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(FWIW, I'm in VC, but I know very little about how PE works.) As a general observation, businesses like PE usually don't exist unless somewhere down the line th

(FWIW, I'm in VC, but I know very little about how PE works.) As a general observation, businesses like PE usually don't exist unless somewhere down the line they create some value. So if a PE firm makes a buyout offer to a CEO and the CEO takes it, then presumably that buyout offer was better than the CEO's alternatives (like other offers, or staying private, or etc). The problem here is not the PE firm, but the lack of better alternatives. One could make similar observations about the payday loan industry: most of the firms are predatory and their offers suck, but 1) because of high default rates, the loan offers will necessarily be poor, and 2) creating more alternatives to payday loans would be great. But banning payday loans would be a net negative, because the choice of "very high interest rate loan or nothing" is better than having "nothing" as the only option.

bsder 7y ago
> The problem here is not the PE firm, but the lack of better alternatives. Were the alternatives better for the stockholders or the CEO? And, were the alternatives better for which stockholders? The number of firms that have started public, gone private, and then gone public again seems to indicate that private equity doesn't seem to be adding business value. In addition, a lot of private equity seems to be about stripping cash from companies in creative ways--effectively the endgame of the "hostile takeover and then partition the company" from the 1980's. Toys R Us, Sears, K-Mart sure didn't seem to benefit from private equity.
- zaroth 7y ago
  If the alternative was better for the stockholders and the Board disregarded it, then the shareholders will sue, and win. There were some recent cases where Delaware courts awarded some pretty significant damages using hypothetical valuation models that were extremely favorable to the shareholders (Dell is a famous recent example [1]). PE firms, once they own the company, can strip all the cash they want to from the company they own. There’s no law saying a company can’t be harvested for its assets if the shareholders believe that’s the most effective way to extract value from the asset. [1] - https://corpgov.law.harvard.edu/2017/12/19/analysis-of-delaware-supreme-courts-dell-appraisal-decision/ https://corpgov.law.harvard.edu/2017/12/19/analysis-of-delaw...
- repolfx 7y ago
  The number of firms that have started public, gone private, and then gone public again seems to indicate that private equity doesn't seem to be adding business value No? It seems like the opposite to me, surely. The company couldn't go public again at a profit if it wasn't improved. There's a public company. It has some core goodness to it, but the senior management from board on down are useless and damaging it. The shareholders are passive and don't know what to do. PE steps in, buys it, taking it over and thus taking it private. They then reorganise the firm, getting rid of the bad management and potentially, making hard decisions those managers were emotionally incapable of doing, like shutting down treasured but loss-making business units, slaughtering some sacred cows, quite possibly letting people go and so turning the business around. Having gone in and done the hard stuff, they then take the company public again and profit from turning the firm around, because they don't really want to manage that company in perpetuity, they just wanted to make money by righting the ship and salvaging what was possible. Sometimes maybe the business can't be saved. Maybe it's been cobbled together out of acquisitions that made no sense. Maybe it over-extended into new product lines where it had no real advantage over its competitors. In these cases breaking the firm up actually makes most sense from a macroeconomic perspective: the capacity the uncompetitive product departments had may be better utilised by more capable competitors, maybe the acquired firms make more sense to be separated. The article is written from a leftist perspective that PE is bad and uses lots of perjorative and biased language as a consequence, e.g. "A private equity fund is a large unregulated pool of money run by financiers". What makes this pool of money "unregulated" vs any businesses pool of money? The question is left unanswered. The author knows that "unregulated" is a dog-whistle to certain types of reader and is blowing it as hard as he can. Other things it says that just aren't true: private equity is not business Yes it is. PE is a political movement No it isn't. I've read quite a few critiques of private equity over the years, and worked at a firm that received a major investment by one, albeit not a controlling stake due to the complex nature of that firm's privatisation from government. True to form one of the first things the PE guys did was come in and review every employee, firing a lot of them. "Dead wood", one of them apparently said. But they were right and the company has grown significantly through the privatisation and their involvement. Even the critiques I've read (like this one) usually admit there's positive outcomes to the work PE does.
milesskorpen 7y ago
The challenge I have is that I'm not really sure what "value" is right now; if you give the Bain Cap guys another couple hundred million / billions in compensation, it's not like they're going to go out and invest it in incredibly high returning things that really drive our economy forward. It'll just sit there, along with the other huge pools of capital that can't seem to find great investment opportunities. I think (?) that Toys-R-Us provides more value to the _country_, if nothing else in terms of employment for a few thousand people, than a few $b sitting in a bank somewhere. If we were really effective at putting that $b to work, that might be the better option. Infrastructure somewhere might be worth more than TRU to society.

