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The problem is they were already operating on razor thin margins. Imagine people walking through their lives with only $10 of savings, and hundreds of thousands

The problem is they were already operating on razor thin margins. Imagine people walking through their lives with only $10 of savings, and hundreds of thousands of dollars in debt. First time something happens, boom, you go bankrupt. Same with PE companies. They leverage up to the highest possible values, and then a bit more. They knew the risks of doing so, but the risks were worth it because they would make so much money if they paid off. But they didn't paid off. Why should we bail them out? In fact, is there something we can do to PREVENT these colossal leverage figures? Banks don't care, regulators can't do much about it, PE companies don't care, the companies being bought out don't have a say, and neither consumers.

leveredequity 7y ago
It's disingenuous to say PE doesn't care. They have every incentive to preserve and generate equity value. That is literally their business. However, the issue is employees are also hurt, not just equity and debt holders. Edit: I don't see how you can disagree with this statement. Literally the only job of a PE firm is retain and create value for investors. They would be out of business if they did not do that. Hence, they care about preserving capital. With the caveat that this is in aggregate across the portfolio. I don't disagree, however, that there needs to be significant regulation and social safety support for workers. I believe there needs to be significant changes to ensure we protect worker rights.
- downrightmike 7y ago
  Buy companies, layoff and outsource staff. Over work those that are left. PE is already bad for employees.
  - leveredequity 7y ago
    I work at a PE firm. There are multiple strategies employed, but the name of the game is not to lose money. Disagree with the term "value creation" - fine - but my point is there is zero incentive to lose money. Otherwise, they would be out of business in the long term. I am arguing for worker protection. Not protection of equity value. You inherently take on risk by deploying it, and should accept the realities of that risk.
    - downrightmike 7y ago
      But the core activity is still harm employees at all times. and cut to the bone at every chance to the detriment of employees, that had the original company not sold out, would have had to take better care of their employees and also require more employees as there wouldn't be redundancy between the parent and subsidiary. And all around increases the value to the workers and community. PE over leverage so they have to detriment the employees by default.
    - majormajor 7y ago
      > Otherwise, they would be out of business in the long term. ... that would be a fine incentive if we don't bail them out. Otherwise...
      - leveredequity 7y ago
        Totally agree, I thought we were arguing to bail out employees here. That's what I'm aware of based on what I've seen going on in the industry
    - TuringNYC 7y ago
      >> I am arguing for worker protection. Why not simply fund unemployment checks, direct cash, food stamps, student loan deferrals, or more direct means of worker protection than handing the money to PE Firms (which by the way operate by design to squeeze workers) and hoping they protect workers? We've seen this in 2009-2010 -- giving the money to banks doesn't magically make the money trickle down to workers. Perhaps some of it does, but why not make all of it trickle down by skipping the middlemen? What are the odds the middlemen will conveniently issue a giant dividend to themselves or do a stock buy-back or any other number of tricks that will achieve nothing for the workers.
  - rmrfstar 7y ago
    You can make money robbing little old ladies on their way to the grocery store. Doesn't make it a socially useful activity or one that should be permitted in a civilized society.
    - smabie 7y ago
      Are you saying that buying a company and having it take on debt should be illegal?
      - TuringNYC 7y ago
        I think they are saying that some things are lower in the line of requiring publicly funded bailouts. Like, say, perhaps we should spend the money on longer unemployment checks for the poor and middle class before we consider giant checks to risky business ventures.
      - rmrfstar 7y ago
        Yeah, I think that most LBO's should be taxed out of existence. The industry is a destructive and parasitic. https://www.youtube.com/watch?v=qs1DhA91fm0 https://www.youtube.com/watch?v=qs1DhA91fm0
- rmrfstar 7y ago
  I worked at a PE fund whose name you'd know. VC has a plausible claim to value creation. Buyout is a shell game. They are arsonists that we have allowed to torch our industrial economy to the ground. There are massive financial incentives to lever to the hilt. Back in the day social pressures restrained it. In the 1980s that all went out the window. https://www.gsb.stanford.edu/faculty-research/working-papers/leverage-ratchet-effect-0 https://www.gsb.stanford.edu/faculty-research/working-papers...
- TuringNYC 7y ago
