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No. Creditors, after the IRS, are first in line for assets in bankruptcy law.

by sadris 8y ago

jjeaff 8y ago
That doesn't mean in many cases the PE firms aren't getting paid though. They usually charge "consulting fees" to the companies they buy sometimes in the hundreds of millions of dollars. They get that money long before any bankruptcy proceedings start.
- colechristensen 8y ago
  The way I understood it is they have their acquisitions raise a lot of money through debt, pay themselves enormous fees out of that debt, and then do hail-mary plays to try to recover the company (which never, probably by intent, work) and then have the company go bankrupt. Pocketing the fees, etc which are in excess of anything they ever put in.
- berliner214 8y ago
  So let me get this straight: You think banks willingly loan PE firms billions of dollars so they can pocket consulting fees and put the company into bankruptcy? That's completely wrong. The money put up by PE firms is more at risk than any loan received by a bank. Bain Capital, for instance, lost money on the Toys R Us buyout. The bank would not agree to loan money for a buyout without an explicit covenant that would prevent such shenanigans. The generated cash flow is used to pay down debt; the PE firm usually only makes a profit when it exits its investment. Banks agree to loan to PE firms because buyouts usually work and PE firms are right when they believe they can increase margins. The extra debt load reduces the tax burden and makes the debt easier to pay off.
  - jjeaff 8y ago
    The fact that you don't know about the consulting fees that PE firms charge makes me think you are just spitballing here. The PE firms put up around $1.3B for Toys R Us with a $6.6B total leveraged buyout. The received around $200mm in consulting and other fees during their tenure. They also received interest payments for their portion of the capital. And there were several other deals and consolidations that are estimated to have netted the P/E firms several hundred million more. But these deals are far to complex to get exact numbers. It's likely that the PE firms lost big on deals like toys-r-us, but they definitely skim off the top all along the way thus making their final losses less. https://www.theatlantic.com/magazine/archive/2018/07/toys-r-us-bankruptcy-private-equity/561758/ https://www.theatlantic.com/magazine/archive/2018/07/toys-r-...
acdha 8y ago
First in line for assets which exist at the time of bankruptcy. That can be years after the looting has begun — for example, with Sears they poured huge amounts of money into stock buybacks and transferred the real estate holdings to a separate company which rented them back: https://www.nytimes.com/2017/08/11/business/the-incredible-shrinking-sears.html https://www.nytimes.com/2017/08/11/business/the-incredible-s... None of that can be easily undone by a bankruptcy court.
rhizome 8y ago
Which is why PE firms sell off the assets before the bankruptcy.

No. Creditors, after the IRS, are first in line for assets in bankruptcy law.

by sadris 8y ago

No. Creditors, after the IRS, are first in line for assets in bankruptcy law.

That doesn't mean in many cases the PE firms aren't getting paid though. They usually charge "consulting fees" to the companies they buy sometimes in the hundreds of millions of dollars. They get that money long before any bankruptcy proceedings start.

colechristensen 8y ago
The way I understood it is they have their acquisitions raise a lot of money through debt, pay themselves enormous fees out of that debt, and then do hail-mary plays to try to recover the company (which never, probably by intent, work) and then have the company go bankrupt. Pocketing the fees, etc which are in excess of anything they ever put in.
berliner214 8y ago
So let me get this straight: You think banks willingly loan PE firms billions of dollars so they can pocket consulting fees and put the company into bankruptcy? That's completely wrong. The money put up by PE firms is more at risk than any loan received by a bank. Bain Capital, for instance, lost money on the Toys R Us buyout. The bank would not agree to loan money for a buyout without an explicit covenant that would prevent such shenanigans. The generated cash flow is used to pay down debt; the PE firm usually only makes a profit when it exits its investment. Banks agree to loan to PE firms because buyouts usually work and PE firms are right when they believe they can increase margins. The extra debt load reduces the tax burden and makes the debt easier to pay off.
- jjeaff 8y ago
  The fact that you don't know about the consulting fees that PE firms charge makes me think you are just spitballing here. The PE firms put up around $1.3B for Toys R Us with a $6.6B total leveraged buyout. The received around $200mm in consulting and other fees during their tenure. They also received interest payments for their portion of the capital. And there were several other deals and consolidations that are estimated to have netted the P/E firms several hundred million more. But these deals are far to complex to get exact numbers. It's likely that the PE firms lost big on deals like toys-r-us, but they definitely skim off the top all along the way thus making their final losses less. https://www.theatlantic.com/magazine/archive/2018/07/toys-r-us-bankruptcy-private-equity/561758/ https://www.theatlantic.com/magazine/archive/2018/07/toys-r-...

acdha 8y ago

First in line for assets which exist at the time of bankruptcy. That can be years after the looting has begun — for example, with Sears they poured huge amounts of money into stock buybacks and transferred the real estate holdings to a separate company which rented them back: https://www.nytimes.com/2017/08/11/business/the-incredible-shrinking-sears.html https://www.nytimes.com/2017/08/11/business/the-incredible-s... None of that can be easily undone by a bankruptcy court.

rhizome 8y ago

Which is why PE firms sell off the assets before the bankruptcy.