The flip side is: efficient capital allocation is better for our economy as a whole than trying to save certain jobs for emotional reasons.
Struggling businesses that can’t operate effectively and provide a poor return on capital should be shuttered - the only way to deal with the mountains of paperwork involved is to incentivize very smart people to work at very bad companies. smart people don’t like to work at failing companies. how to reconcile this and ensure efficient capital allocation? huge monetary compensation.
For this model to be convincing, you would need to explain the motivation for the pension funds loaning the 90% that then goes to zero. They are repeat investors after all. As are the PE firms.
Are they getting kickbacks? That would be straight up illegal, but it would make the most sense.
Its a broad strokes overview but id love to see a deeper documentary exploring how this works. If the companies are taking on all this debt, which makes them subsequently implode, who is taking the losses on the loans and why are they still making those loans?
Because most businesses take out loans for legitimate reasons. Banks usually charged PE owned companies significantly higher rates for their loans to address the risk(used to work at a PE owned company and we paid 4x prevailing market rate) so PE firms go to great lengths to hide their ownership.
It seems like a lot of lenders should be sued for irresponsible investing then. How much interest can you charge when you get so little of the actual capital back? Is it 100% or more?
Like with VC investing, lenders don't always need every pitch to end up a home run. In the case of business lending something like 90+% of loans get paid off. For PE-owned businesses, just over half get paid off, which justifies the risk on the half that don't, but since this risk is far greater than with normal loans the interest rate is higher for PE-owned businesses. It's just basic finance. It doesn't require caricatures, just a knowledge of how this stuff works.
Lenders are also not all banks, and in the case of PE-owned businesses, most lenders are not banks (but would be characterized as financial institutions), because most banks simply won't lend to PE-owned businesses, having been burned in the past. For some PE firms, business flow is highly dependent on finding new lenders to finance their debt-financed purchases because their old lenders won't lend to them anymore.
PE firms aren't the caricatures that HN thinks they are. They're worse. You want to know why small town America can't afford to go to their small town doctor or dentist or veterinarian anymore? (Hint: the PE firms bought most of the small practices.) Want to know why it costs 10x as much to send grandma to the retirement home or hopsice? (Hint: PE firms bought nearly all of the retirement homes and hospices.) Want to know why insurance keeps rising by double-digits every year despite a corresponding lack of insurance payouts? (Hint: PE firms either own or are now major investors in most insurance companies). Want to know why dozens of major PE-owned retailers survived COVID but then died despite being cash-flow positive on an EBITDA basis? (Hint: the "I" in EBITDA from the PE debt financing overwhelmed everything else.)
Banks are not taking huge losses because a huge fraction of loans to PE work out.
Imagine believing PEs are just constantly scamming banks out of their money. Yeah sure.
Its just that people have this carricature of PE in their head plus we are on HN where there are a huge fraction of Dunning-Krugers when it comes to topics about economy. Thats why you get these internally inconsistent arguments
Banks aren't the primary lenders to PE firms, but yes, the general PE business model for debt-financed acquisitions is entirely premised on using the collateral of acquired businesses to take out loans to pay themselves "dividends" and then letting the business fall into bankruptcy. This has been covered in extensive detail by WaPo, WSJ, The Economist, and the NYT. Mark Levine has some good articles on this.
It's okay for you to admit that you don't understand how PE firms work. I've been on both sides; as their tax advisor and at a PE-owned company and I've got firsthand experience with it.
The flip side is: efficient capital allocation is better for our economy as a whole than trying to save certain jobs for emotional reasons.
Struggling businesses that can’t operate effectively and provide a poor return on capital should be shuttered - the only way to deal with the mountains of paperwork involved is to incentivize very smart people to work at very bad companies. smart people don’t like to work at failing companies. how to reconcile this and ensure efficient capital allocation? huge monetary compensation.
... job displacememt by budgetary cuts or by competition/progress. It seems you conflate PE with the latter (for emotional reasons).
This doesn’t explain anything.
Author here: happy to explain anything about this topic.
My book about this is almost 3,000 pages - free download here: https://www.Founderstowne.com
For this model to be convincing, you would need to explain the motivation for the pension funds loaning the 90% that then goes to zero. They are repeat investors after all. As are the PE firms.
Are they getting kickbacks? That would be straight up illegal, but it would make the most sense.
It's true. Private Equity is destroying (almost) everything it touches.
Its a broad strokes overview but id love to see a deeper documentary exploring how this works. If the companies are taking on all this debt, which makes them subsequently implode, who is taking the losses on the loans and why are they still making those loans?
selection bias is why
The lenders are taking the losses.
Because most businesses take out loans for legitimate reasons. Banks usually charged PE owned companies significantly higher rates for their loans to address the risk(used to work at a PE owned company and we paid 4x prevailing market rate) so PE firms go to great lengths to hide their ownership.
It seems like a lot of lenders should be sued for irresponsible investing then. How much interest can you charge when you get so little of the actual capital back? Is it 100% or more?
Like with VC investing, lenders don't always need every pitch to end up a home run. In the case of business lending something like 90+% of loans get paid off. For PE-owned businesses, just over half get paid off, which justifies the risk on the half that don't, but since this risk is far greater than with normal loans the interest rate is higher for PE-owned businesses. It's just basic finance. It doesn't require caricatures, just a knowledge of how this stuff works.
Lenders are also not all banks, and in the case of PE-owned businesses, most lenders are not banks (but would be characterized as financial institutions), because most banks simply won't lend to PE-owned businesses, having been burned in the past. For some PE firms, business flow is highly dependent on finding new lenders to finance their debt-financed purchases because their old lenders won't lend to them anymore.
PE firms aren't the caricatures that HN thinks they are. They're worse. You want to know why small town America can't afford to go to their small town doctor or dentist or veterinarian anymore? (Hint: the PE firms bought most of the small practices.) Want to know why it costs 10x as much to send grandma to the retirement home or hopsice? (Hint: PE firms bought nearly all of the retirement homes and hospices.) Want to know why insurance keeps rising by double-digits every year despite a corresponding lack of insurance payouts? (Hint: PE firms either own or are now major investors in most insurance companies). Want to know why dozens of major PE-owned retailers survived COVID but then died despite being cash-flow positive on an EBITDA basis? (Hint: the "I" in EBITDA from the PE debt financing overwhelmed everything else.)
You nailed it!
Banks are not taking huge losses because a huge fraction of loans to PE work out.
Imagine believing PEs are just constantly scamming banks out of their money. Yeah sure.
Its just that people have this carricature of PE in their head plus we are on HN where there are a huge fraction of Dunning-Krugers when it comes to topics about economy. Thats why you get these internally inconsistent arguments
Banks aren't the primary lenders to PE firms, but yes, the general PE business model for debt-financed acquisitions is entirely premised on using the collateral of acquired businesses to take out loans to pay themselves "dividends" and then letting the business fall into bankruptcy. This has been covered in extensive detail by WaPo, WSJ, The Economist, and the NYT. Mark Levine has some good articles on this.
It's okay for you to admit that you don't understand how PE firms work. I've been on both sides; as their tax advisor and at a PE-owned company and I've got firsthand experience with it.