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.
> Private equity hoovers up existing businesses that are mostly well functioning.
There's many flavors of private equity, but the predatory ones tend to buy businesses that are slowly failing, and turn them into something that hits a brick wall and completely fails.
If it was a mostly well functioning business with good prospects, likely the current ownership would be less interested in selling or a sale to similar ownership could be made.
Dental clinics owned by a dentist sell to a new dentist all the time. If they're being sold to PE firms, it's because the business of being a dentist is changing and not in a good way. Dental insurance is a hassle and doesn't pay well, finding customers can be hard without accepting insurance, hiring staff is hard (at least in my area), young dentists may not have the capital to buy out retirees, new equipment is expensive but patients like being wowed.
> But imagine a world where every strong business goes private and only failing businesses are public.
That's the opposite of what happens with PE. PE firms don't buy fairly priced, well run businesses. They (typically) buy underpriced, poorly performing but cash flow heavy businesses that would benefit from leveraging up and making operations more lean.
Think about it, if a business is fairly priced and well run, PE firms have no incentive to buy it because where do they generate returns?
I don't like PE firms but there's no doubt that they force businesses to operate better, and ultimately that benefits people like you and me who have retirement savings, because PE firms aren't getting their money out of thin air.
Or they can do things like buy VMWare, gut the support/engineering/sales staff, hound and threaten their install base, and ultimatley profit greatly by stripping down and destroying a perfectly healthy if relatively late stage business.
How does private equity businesses operating better improve our retirement savings? Wont they just improve the PE fund performance and benefit only the investors ?I am genuinely curious as its very difficult to find public information on how they actually function
Read Matt Levine's newsletter, it's a VERY simple business model built on financial engineering (it's rare they do something "novel"). But broadly, if you've got money in any sort of mutual fund, pension or retirement asset, the people managing your money WILL have some sort of allocation into PE funds. Even if you own a stock standard ETF like SPDR, PE funds like KKR are publicly listed.
>I don't like PE firms but there's no doubt that they force businesses to operate better, and ultimately that benefits people like you and me...
They do not force businesses to "operate better." They force businesses to operate at a higher EBITDA, purely for their own benefit. Sometimes by chance this results in improvements for the employees or customers, but more often it ultimately results in a worse experience for both and the eventual demise of the business after the PE firm has taken sufficient profit to generate its target returns.
Believe it or not, businesses don't exist to provide you a "good service" they exist to make money. So yes, they do in fact force firms to operate better when they attain a higher EBITDA.
Until the definition of why a business exists changes, you can purely measure a business success over how much money it makes for the owner, legally.
Should that be the case? No, I don't agree. But as it currently stands, that's how things are.
> 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.
Financial entities you rely on (pension funds, insurance companies, and universities among others) invest, and you may be getting access yourself thanks to Trump!
> IMO any business over a certain size should be forced to be public and no option to go private again.
What on earth is the rationale for this policy? If you build a successful company, you're required by law to give up control?
Your tiny indirect share of the PE firm's profits will not match your direct loss of service as a customer and/or loss of compensation as an employee. Contrary to popular myth, wealth does not trickle down in any meaningful way. In an unregulated capitalist system, wealth flows toward the centers of wealth, just as surely as gravity pulls toward the centers of mass.
I don't think there is a valid rationale for this.
Unfortunately, there are a lot of armchair spectators that don't understand how the economy actually functions; and they've got brigades that go after people that do actually know who speak out (based on certain keywords).
As a result, its totally not worth talking about since the point of no return has largely already come and gone and we're stuck in a hysteresis trap.
People don't see how the things we are seeing today were predictable outcomes given choices made at the money-printer level (i.e. Fed/Private Banking).
No deposit requirement, is no reserve money-printing. It always fails, but I'm sure someone will say... but this time will be different. Needless to say, any discussion on economics is basically flame bait these days with a lot of delusional people on both sides of the aisle.
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.
>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.
They have very strong incentive because debt holders have first dibs on the assets if EA goes belly up. Equity owners (ie. PE) are the last to get paid, so it's very much in their best interest that EA doesn't even lose a tiny bit of money, because such losses are magnified through leverage.
And you're assuming, or insinuating that lenders don't care that the collateral for their loans are getting drained by the PE company. It's like saying buying a house is a free money machine because you can demolish it and strip out the copper.
The real problem here is the lack of accountability. We invented a huge pile of regulations forcing public firms to be transparent, largely because the lack of transparency was easy to abuse and small investors don’t have the resources to do their own investigatory work. Now those regulations are being undermined by this new backdoor approach, and so even public and regulated investments are becoming more risky. It’s a bad trend and it will only reverse when people inevitably follow the incentives and there’s a big crisis.
>Now those regulations are being undermined by this new backdoor approach, and so even public and regulated investments are becoming more risky. It’s a bad trend and it will only reverse when people inevitably follow the incentives and there’s a big crisis.