bsder 7y ago

> The problem here is not the PE firm, but the lack of better alternatives. Were the alternatives better for the stockholders or the CEO? And, were the alternatives better for which stockholders? The number of firms that have started public, gone private, and then gone public again seems to indicate that private equity doesn't seem to be adding business value. In addition, a lot of private equity seems to be about stripping cash from companies in creative ways--effectively the endgame of the "hostile takeover and then partition the company" from the 1980's. Toys R Us, Sears, K-Mart sure didn't seem to benefit from private equity.

zaroth 7y ago
If the alternative was better for the stockholders and the Board disregarded it, then the shareholders will sue, and win. There were some recent cases where Delaware courts awarded some pretty significant damages using hypothetical valuation models that were extremely favorable to the shareholders (Dell is a famous recent example [1]). PE firms, once they own the company, can strip all the cash they want to from the company they own. There’s no law saying a company can’t be harvested for its assets if the shareholders believe that’s the most effective way to extract value from the asset. [1] - https://corpgov.law.harvard.edu/2017/12/19/analysis-of-delaware-supreme-courts-dell-appraisal-decision/ https://corpgov.law.harvard.edu/2017/12/19/analysis-of-delaw...
repolfx 7y ago
The number of firms that have started public, gone private, and then gone public again seems to indicate that private equity doesn't seem to be adding business value No? It seems like the opposite to me, surely. The company couldn't go public again at a profit if it wasn't improved. There's a public company. It has some core goodness to it, but the senior management from board on down are useless and damaging it. The shareholders are passive and don't know what to do. PE steps in, buys it, taking it over and thus taking it private. They then reorganise the firm, getting rid of the bad management and potentially, making hard decisions those managers were emotionally incapable of doing, like shutting down treasured but loss-making business units, slaughtering some sacred cows, quite possibly letting people go and so turning the business around. Having gone in and done the hard stuff, they then take the company public again and profit from turning the firm around, because they don't really want to manage that company in perpetuity, they just wanted to make money by righting the ship and salvaging what was possible. Sometimes maybe the business can't be saved. Maybe it's been cobbled together out of acquisitions that made no sense. Maybe it over-extended into new product lines where it had no real advantage over its competitors. In these cases breaking the firm up actually makes most sense from a macroeconomic perspective: the capacity the uncompetitive product departments had may be better utilised by more capable competitors, maybe the acquired firms make more sense to be separated. The article is written from a leftist perspective that PE is bad and uses lots of perjorative and biased language as a consequence, e.g. "A private equity fund is a large unregulated pool of money run by financiers". What makes this pool of money "unregulated" vs any businesses pool of money? The question is left unanswered. The author knows that "unregulated" is a dog-whistle to certain types of reader and is blowing it as hard as he can. Other things it says that just aren't true: private equity is not business Yes it is. PE is a political movement No it isn't. I've read quite a few critiques of private equity over the years, and worked at a firm that received a major investment by one, albeit not a controlling stake due to the complex nature of that firm's privatisation from government. True to form one of the first things the PE guys did was come in and review every employee, firing a lot of them. "Dead wood", one of them apparently said. But they were right and the company has grown significantly through the privatisation and their involvement. Even the critiques I've read (like this one) usually admit there's positive outcomes to the work PE does.

milesskorpen 7y ago

The challenge I have is that I'm not really sure what "value" is right now; if you give the Bain Cap guys another couple hundred million / billions in compensation, it's not like they're going to go out and invest it in incredibly high returning things that really drive our economy forward. It'll just sit there, along with the other huge pools of capital that can't seem to find great investment opportunities. I think (?) that Toys-R-Us provides more value to the _country_, if nothing else in terms of employment for a few thousand people, than a few $b sitting in a bank somewhere. If we were really effective at putting that $b to work, that might be the better option. Infrastructure somewhere might be worth more than TRU to society.