  >> It's disingenuous to say PE doesn't care. They have every incentive to preserve and generate equity value. That is literally their business. This might be the headline intent for the public, but in practice has often not been the primary intent. PE firms often extract massive fees from the companies to recover their initial investment -- long before they realize equity based gains. I'd say VCs are more aligned on this matter, not PE.
  - leveredequity 7y ago
    That is simply not true. Management fees are such a small percentage of contributed capital. And, typically doesn't count towards your returns calculation.
    - FireBeyond 7y ago
      Toys R Us. $1.8B in debts prior to PE involvement. Immediately following the deal signing that ballooned to $5B+. Interest fees now encompassed 97% of operating profits. PE firm only paid about 1.3% of the equity for the leveraged buyout, Toys contributed the rest (hence the increased debt load). KKR and Bain stated that management fees, transaction fees and interest entirely covered, and more, the losses from the deal. $128M in transaction fees, $800M in management fees, and so on.
      - leveredequity 7y ago
        I don't believe the 1.3% is correct, as I think it's closer to 20-25%. Data I have seen supports that they put up $1.3bn of equity in the acquisition, in addition to ~$5Bn of debt (at ~7x leverage I think? -- that's more of the sticker shock). In today's market at least, you need to put up at least around ~30% of the purchase price as equity from the private equity firm. The Toys R Us deal had a whole bunch of issues, and the business may very well have been over-levered. I do think we should bring back stricter leveraged lending guidelines, in some form. Those fees, however, don't cover the losses the way that you think (sometimes they cover the amount contributed from the fund itself, not from its investors). I think there were only received $180M in management fees over the nearly 10 year hold paid to the 3 firms involved.
clairity 7y ago
> "In fact, is there something we can do to PREVENT these colossal leverage figures?" yes, at least these 3 things: * remove the tax advantage of debt over equity (currently debt payments reduce tax burdens). * remove the tax advantage of capital gains over ordinary income. * on any bailout, massively cram down the equity holding of the PE firm(s) and all executives by issuing new shares to every other stakeholder besides them, including other shareholders (if there are any, typically not), employees, suppliers, and debtholders, mitigating the too-big-to-fail moral hazard.
- thebean11 7y ago
  > on any bailout, massively cram down the equity holding of the PE firm(s) and all executives by issuing new shares to every other stakeholder besides them, including other shareholders IMO that's a step to far, and is a totally uneven punishment depending on how shares are held. Just make them give the government equity (or options) as part of the bailout that would dilute all existing shareholders. Executives aren't the only ones responsible, they are hired by the shareholders.
  - pnutjam 7y ago
    The whole point of shareholders is to dilute the investment so much that nobody really has a voice. Pick up some of the books by Frederick Lewis Allen, he wrote some great financial history books.
    - thebean11 7y ago
      I haven't read any of his work..but surely there is some aggregate voice made up of the shareholders right? Do you think the shareholder votes are meaningless?
      - freeopinion 7y ago
        I don't think you and I know each other, but I'm going to guess that you own shares in hundreds of companies. I'm also guessing that you have never voted at the shareholder meeting of most or all of those companies. Again, just guessing, but I'm guessing that the same is true for most of the people who read this site. And this is YC--all about founders and funders.
TuringNYC 7y ago
>> In fact, is there something we can do to PREVENT these colossal leverage figures? Banks don't care, regulators can't do much about it, PE companies don't care, the companies being bought out don't have a say, and neither consumers. Yes there is -- let them fail if they cannot service debt. If you bail them out, it only fosters the behavior further.
- bdcravens 7y ago
  Couldn't the same be said for highly-leveraged workers?
  - arcticfox 7y ago
    What is a highly leveraged worker? Is it someone that has no savings account? If so, what does letting them fail look like to you? To me, letting an over-leveraged worker 'fail' (starve, die, become homeless, whatever it is) is categorically different than letting an over-leveraged business fail.
    - solarkraft 7y ago
      Despite some court verdicts (or memes resulting from them) claiming otherwise, companies are not people and should be held to different standards.
      - bdcravens 7y ago
        Many companies are the sole income for one person however. I think it's easy to portray business as soulless corporations, but most business in the US are small businesses. As such, the fate of those businesses is tied to the fate of the workers, of which the owner is one.
    - smabie 7y ago
      I mean, an over-leveraged business failing is gonna create over-leveraged workers failing. I don't really see the material difference, anyways.

