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LBOs don't create value, they exist to transfer value from stakeholders to shareholders. PE buyouts have something like a 10x rate of bankruptcy filing compared

LBOs don't create value, they exist to transfer value from stakeholders to shareholders. PE buyouts have something like a 10x rate of bankruptcy filing compared to the benchmark. LBO's require buying a healthy cash-rich business, loading it up with debt, an then forcing repayment and management fees to the PE fund through cost cutting, dividend recaps, and other measures to transfer cash. Plus since the PE firm themselves puts in 1-2% of their own cash, they face little risk and huge upside for taking on large debts on their PortCo. LBO firms aren't responsible managers because they don't have the same capital stake that a real owner would have. LBO's wouldn't exist if funds were responsible for the financial liabilities they place on their PortCos.

formercoder 7y ago
Cost cutting is one view, increased efficiency is another.
citrablue 7y ago
Wouldn't it be expected that companies who are targeted by PE are more likely to go bankrupt, independent of any actions by the PE firm? They say they're targeting poorly run companies, after all. (Not to disagree with your larger point, but want to correct any mistakes in my understanding.)
- notfromhere 7y ago
  A very small portion of PE is funds focused on either turning around poorly-run companies or growing small companies, mainly because this is very hard and requires specializing in a sector. Plus exit horizons are longer than 3-5 years. Most PE activity is about finding a cash-rich company with steady returns, having said firm take out large loans to service the debt, and using fees/dividend recaps to transfer company wealth to the PE fund. PE acquired companies have a much higher bankruptcy rate than the benchmark
  - airstrike 7y ago
    The fact that there are poor performing PE funds out there doesn't make LBOs an objectively evil device. You're simply arguing investors are dumb for throwing their money at PEs somewhat indiscriminately rather than only investing in high-quality PE funds with investments that do not go bankrupt as often. Moreover, one could argue that the mere existence of LBOs forces managers to be more disciplined and act on behalf of their shareholders, which marginally reduces the challenge that agency costs pose on public corporations
    - notfromhere 7y ago
      The LBO model inherently makes operational flexibility difficult. The whole idea that shareholders are the only ones that matter is both recent and poisonous to the long-term health of the economy.
      - airstrike 7y ago
        > The whole idea that shareholders are the only ones that matter is both recent and poisonous to the long-term health of the economy. They are not the only ones who matter, just the ones who matter the most. My point was more about corporate kleptocracy and whimsical managers running wild. I did not claim shareholder value trumps everything else. In fact, the agency costs of appointing managers to run a business affects not only shareholders but every other stakeholder. But for the record, Unocal v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985) established that takeover offers ought to be evaluated in the context of all stakeholders – "shareholders, creditors, customers, employees, and the community"¹ – with Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986)² later modifying this test to put shareholder value above all other stakeholders in certain circumstances ("Revlon duties"). Whether that is "poisonous to the long-term health of the economy" is most certainly not a foregone conclusion and a bold claim to make, particularly given that we're currently in the longest period of prosperity³ and LBOs are everywhere to be found –––––––––– 1. https://en.wikipedia.org/wiki/Unocal_Corp._v._Mesa_Petroleum_Co.#Judgment https://en.wikipedia.org/wiki/Unocal_Corp._v._Mesa_Petroleum... 2. https://en.wikipedia.org/wiki/Revlon,_Inc._v._MacAndrews_%26_Forbes_Holdings,_Inc https://en.wikipedia.org/wiki/Revlon,_Inc._v._MacAndrews_%26.... 3. https://www.cnbc.com/2019/07/02/this-is-now-the-longest-us-economic-expansion-in-history.html https://www.cnbc.com/2019/07/02/this-is-now-the-longest-us-e...

formercoder 7y ago

Cost cutting is one view, increased efficiency is another.

citrablue 7y ago

Wouldn't it be expected that companies who are targeted by PE are more likely to go bankrupt, independent of any actions by the PE firm? They say they're targeting poorly run companies, after all. (Not to disagree with your larger point, but want to correct any mistakes in my understanding.)

notfromhere 7y ago
A very small portion of PE is funds focused on either turning around poorly-run companies or growing small companies, mainly because this is very hard and requires specializing in a sector. Plus exit horizons are longer than 3-5 years. Most PE activity is about finding a cash-rich company with steady returns, having said firm take out large loans to service the debt, and using fees/dividend recaps to transfer company wealth to the PE fund. PE acquired companies have a much higher bankruptcy rate than the benchmark
- airstrike 7y ago
  The fact that there are poor performing PE funds out there doesn't make LBOs an objectively evil device. You're simply arguing investors are dumb for throwing their money at PEs somewhat indiscriminately rather than only investing in high-quality PE funds with investments that do not go bankrupt as often. Moreover, one could argue that the mere existence of LBOs forces managers to be more disciplined and act on behalf of their shareholders, which marginally reduces the challenge that agency costs pose on public corporations
  - notfromhere 7y ago
    The LBO model inherently makes operational flexibility difficult. The whole idea that shareholders are the only ones that matter is both recent and poisonous to the long-term health of the economy.
    - airstrike 7y ago
      > The whole idea that shareholders are the only ones that matter is both recent and poisonous to the long-term health of the economy. They are not the only ones who matter, just the ones who matter the most. My point was more about corporate kleptocracy and whimsical managers running wild. I did not claim shareholder value trumps everything else. In fact, the agency costs of appointing managers to run a business affects not only shareholders but every other stakeholder. But for the record, Unocal v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985) established that takeover offers ought to be evaluated in the context of all stakeholders – "shareholders, creditors, customers, employees, and the community"¹ – with Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986)² later modifying this test to put shareholder value above all other stakeholders in certain circumstances ("Revlon duties"). Whether that is "poisonous to the long-term health of the economy" is most certainly not a foregone conclusion and a bold claim to make, particularly given that we're currently in the longest period of prosperity³ and LBOs are everywhere to be found –––––––––– 1. https://en.wikipedia.org/wiki/Unocal_Corp._v._Mesa_Petroleum_Co.#Judgment https://en.wikipedia.org/wiki/Unocal_Corp._v._Mesa_Petroleum... 2. https://en.wikipedia.org/wiki/Revlon,_Inc._v._MacAndrews_%26_Forbes_Holdings,_Inc https://en.wikipedia.org/wiki/Revlon,_Inc._v._MacAndrews_%26.... 3. https://www.cnbc.com/2019/07/02/this-is-now-the-longest-us-economic-expansion-in-history.html https://www.cnbc.com/2019/07/02/this-is-now-the-longest-us-e...