It's hardly "backdoor" when pension funds and other institutions could always have bought private companies. If anything the recent shift to ETFs and passive investing is a move in the opposite direction. In the past such institutions would have managed their portfolios in-house, ie. private equity.
I feel like it adds a huge layer of opacity. If you buy a private company, you have to monitor its financials and potentially report them. If you buy a private fund, you have to report the valuation of the fund. If the valuation of the fund just tends to go up (as many such funds do), you won’t necessarily know if this actually reflects the prospects of the underlying companies or just the impression of other investors. The impact of adding these layers is not necessarily efficiency (each layer of management adds more cost), but it is increasing distance from the messy short-term ups and downs of real businesses.
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.
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?
There are so many PE firms with such different practices that's it's difficult to make any generalized case for or against them. Ideally they provide liquidity for small business owners who want to sell and move on but lack other buyers. PE firms also do rescue many businesses that would have otherwise failed due to incompetent management or lack of capital: the mainstream press loves to hype up failures and abuses but seldom reports on successes.
Defined benefit pension plans shouldn't be a thing in the first place: they're too risky for workers, employers, and taxpayers alike. All pensions should be replaced with defined contribution plans like 401(k) where assets are safely held in individual named accounts.
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.
> Private equity hoovers up existing businesses that are mostly well functioning.
There's many flavors of private equity, but the predatory ones tend to buy businesses that are slowly failing, and turn them into something that hits a brick wall and completely fails.
If it was a mostly well functioning business with good prospects, likely the current ownership would be less interested in selling or a sale to similar ownership could be made.
Dental clinics owned by a dentist sell to a new dentist all the time. If they're being sold to PE firms, it's because the business of being a dentist is changing and not in a good way. Dental insurance is a hassle and doesn't pay well, finding customers can be hard without accepting insurance, hiring staff is hard (at least in my area), young dentists may not have the capital to buy out retirees, new equipment is expensive but patients like being wowed.
There are predatory ones that corner the market on something (pet care, dentistry) in an area to jack up prices and make a killing.
> But imagine a world where every strong business goes private and only failing businesses are public.
That's the opposite of what happens with PE. PE firms don't buy fairly priced, well run businesses. They (typically) buy underpriced, poorly performing but cash flow heavy businesses that would benefit from leveraging up and making operations more lean.
Think about it, if a business is fairly priced and well run, PE firms have no incentive to buy it because where do they generate returns?
I don't like PE firms but there's no doubt that they force businesses to operate better, and ultimately that benefits people like you and me who have retirement savings, because PE firms aren't getting their money out of thin air.
> Think about it, if a business is fairly priced and well run, PE firms have no incentive to buy it because where do they generate returns?
PE has access to business models unavailable to the original owner.
- Buy all local dentist clinics at an enticing markup then increase rates.
- Buy businesses and migrate them to tech where the PE firm holds an advantage. For example, a PE firm that runs its own payment gateway.
- Buy a business that complements a larger business to reduce churn or increase sales.
Right, which implies that the business was not run well, or at the least didn't reach its full potential.
None of those situations imply the business was poorly run.
If they were run well, then you wouldn't be able to improve on them by buying them.
Offerring a dentist a large amount of money (for them) to sell isn’t an indication how the business is run.
Or they can do things like buy VMWare, gut the support/engineering/sales staff, hound and threaten their install base, and ultimatley profit greatly by stripping down and destroying a perfectly healthy if relatively late stage business.
That was Broadcom and not a PE fund?
True, though Broadcom operates in a very similar manner in this regard.
How does private equity businesses operating better improve our retirement savings? Wont they just improve the PE fund performance and benefit only the investors ?I am genuinely curious as its very difficult to find public information on how they actually function
Read Matt Levine's newsletter, it's a VERY simple business model built on financial engineering (it's rare they do something "novel"). But broadly, if you've got money in any sort of mutual fund, pension or retirement asset, the people managing your money WILL have some sort of allocation into PE funds. Even if you own a stock standard ETF like SPDR, PE funds like KKR are publicly listed.
PE firms are heavily funded by pensions, sovereign wealth, university endowments, and insurance companies.
>I don't like PE firms but there's no doubt that they force businesses to operate better, and ultimately that benefits people like you and me...
They do not force businesses to "operate better." They force businesses to operate at a higher EBITDA, purely for their own benefit. Sometimes by chance this results in improvements for the employees or customers, but more often it ultimately results in a worse experience for both and the eventual demise of the business after the PE firm has taken sufficient profit to generate its target returns.
Believe it or not, businesses don't exist to provide you a "good service" they exist to make money. So yes, they do in fact force firms to operate better when they attain a higher EBITDA.
Until the definition of why a business exists changes, you can purely measure a business success over how much money it makes for the owner, legally.
Should that be the case? No, I don't agree. But as it currently stands, that's how things are.
Do PE hospitals and veterinary clinics perform better?
Depends how you define "better" doesn't it?
Better ROI: yes!