leveredequity 7y ago

It's disingenuous to say PE doesn't care. They have every incentive to preserve and generate equity value. That is literally their business. However, the issue is employees are also hurt, not just equity and debt holders. Edit: I don't see how you can disagree with this statement. Literally the only job of a PE firm is retain and create value for investors. They would be out of business if they did not do that. Hence, they care about preserving capital. With the caveat that this is in aggregate across the portfolio. I don't disagree, however, that there needs to be significant regulation and social safety support for workers. I believe there needs to be significant changes to ensure we protect worker rights.

downrightmike 7y ago
Buy companies, layoff and outsource staff. Over work those that are left. PE is already bad for employees.
- leveredequity 7y ago
  I work at a PE firm. There are multiple strategies employed, but the name of the game is not to lose money. Disagree with the term "value creation" - fine - but my point is there is zero incentive to lose money. Otherwise, they would be out of business in the long term. I am arguing for worker protection. Not protection of equity value. You inherently take on risk by deploying it, and should accept the realities of that risk.
  - downrightmike 7y ago
    But the core activity is still harm employees at all times. and cut to the bone at every chance to the detriment of employees, that had the original company not sold out, would have had to take better care of their employees and also require more employees as there wouldn't be redundancy between the parent and subsidiary. And all around increases the value to the workers and community. PE over leverage so they have to detriment the employees by default.
  - majormajor 7y ago
    > Otherwise, they would be out of business in the long term. ... that would be a fine incentive if we don't bail them out. Otherwise...
    - leveredequity 7y ago
      Totally agree, I thought we were arguing to bail out employees here. That's what I'm aware of based on what I've seen going on in the industry
  - TuringNYC 7y ago
    >> I am arguing for worker protection. Why not simply fund unemployment checks, direct cash, food stamps, student loan deferrals, or more direct means of worker protection than handing the money to PE Firms (which by the way operate by design to squeeze workers) and hoping they protect workers? We've seen this in 2009-2010 -- giving the money to banks doesn't magically make the money trickle down to workers. Perhaps some of it does, but why not make all of it trickle down by skipping the middlemen? What are the odds the middlemen will conveniently issue a giant dividend to themselves or do a stock buy-back or any other number of tricks that will achieve nothing for the workers.
- rmrfstar 7y ago
  You can make money robbing little old ladies on their way to the grocery store. Doesn't make it a socially useful activity or one that should be permitted in a civilized society.
  - smabie 7y ago
    Are you saying that buying a company and having it take on debt should be illegal?
    - TuringNYC 7y ago
      I think they are saying that some things are lower in the line of requiring publicly funded bailouts. Like, say, perhaps we should spend the money on longer unemployment checks for the poor and middle class before we consider giant checks to risky business ventures.
    - rmrfstar 7y ago
      Yeah, I think that most LBO's should be taxed out of existence. The industry is a destructive and parasitic. https://www.youtube.com/watch?v=qs1DhA91fm0 https://www.youtube.com/watch?v=qs1DhA91fm0
rmrfstar 7y ago
I worked at a PE fund whose name you'd know. VC has a plausible claim to value creation. Buyout is a shell game. They are arsonists that we have allowed to torch our industrial economy to the ground. There are massive financial incentives to lever to the hilt. Back in the day social pressures restrained it. In the 1980s that all went out the window. https://www.gsb.stanford.edu/faculty-research/working-papers/leverage-ratchet-effect-0 https://www.gsb.stanford.edu/faculty-research/working-papers...
TuringNYC 7y ago
>> It's disingenuous to say PE doesn't care. They have every incentive to preserve and generate equity value. That is literally their business. This might be the headline intent for the public, but in practice has often not been the primary intent. PE firms often extract massive fees from the companies to recover their initial investment -- long before they realize equity based gains. I'd say VCs are more aligned on this matter, not PE.
- leveredequity 7y ago
  That is simply not true. Management fees are such a small percentage of contributed capital. And, typically doesn't count towards your returns calculation.
  - FireBeyond 7y ago
    Toys R Us. $1.8B in debts prior to PE involvement. Immediately following the deal signing that ballooned to $5B+. Interest fees now encompassed 97% of operating profits. PE firm only paid about 1.3% of the equity for the leveraged buyout, Toys contributed the rest (hence the increased debt load). KKR and Bain stated that management fees, transaction fees and interest entirely covered, and more, the losses from the deal. $128M in transaction fees, $800M in management fees, and so on.
    - leveredequity 7y ago
      I don't believe the 1.3% is correct, as I think it's closer to 20-25%. Data I have seen supports that they put up $1.3bn of equity in the acquisition, in addition to ~$5Bn of debt (at ~7x leverage I think? -- that's more of the sticker shock). In today's market at least, you need to put up at least around ~30% of the purchase price as equity from the private equity firm. The Toys R Us deal had a whole bunch of issues, and the business may very well have been over-levered. I do think we should bring back stricter leveraged lending guidelines, in some form. Those fees, however, don't cover the losses the way that you think (sometimes they cover the amount contributed from the fund itself, not from its investors). I think there were only received $180M in management fees over the nearly 10 year hold paid to the 3 firms involved.

