How much of this will end being a ZIRP phenomenon? The article does cover the implications of rising interest rates towards the end.
> Meanwhile, interest rates have reached a 20-year high, posing a direct threat to private equity’s debt-heavy business model. In response, many private-equity funds have migrated toward even riskier forms of backroom financing. Many of these involve taking on even more debt on the assumption that market conditions will soon improve enough to restore profitability. If that doesn’t happen—and many of these big deals fail—the implications could be massive.
For anyone interested in the nuts and bolts of how private equity works I highly recommend the 50X podcast[1] which covers how a firm focusing on buying out aircraft component suppliers operates.
>How much of this will end being a ZIRP phenomenon?
A lot, given that private equity operates on a debt driven M&A strategy. But don't expect the consolidation to slow down. They will just squeeze their businesses and customers that much harder.
> A lot, given that private equity operates on a debt driven M&A strategy. But don't expect the consolidation to slow down. They will just squeeze their businesses and customers that much harder.
This. The likely outcome is a deterioration of the companies. The deterioration will be felt by employees and customers both. This is the only way PE will be able to recoup any high interest debt they take on.
>I don't doubt that will happen but how does that translate to sustainable, as opposed to short-term, earnings?
It doesn't. The PE playbook is to find distressed businesses with solid brand power, milk them dry until there's nothing left, and then sell off or liquidate the remnants. They function more or less as garbage collection for the economy.
It's not the amount of regulation that matters, it's the intent. Is it written to benefit a greater good, or written to benefit a political party's benefactor? The same applies to removing regulations. Where did the intent lie? New regulation and repeal are most often shades of grey --bad mixed with good in terms of overall consequences, disproportionately helping a few at some expense to the many. That's what happens when minority interests with a lot of money are overrepresented in government, lobbyists write bills, etc.
There is nothing wrong with private companies. A lot of family businesses are private. I understand that private equity investment companies controlling a lot of businesses might not be a great thing, but let's not demonize private ownership.
These are not your “mom and pop” private businesses, these are “billions of dollars at disposal” businesses. And the central point isn’t their existence, the point is their operation with little oversight in a way that hollows out industries and harms consumers.
I wasn't talking about mom and pop businesses. There are many large private companies which are owned by families or individuals. One thing these companies can do which public companies can't is to think longer term and ignore the pressure of quarterly reporting and institutional investors. We can't stereotype all medium and large private businesses as doing the bidding of private equity investment companies.
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[ 3.1 ms ] story [ 51.6 ms ] thread> Meanwhile, interest rates have reached a 20-year high, posing a direct threat to private equity’s debt-heavy business model. In response, many private-equity funds have migrated toward even riskier forms of backroom financing. Many of these involve taking on even more debt on the assumption that market conditions will soon improve enough to restore profitability. If that doesn’t happen—and many of these big deals fail—the implications could be massive.
For anyone interested in the nuts and bolts of how private equity works I highly recommend the 50X podcast[1] which covers how a firm focusing on buying out aircraft component suppliers operates.
[1] https://www.50xpodcast.com
A lot, given that private equity operates on a debt driven M&A strategy. But don't expect the consolidation to slow down. They will just squeeze their businesses and customers that much harder.
This. The likely outcome is a deterioration of the companies. The deterioration will be felt by employees and customers both. This is the only way PE will be able to recoup any high interest debt they take on.
It doesn't. The PE playbook is to find distressed businesses with solid brand power, milk them dry until there's nothing left, and then sell off or liquidate the remnants. They function more or less as garbage collection for the economy.
Anyways. As usual, finding that regulation sweet spot is clearly still as hard as ever.
Less regulation is better than more regulation, until it's not.
Although, in situations like this, I feel like having too much is better than not enough.