"Trickle down stimulus" is not an economic theory. It's a criticism of supply side economics, equivalent to calling Keynesian economics "money printer go brrr" stimulus.

Arguably, corporate bailouts like we're seeing now ARE a Keynesian stimulus because they're meant to keep businesses afloat while consumer demand has fallen off a cliff so that they can continue to do business (i.e. maintain demand for business inputs). Few if any of these corporations are taking the bailout money and investing it in capital infrastructure.

The bigger issue is that the "current path" is to use both Keynesian stimulus and supply-side stimulus with no regard for the deficit. At some point, unless the US has another WWII-like economic expansion, all the debt we've created to fuel these policies will need to be paid back, either explicitly or implicitly through inflation.

Re: Private Equity Wants in on the Bailout? Spare Me

#74

Post by cmrdporcupine »

danharaj wrote: post #66
cmrdporcupine wrote: post #53

Earlier quoted context omitted.

Marx said it 174 years ago... "The executive of the modern state is nothing but a committee for managing the common affairs of the whole bourgeoisie" The state is created by the class of people who own capital, in order to mediate, protect, justify and manage a world in which they continue to own and profit from their ownership of capital.

I don't even know how this is controversial, and yet here we are. You said the M x word, I guess.

Whatever, it's just number points on the interwebbies. There is a libertarian tinge to discourse on HN, and libertarians have an opposite view of the state. I think this perspective on the state -- as "outside" and in permanent opposition to the market -- so permeates the dominant North American ideology that saying otherwise just sounds like nonsense to many people.

I obviously don't think it's nonsense, but it doesn't surprise me it gets downvotes. I think it's sad though.

Re: Private Equity Wants in on the Bailout? Spare Me

#75

Post by SpicyLemonZest »

sytelus wrote: post #44
hazeii wrote: post #39

Matthew effect in full flight. [0] https://en.wikipedia.org/wiki/Matthew_effect

Capitalism is itself a pure unadulterated implementation of Matthew's effect. If you have capital of $X, you automatically are entitled increase in that $X. If you have $0 then you work day after day to find your share of global wealth keeps dipping. This is typically gets sold as "risk vs reward" system while the fact is that if you had invested in S&P500, your investment is practically protected by the US Army and…

Your premise just isn't true. A significant majority of Americans have investments in the stock market.

Re: Private Equity Wants in on the Bailout? Spare Me

#76

Post by leveredequity »

FireBeyond wrote: post #58
leveredequity wrote: post #26

Earlier quoted context omitted.

That is simply not true. Management fees are such a small percentage of contributed capital. And, typically doesn't count towards your returns calculation.

Toys R Us. $1.8B in debts prior to PE involvement. Immediately following the deal signing that ballooned to $5B+. Interest fees now encompassed 97% of operating profits. PE firm only paid about 1.3% of the equity for the leveraged buyout, Toys contributed the rest (hence the increased debt load). KKR and Bain stated that management fees, transaction fees and interest entirely covered, and more, the losses from the de…

I don't believe the 1.3% is correct, as I think it's closer to 20-25%. Data I have seen supports that they put up $1.3bn of equity in the acquisition, in addition to ~$5Bn of debt (at ~7x leverage I think? -- that's more of the sticker shock). In today's market at least, you need to put up at least around ~30% of the purchase price as equity from the private equity firm.

The Toys R Us deal had a whole bunch of issues, and the business may very well have been over-levered. I do think we should bring back stricter leveraged lending guidelines, in some form.

Those fees, however, don't cover the losses the way that you think (sometimes they cover the amount contributed from the fund itself, not from its investors). I think there were only received $180M in management fees over the nearly 10 year hold paid to the 3 firms involved.

Re: Private Equity Wants in on the Bailout? Spare Me

#77

Post by cmrdporcupine »

perpetualpatzer wrote: post #72
cmrdporcupine wrote: post #63

Earlier quoted context omitted.

It's only "socialism" in the bizarre American definition where "socialism" = "anything government." Socialism is social ownership of the economy, what you're describing the opposite. There's another word for what you're describing, which is the extreme capture of the state by corporate entities: corporatism. The extreme form of which is fascism.

>Socialism is social ownership of the economy Having a large portion of the population with fractional ownership over a broad portion of the economy (via ETFs, etc.) sounds a lot like "social ownership of the economy" to me. Unless, by social, you mean "equal" ownership (as GP points out).

There's a yawning gap between your "fractional" and "equal" when you consider that the vast majority of the few million ETF and mutual fund shareholders with a few tens of thousands in their retirement accounts (if they're lucky) have an _extremely_ small fraction and really no voting power or control.

I mean, they send me their prospectus. I can listen on the call. That's about it.

And that's not even accounting for the fact that the majority of citizens don't even have retirement funds to get them through.

Re: Private Equity Wants in on the Bailout? Spare Me

#78

Post by SpicyLemonZest »

danharaj wrote: post #66
cmrdporcupine wrote: post #53

Earlier quoted context omitted.

Marx said it 174 years ago... "The executive of the modern state is nothing but a committee for managing the common affairs of the whole bourgeoisie" The state is created by the class of people who own capital, in order to mediate, protect, justify and manage a world in which they continue to own and profit from their ownership of capital.

I don't even know how this is controversial, and yet here we are. You said the M x word, I guess.

I'm just not sure what it means to talk about "the class of people who own capital". It seems to presume a country that's strictly divided between owners and workers, which hasn't been true for decades at this point; most Americans own at least a little capital.

Re: Private Equity Wants in on the Bailout? Spare Me

#79

Post by sagarm »

abakker wrote: post #55
TomMckenny wrote: post #40

Earlier quoted context omitted.

These two options for saving the economy: corporate bailout vs social safety net essentially correspond with belief in trickle down vs Keynesian stimulus. Stated even more bluntly, it is essentially whether you believe customers or assets are most important for business. It is why the current path begins to resemble 1929 where consumer buying power spiraled downward. If the social isolation period ends with millions…

ideally, there would be a 3rd path, which would be direct forgiveness of those debts for a small period. All creditors would take the haircut, instead of the debtors. this means that incoming money would go back into the productive economy. The odd thing about bailouts is that if you bailout businesses, they can't really spur consumer demand, and if you give it to individuals it tends to end up re-concentrated in the…

> ideally, there would be a 3rd path, which would be direct forgiveness of those debts for a small period. All creditors would take the haircut, instead of the debtors. this means that incoming money would go back into the productive economy.

Isn't bankruptcy exactly this, on a firm level?

Re: Private Equity Wants in on the Bailout? Spare Me

#80

Post by twblalock »

brenden2 wrote: post #29

What I learned in school growing up was that if I lose a bunch of money gambling at the casino with my credit card, I don't get a free bailout from the government. But maybe things have changed?

These businesses are suffering because of the government's response to the virus -- an economic shutdown that was made necessary by the government's failure to act early and decisively like the governments of South Korea, Taiwan, and Singapore have done. This is not something the businesses brought on themselves by "gambling".

Why isn't it reasonable for the government to compensate businesses (and people) who are suffering as a result of the government's screwup?

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