clairity 7y ago

> "In fact, is there something we can do to PREVENT these colossal leverage figures?" yes, at least these 3 things: * remove the tax advantage of debt over equity (currently debt payments reduce tax burdens). * remove the tax advantage of capital gains over ordinary income. * on any bailout, massively cram down the equity holding of the PE firm(s) and all executives by issuing new shares to every other stakeholder besides them, including other shareholders (if there are any, typically not), employees, suppliers, and debtholders, mitigating the too-big-to-fail moral hazard.

thebean11 7y ago
> on any bailout, massively cram down the equity holding of the PE firm(s) and all executives by issuing new shares to every other stakeholder besides them, including other shareholders IMO that's a step to far, and is a totally uneven punishment depending on how shares are held. Just make them give the government equity (or options) as part of the bailout that would dilute all existing shareholders. Executives aren't the only ones responsible, they are hired by the shareholders.
- pnutjam 7y ago
  The whole point of shareholders is to dilute the investment so much that nobody really has a voice. Pick up some of the books by Frederick Lewis Allen, he wrote some great financial history books.
  - thebean11 7y ago
    I haven't read any of his work..but surely there is some aggregate voice made up of the shareholders right? Do you think the shareholder votes are meaningless?
    - freeopinion 7y ago
      I don't think you and I know each other, but I'm going to guess that you own shares in hundreds of companies. I'm also guessing that you have never voted at the shareholder meeting of most or all of those companies. Again, just guessing, but I'm guessing that the same is true for most of the people who read this site. And this is YC--all about founders and funders.

TuringNYC 7y ago

>> In fact, is there something we can do to PREVENT these colossal leverage figures? Banks don't care, regulators can't do much about it, PE companies don't care, the companies being bought out don't have a say, and neither consumers. Yes there is -- let them fail if they cannot service debt. If you bail them out, it only fosters the behavior further.

bdcravens 7y ago
Couldn't the same be said for highly-leveraged workers?
- arcticfox 7y ago
  What is a highly leveraged worker? Is it someone that has no savings account? If so, what does letting them fail look like to you? To me, letting an over-leveraged worker 'fail' (starve, die, become homeless, whatever it is) is categorically different than letting an over-leveraged business fail.
  - solarkraft 7y ago
    Despite some court verdicts (or memes resulting from them) claiming otherwise, companies are not people and should be held to different standards.
    - bdcravens 7y ago
      Many companies are the sole income for one person however. I think it's easy to portray business as soulless corporations, but most business in the US are small businesses. As such, the fate of those businesses is tied to the fate of the workers, of which the owner is one.
  - smabie 7y ago
    I mean, an over-leveraged business failing is gonna create over-leveraged workers failing. I don't really see the material difference, anyways.