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From the article: Remember the plant and equipment writedowns? That reduces the annual depreciation charge by $15m. Throw in a few onerous lease provisions and

From the article: Remember the plant and equipment writedowns? That reduces the annual depreciation charge by $15m. Throw in a few onerous lease provisions and the like, totaling roughly $10m, and you can fairly easily turn a $7m 2013 profit into a $40m forecast 2014 profit. That allows Anchorage to confidently forecast a huge profit number and, on the back of this rosy forecast, the business is floated for a $520m market capitalisation, some 52 times the $10m they put in. The PE firm didn't do anything "wrong"...they simply charged (much) more than the company was worth off the back of unrealistic and borderline fudged profit forecasts. It's the buyers' fault for not conducting due diligence and calling bullshit on the price set by the PE firm. But at the end of the day $520m is peanuts compared to the size of institutional mutual and pension funds who need to find places to invest hundreds of billions in a multi trillion dollar market. I wouldn't be surprised if many small-mid PE firms were using financial bloat to their advantage - find small deals, strip and reorg, optimize profit to secure some unreasonably high valuation, but still small in the grand scheme of things, float the new org to huge institutional funds who are starving for new, diversified assets to add to their portfolio in the ZIRP era.

Hermel 11y ago
IMHO, misleading others is wrong.
charlesdm 11y ago
This is exactly what a lot of wealthy people are doing: "yield arbitration" Pension funds buy assets that generate between 3-4% a year (i.e. property). Let's say you are able to put together a €30m property portfolio generating 10% a year. Pension funds will pay €50-80m for that.
kolbe 11y ago
> It's the buyers' fault for not conducting due diligence and calling bullshit on the price set by the PE firm. The problem with statements like these is that you don't even know who the "buyer" is. It's not as cut and dry as Econ 101 would make you believe. The true buyer of an asset can be people who have no idea they bought it. For example, Chicago's public pensions have a shortfall of $23,000 per resident[1] due to the poor management of its fund. This means, for all intents and purposes, I bought shitty companies like Dick Smith. And me buying it had nothing to do with my lack of due diligence. I have no control over it. And neither do the teachers or policemen or 99.999% of the residents in Chicago who end up footing the bill for this nonsense. [1] https://www.illinoispolicy.org/chicagos-63-billion-debt-burden/ https://www.illinoispolicy.org/chicagos-63-billion-debt-burd...
- harryh 11y ago
  Chicago has pension problems because it promised benefits that it couldn't afford, not because the funds in it underperformed.
  - kolbe 11y ago
    Column A: shitty investing. Column B: over-promsing. Column C: under-funding. Column D: pension gaming. Column E-N: other stuff. There's usually more than one reason when $63bn holes arise.
- bmm6o 11y ago
  > The true buyer of an asset can be people who have no idea they bought it. They're the buyers in the sense that their money is funding the purchase, but they are not the ones negotiating contracts. If their agents failed to perform due diligence or other fiduciary duties, the fund should file a civil suit.
  - kolbe 11y ago
    That's only effective in the case of fraud or gross negligence. There isn't a single court that considers being too dumb to properly do your job as either. Additionally, what would you expect from the civil suit? These guys get paid a few hundred grand a year, and they lose billions. The only people who would win anything meaningful are lawyers. Additionally, in the case of Chicago, the pensioners don't really care either. The government has guaranteed they'd honor pension liabilities whether they're currently funded or not.
    - toomuchtodo 11y ago
      > Additionally, in the case of Chicago, the pensioners don't really care either. The government has guaranteed they'd honor pension liabilities whether they're currently funded or not. As a former Illinois resident, I'm super excited to see what happens when the government attempts to honor pension obligations with bank accounts at 0, and property owners flee the state as their property taxes skyrocket to foot the bill.

Hermel 11y ago

IMHO, misleading others is wrong.

charlesdm 11y ago

This is exactly what a lot of wealthy people are doing: "yield arbitration" Pension funds buy assets that generate between 3-4% a year (i.e. property). Let's say you are able to put together a €30m property portfolio generating 10% a year. Pension funds will pay €50-80m for that.

kolbe 11y ago

> It's the buyers' fault for not conducting due diligence and calling bullshit on the price set by the PE firm. The problem with statements like these is that you don't even know who the "buyer" is. It's not as cut and dry as Econ 101 would make you believe. The true buyer of an asset can be people who have no idea they bought it. For example, Chicago's public pensions have a shortfall of $23,000 per resident[1] due to the poor management of its fund. This means, for all intents and purposes, I bought shitty companies like Dick Smith. And me buying it had nothing to do with my lack of due diligence. I have no control over it. And neither do the teachers or policemen or 99.999% of the residents in Chicago who end up footing the bill for this nonsense. [1] https://www.illinoispolicy.org/chicagos-63-billion-debt-burden/ https://www.illinoispolicy.org/chicagos-63-billion-debt-burd...

harryh 11y ago
Chicago has pension problems because it promised benefits that it couldn't afford, not because the funds in it underperformed.
- kolbe 11y ago
  Column A: shitty investing. Column B: over-promsing. Column C: under-funding. Column D: pension gaming. Column E-N: other stuff. There's usually more than one reason when $63bn holes arise.
bmm6o 11y ago
> The true buyer of an asset can be people who have no idea they bought it. They're the buyers in the sense that their money is funding the purchase, but they are not the ones negotiating contracts. If their agents failed to perform due diligence or other fiduciary duties, the fund should file a civil suit.
- kolbe 11y ago
  That's only effective in the case of fraud or gross negligence. There isn't a single court that considers being too dumb to properly do your job as either. Additionally, what would you expect from the civil suit? These guys get paid a few hundred grand a year, and they lose billions. The only people who would win anything meaningful are lawyers. Additionally, in the case of Chicago, the pensioners don't really care either. The government has guaranteed they'd honor pension liabilities whether they're currently funded or not.
  - toomuchtodo 11y ago
    > Additionally, in the case of Chicago, the pensioners don't really care either. The government has guaranteed they'd honor pension liabilities whether they're currently funded or not. As a former Illinois resident, I'm super excited to see what happens when the government attempts to honor pension obligations with bank accounts at 0, and property owners flee the state as their property taxes skyrocket to foot the bill.