Private equity itself is really not a problem - there are plenty of private equity transactions that more or less function like they are supposed to: buy up a struggling company and turn them around. (It should also not be a surprise that struggling companies are also more likely to go bankrupt or layoff employees).
Most of the problems that come from private equity come specifically from leveraged buyouts - aka when private equity... provides no equity!
These deals are unbelievably slimy by nature - in almost no other sector of the economy would we tolerate them. The last thing a struggling company needs is to take on a massive load of debt, just to change to owners who have no skin in the game!
What I would like to be explained is who is lending them the money.
In the article, they went bankrupt with 7 billion in debt. Someone isn't getting that money back. Whoever gave them the money evidently gave it to them unsecured as well, as the PE company ran off with the buildings. Lender gave some very generous terms here evidently.
The fees on this kind of debt are incredibly high, and banks are kind of desperate right now for higher interest loans.
I think banks kind of have a "fool me twice, shame on me" attitude when it comes to bad loans - if they are adjusting the fees accordingly for the risk they should (theoretically) be fine on average in the long run.
It isnt very different than an auto loan. A bank gives you money to buy it, knowing full well that the value will only go down after you drive it off the lot. The car is collateral for the loan, and if you pay a high enough premium, the bank may accept the car as the only collateral. The bank has an actuarial team that models the rate of loan defaults and car crashes.
Back to the real examples, banks invest in leveraged buyouts because on average, they make more money than they lose.
I dont really see the issue with leveraged buyouts.
It is basically the same as banks buying a company and paying the equity firm for management.
>The last thing a struggling company needs is to take on a massive load of debt, just to change to owners who have no skin in the game!
This depends on your the goal. The owner of the struggling company wants out, and this is their exit. In some cases the purpose is simply to pay someone shut down the company in the most profitable way possible, which is a completely legitimate financial goal.
One analogy is someone buying a car because the market value is less than they can get by driving it until it dies and then selling off the parts. It is normal to buy assets you know will depreciate to zero, as long as you get more value than the price.
I’ve yet to meet someone with experience in dealing with PE who didn’t find it anything other than a “gut and pump” arrangement. The myth of PE creating operating efficiency is as necessary as VCs “adding value.” Having seen the ops behind the curtain, the skepticism on those claims is wholly justified.
How is it that they can borrow that much money for struggling companies? I am quite perplexed at how banks view these deals if they (supposedly) regularly end up in bankruptcy.
Someone held that 7 billion in debt that went into bankruptcy. Why did a struggling company that was about to be strip-mined of assets get lent that money in the first place? And especially how did they get that money unsecured by hard tangible assets such as real estate?
Until they aren't. Sometimes banks fail, and then taxpayers seem to be on the hook to bail them out: SVB, the 2008 meltdown, the Savings and Loan scandal, etc.
There is this weird misconception that PE wants to kill companies. They're equity holders...they get enormous upside if the company does well.
Since the investments are often into high risk / struggling companies though the deals are calibrated to end up OK even if things go south. Not as amazing as a successful company, but usually still OK.
Do you ever see nytimes articles on "PE injected cash, company did well, the end"? Of course not. They just cover the "things go south, gotta strip what can be salvaged" instances.
Just another type of "if it bleeds, it leads" media slant. And since PE is a very opaque world that's makes up 100% of people's datapoints.
Under very specific circumstances killing companies can absolutely be profitable and thus for some shady characters that is Plan A, but definitely not industry representative.
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[ 1.8 ms ] story [ 50.0 ms ] threadMost of the problems that come from private equity come specifically from leveraged buyouts - aka when private equity... provides no equity!
These deals are unbelievably slimy by nature - in almost no other sector of the economy would we tolerate them. The last thing a struggling company needs is to take on a massive load of debt, just to change to owners who have no skin in the game!
In the article, they went bankrupt with 7 billion in debt. Someone isn't getting that money back. Whoever gave them the money evidently gave it to them unsecured as well, as the PE company ran off with the buildings. Lender gave some very generous terms here evidently.
The fees on this kind of debt are incredibly high, and banks are kind of desperate right now for higher interest loans.
I think banks kind of have a "fool me twice, shame on me" attitude when it comes to bad loans - if they are adjusting the fees accordingly for the risk they should (theoretically) be fine on average in the long run.
Back to the real examples, banks invest in leveraged buyouts because on average, they make more money than they lose.
It is basically the same as banks buying a company and paying the equity firm for management.
>The last thing a struggling company needs is to take on a massive load of debt, just to change to owners who have no skin in the game!
This depends on your the goal. The owner of the struggling company wants out, and this is their exit. In some cases the purpose is simply to pay someone shut down the company in the most profitable way possible, which is a completely legitimate financial goal.
One analogy is someone buying a car because the market value is less than they can get by driving it until it dies and then selling off the parts. It is normal to buy assets you know will depreciate to zero, as long as you get more value than the price.
Someone held that 7 billion in debt that went into bankruptcy. Why did a struggling company that was about to be strip-mined of assets get lent that money in the first place? And especially how did they get that money unsecured by hard tangible assets such as real estate?
The answer is simple and boring. Despite high profile failures, the investment on average are profitable for banks.
That said, we havent had a leveraged-buyout bailout yet, so the larger point is still accurate. These deals are profitable.
Since the investments are often into high risk / struggling companies though the deals are calibrated to end up OK even if things go south. Not as amazing as a successful company, but usually still OK.
Do you ever see nytimes articles on "PE injected cash, company did well, the end"? Of course not. They just cover the "things go south, gotta strip what can be salvaged" instances.
Just another type of "if it bleeds, it leads" media slant. And since PE is a very opaque world that's makes up 100% of people's datapoints.
Under very specific circumstances killing companies can absolutely be profitable and thus for some shady characters that is Plan A, but definitely not industry representative.