4 ms·

I work in the industry and whilst the article does make some good points, it largely feels like a hit piece focused predominately on the negatives. In a way the

I work in the industry and whilst the article does make some good points, it largely feels like a hit piece focused predominately on the negatives. In a way there is a clear lack of nuance....for instance: "the PE firm and its investors can put in a comparatively small amount of cash". PE deals are typically funded with ~40% to 50% equity with the rest in debt. They are putting substaintial equity into these companies. Secondly, the PE ecosystem is large with a significant number of places with a range of different investment strategies. I don't have the time to make all my points...PE is a lot more gray than the article paints and it's easy to point to the big, evil capitalist who make money and say they are ruining the world... As an example, I've seen private equity save companies. One group acquired a company that was losing millions with a plan to return it to profitability and keep jobs....these kind of deals are never discussed in articles like this because all we hear about are the bankrupticies because they go through court...

notfromhere 7y ago
The PE "fund" puts in 30-50% equity, largely coming out of LP money. The GPs put in 1-2%. So while the GPs act like managers, they have little skin in the game and aren't liable for the debts they rack up on the PortCo. Growth equity has seen some success, but the vast majority of PE activity is based around financially engineering a PortCo to transfer value from the PortCo to the fund, regardless of how it wrecks all other stakeholders or the long-term health of the PortCo.
- Blackstone4 7y ago
  I understand that the majority of equity is coming from LPs but that's not the point I was making. The way the author framed it sounded like the deals were 90% debt and 10% equity which is not the case. It depends on the size of manager and I've seen GP commits range from 1% to 10%. The largest dollar commitment I've seen is in the ~$500m ballpark....either way what matters is whether the GP commit is meaningful in terms of their own net worth due to alignment of interest. Again this is not a black and white issue....some GPs do have skin in the game. Most people do not understand debt including the author...at the moment, debt is so darn cheap, tax-effecient and covenant-lite that it's almost free money.... I would rather be on the equity side of the equation then be a lender....whether that would be a bank or high yield/junk bond investor. I would argue that raising a PE fund is asymmetric for the manager since heads: I earn plenty of carried interest....tails: I get fat from the management fees and hold onto the portfolio companies for as long as I can (~10 years). Which segment of the PE market are you refering to? What do you mean by financial engineering? I've spent a lot of my time in the US LMM and I see plenty of value creation/professionalization of small businesses. That said, I appreciate the fact that that kind of work is harder to do at the larger end...and it's more about the leverage, buying right with the right secular trends etc. Again not black and white.... For example on job creation: "We find that the real-side effects of buyouts on target firms and their workers vary greatly by deal type and market conditions... This conclusion cast doubts on the efficacy of 'one-size-fits-all' policy prescriptions for private equity." If I was to use an analogy with regards to the article, its as if someone tried describing the entire software industry to an outsider by only refering to Microsoft, Google and IBM...what about the rest of the industry? [0] Pro Rata https://www.axios.com/newsletters/axios-pro-rata-ed716a8a-3790-4e1d-8a56-d05db1e4e803.html https://www.axios.com/newsletters/axios-pro-rata-ed716a8a-37...

notfromhere 7y ago

The PE "fund" puts in 30-50% equity, largely coming out of LP money. The GPs put in 1-2%. So while the GPs act like managers, they have little skin in the game and aren't liable for the debts they rack up on the PortCo. Growth equity has seen some success, but the vast majority of PE activity is based around financially engineering a PortCo to transfer value from the PortCo to the fund, regardless of how it wrecks all other stakeholders or the long-term health of the PortCo.

Blackstone4 7y ago
I understand that the majority of equity is coming from LPs but that's not the point I was making. The way the author framed it sounded like the deals were 90% debt and 10% equity which is not the case. It depends on the size of manager and I've seen GP commits range from 1% to 10%. The largest dollar commitment I've seen is in the ~$500m ballpark....either way what matters is whether the GP commit is meaningful in terms of their own net worth due to alignment of interest. Again this is not a black and white issue....some GPs do have skin in the game. Most people do not understand debt including the author...at the moment, debt is so darn cheap, tax-effecient and covenant-lite that it's almost free money.... I would rather be on the equity side of the equation then be a lender....whether that would be a bank or high yield/junk bond investor. I would argue that raising a PE fund is asymmetric for the manager since heads: I earn plenty of carried interest....tails: I get fat from the management fees and hold onto the portfolio companies for as long as I can (~10 years). Which segment of the PE market are you refering to? What do you mean by financial engineering? I've spent a lot of my time in the US LMM and I see plenty of value creation/professionalization of small businesses. That said, I appreciate the fact that that kind of work is harder to do at the larger end...and it's more about the leverage, buying right with the right secular trends etc. Again not black and white.... For example on job creation: "We find that the real-side effects of buyouts on target firms and their workers vary greatly by deal type and market conditions... This conclusion cast doubts on the efficacy of 'one-size-fits-all' policy prescriptions for private equity." If I was to use an analogy with regards to the article, its as if someone tried describing the entire software industry to an outsider by only refering to Microsoft, Google and IBM...what about the rest of the industry? [0] Pro Rata https://www.axios.com/newsletters/axios-pro-rata-ed716a8a-3790-4e1d-8a56-d05db1e4e803.html https://www.axios.com/newsletters/axios-pro-rata-ed716a8a-37...