Better Customer Prices: No!
Better Business Operations: Yes.
Better Customer Experience: No.
Better Profit Margins: Yes.
Better Care: No.
Better Shareholder Returns: Yes.
Better Employee Compensation: No.
For the owners? Yeah, they do typically. For the service they provide stakeholders other than the owners? Probably not.
> 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.
Financial entities you rely on (pension funds, insurance companies, and universities among others) invest, and you may be getting access yourself thanks to Trump!
> IMO any business over a certain size should be forced to be public and no option to go private again.
What on earth is the rationale for this policy? If you build a successful company, you're required by law to give up control?
Your tiny indirect share of the PE firm's profits will not match your direct loss of service as a customer and/or loss of compensation as an employee. Contrary to popular myth, wealth does not trickle down in any meaningful way. In an unregulated capitalist system, wealth flows toward the centers of wealth, just as surely as gravity pulls toward the centers of mass.
I don't think there is a valid rationale for this.
Unfortunately, there are a lot of armchair spectators that don't understand how the economy actually functions; and they've got brigades that go after people that do actually know who speak out (based on certain keywords).
As a result, its totally not worth talking about since the point of no return has largely already come and gone and we're stuck in a hysteresis trap.
People don't see how the things we are seeing today were predictable outcomes given choices made at the money-printer level (i.e. Fed/Private Banking).
No deposit requirement, is no reserve money-printing. It always fails, but I'm sure someone will say... but this time will be different. Needless to say, any discussion on economics is basically flame bait these days with a lot of delusional people on both sides of the aisle.
Fractional Banking (RIP, Circa 2020).
https://archive.ph/vS1z0
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.
>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.
They have very strong incentive because debt holders have first dibs on the assets if EA goes belly up. Equity owners (ie. PE) are the last to get paid, so it's very much in their best interest that EA doesn't even lose a tiny bit of money, because such losses are magnified through leverage.
You’re assuming, or insinuating, the PE firms don’t immediately start paying themselves outsized management fees, bonuses, and the like.
And you're assuming, or insinuating that lenders don't care that the collateral for their loans are getting drained by the PE company. It's like saying buying a house is a free money machine because you can demolish it and strip out the copper.
They don't receive bonuses until they exit.
The unfortunate reality of PE is that regardless of your opinion of them, your money is probably tied to them.
Seems like that’s literally not true considering that most people can only invest in public exchange tradeable funds.
Not directly. But pension funds, investment groups, insurance companies — organizations who everyday investors rely on — give them money.
And thanks to the current administration you will soon be able to direct 401k money to them.
The real problem here is the lack of accountability. We invented a huge pile of regulations forcing public firms to be transparent, largely because the lack of transparency was easy to abuse and small investors don’t have the resources to do their own investigatory work. Now those regulations are being undermined by this new backdoor approach, and so even public and regulated investments are becoming more risky. It’s a bad trend and it will only reverse when people inevitably follow the incentives and there’s a big crisis.
>Now those regulations are being undermined by this new backdoor approach, and so even public and regulated investments are becoming more risky. It’s a bad trend and it will only reverse when people inevitably follow the incentives and there’s a big crisis.
It's hardly "backdoor" when pension funds and other institutions could always have bought private companies. If anything the recent shift to ETFs and passive investing is a move in the opposite direction. In the past such institutions would have managed their portfolios in-house, ie. private equity.
I feel like it adds a huge layer of opacity. If you buy a private company, you have to monitor its financials and potentially report them. If you buy a private fund, you have to report the valuation of the fund. If the valuation of the fund just tends to go up (as many such funds do), you won’t necessarily know if this actually reflects the prospects of the underlying companies or just the impression of other investors. The impact of adding these layers is not necessarily efficiency (each layer of management adds more cost), but it is increasing distance from the messy short-term ups and downs of real businesses.
Also banks. The second order effects of a mass collapse of PE market will ensure the public securities market will also see negative effects.
Of which, some of that is PE funds. KKR for instance is publicly listed.
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.
Let them perish.
The people that are proprietors of these institutions count for less than 1% of the social economy in a large state where guns are legal.
Please keep being greedy. You know where this is going.
I mean, they miscalculated valuations. Who else would eat losses but them?
Retail investors and anyone else unsophisticated enough to pay these inflated valuations.
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?
I listened to https://freakonomics.com/podcast/are-private-equity-firms-pl... but didn't come away with a rosier view of them.
There are so many PE firms with such different practices that's it's difficult to make any generalized case for or against them. Ideally they provide liquidity for small business owners who want to sell and move on but lack other buyers. PE firms also do rescue many businesses that would have otherwise failed due to incompetent management or lack of capital: the mainstream press loves to hype up failures and abuses but seldom reports on successes.
Defined benefit pension plans shouldn't be a thing in the first place: they're too risky for workers, employers, and taxpayers alike. All pensions should be replaced with defined contribution plans like 401(k) where assets are safely held in individual named accounts.