Private equity firms seem like the villains many imagine investment bankers to be. Like, actually cracking the bones and sucking the marrow of the little guys in small businesses. Discharging pension obligations, offshoring, cutting corners.
But maybe that's an unfair point of view. Is there a steelman case to be made for PE?
Private equity hoovers up existing businesses that are mostly well functioning.
If they fail, we suffer as those businesses we depend upon fail and disappear. Everything from big national chains to your local doctors office can be destroyed in this way.
But if private equity succeeds, we also suffer.
Private equity is… private. Normal people have our savings invested in public markets. We can’t easily invest in private equity, and we shouldn’t because it’s too risky.
But imagine a world where every strong business goes private and only failing businesses are public. The wealthy take everything private so they don’t have to share the wealth.
IMO any business over a certain size should be forced to be public and no option to go private again.
This sounds very similar to the commercial real estate market. What do they have in common? High amounts of leverage, and holding periods of 5-7 years for assets.
They're trying to sell assets bought with cheap money and a lower acceptable rate of return to buyers with higher financing costs and a higher risk free rate of return.
They're going to be holding onto those assets for a while, until they either accept that they need to eat the loss to get liquid or their paper losses are inflated away.
my alumni association has a related pe fund. Minimum personal wealth requirement to participate is 5 million usd. This is high risk high reward, and total loss is possible. I looked at some of the companies they underwrite and it's completely risky stuff that's ethically ambiguous.
My issue with most PE deals is that the PE firm doesn’t have enough skin in the deal. Look at, say, the EA deal where almost all of the purchase price is coming from debt on EA. This to me is wrong because the new owners have almost no incentive to build the business for the long term—EA is a strong operator but face layoffs and LOB closures just to service the new debt.
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[ 2.6 ms ] story [ 28.7 ms ] threadBut maybe that's an unfair point of view. Is there a steelman case to be made for PE?
I listened to https://freakonomics.com/podcast/are-private-equity-firms-pl... but didn't come away with a rosier view of them.
If they fail, we suffer as those businesses we depend upon fail and disappear. Everything from big national chains to your local doctors office can be destroyed in this way.
But if private equity succeeds, we also suffer.
Private equity is… private. Normal people have our savings invested in public markets. We can’t easily invest in private equity, and we shouldn’t because it’s too risky.
But imagine a world where every strong business goes private and only failing businesses are public. The wealthy take everything private so they don’t have to share the wealth.
IMO any business over a certain size should be forced to be public and no option to go private again.
Please keep being greedy. You know where this is going.
They're trying to sell assets bought with cheap money and a lower acceptable rate of return to buyers with higher financing costs and a higher risk free rate of return.
They're going to be holding onto those assets for a while, until they either accept that they need to eat the loss to get liquid or their paper losses are inflated away.