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Private equity is a scam?
- battery_cowboy 7y agoMaybe he has good points, but he's a fucking writer, and when I got to "20/" I noped out of reading anymore. Just write a damn article and get it published, twitter was designed for ~160 characters or whatever, it's not for long-form articles.
- _bxg1 7y agoYou're really going to ignore the content because you're salty about the way it's laid out on the page?
- battery_cowboy 7y agoYes.
- Justin_K 7y agoYea I did the same.
- look_lookatme 7y agoYes I did too.
- Simon_says 7y agoNot me. My DNS blackholes Twitter.
- WalterBright 7y agoThere's an awful lot available to read. Poor presentation, layout, grammar, spelling, capitalization, punctuation, cursing, etc., is pretty much a guarantee of equally poor thinking. Hence not worth reading.
- musicale 7y agoThat's what threadreaderapp.com is for.
- lokedhs 7y agoThat makes it somewhat more bearable, but the style ends up being terrible anyway with no paragraphs longer than what can fit in a single message.
- battery_cowboy 7y agoI don't want to use 27 apps for different bullshit transformations of content, I want the content in the correct format so it's easy to read the first time.
- cthor 7y agoI don't get this. Just read the tweets like they're paragraphs.
- battery_cowboy 7y agoWhy not just write the damn content into a real article?
- CPLX 7y agoYou seem to have been able to parse the several dozen disparate comments that make up this thread.
- _bxg1 7y agoMy only question is, if the lenders are part of who's getting scammed, why do they keep lending? Do they end up getting paid enough by the predatory looting that it works out?
- musicale 7y agoI think so; the company is saddled with massive debt and interest payments and pays back more than the original loan while never making much of a dent in the principal.
- miketery 7y agoIts a one way function, while the going is hot and good, the facilitators get a cut. When things go south, the cut isn't taken back.
- valuearb 7y agoLenders only lend if they believe it’s going to be profitable. The vast majority of their loans are successful, and they charge enough interest to cover the losers and still make a reasonable return. And predatory looting is mostly mythical. No one is going to give you large loans and allow you to loot the assets and walk away. The loans have lots of restrictions to prevent that. What happens is that many PE firms like to use loans to leverage up their investments to increase returns. If you buy a company, fix it up and sell it for double in 7 years that’s a 100% return but only 10% a year. Borrow half the money at 7%, and now you only net a 75% return on the purchase price, but a 150% return on your investment, or 14% a year. Try to borrow 80% and you can boost your returns nearly to 20% a year. Like a mortgage there is a natural tension between what lenders will lend you. They want to lend as much as possible, without assuming too much risk of default. Sometimes the natural greed of the PE firm and the lender go to far, and you get a failed deal and a default.
- youngtaff 7y agoOne of the problems in UK retail (before CV) is PE buyers, acquiring retailers and then loading them with debt Debenhams (about to go bust this week) is a classic example - until 20yrs ago it owned it's premises, PE bought it, loaded it with debt and then split off the property into a separate company and signed the stores to ever increasing rents Debenhams can't service the debt and the ever increasing rents (and they've lost their way as a business) PE debt killed Toys r Us, and many other retailers in the UK too PE leveraged buyouts are generally bad for everyone except the PE firm, and in some cases lenders
- lixtra 7y ago> Lovell's rule of thumb is the more complicated a bet is, the scammier it is. If it pays 2:1 for one outcome, 5:1 [...] I knew it! Life is a scam!
- dehrmann 7y agoThese tweets are about how it's a scam to lenders, not PE as an investment. The way PE works, even as he lays it out, is pretty easy to understand. Why lenders keep lending? Who knows. Playing devil's advocate with PE is where it gets a little interesting because PE tends to go after firms that are close to dying. Are they actually causing these failures, or are they just the ones delivering the bad news? Do they deliver shareholders some value by selling off what they can for scrap?
- valuearb 7y agoThere all sorts of companies PE invests in, few are dying. Typically it’s companies where your firm can add value. They can be 1) Poorly run, just needing better management. 2) Poorly capitalized, just needing access to more capital to prosper. 3) Businesses that can be franchises, like restaurants. 4) regional businesses that can be combined (rolled up) into a more valuable national business. 5) National businesses that can be expanded internationally. 6) Liquidations, where the operating business is no longer viable but there are assets (real estate, buildings, patents) valuable enough to turn a profit on the purchase. 7) Inefficiently run with hidden assets. Companies that might own their real estate for example, but don’t reflect that in their price. You buy the company and sell the real estate to fund part of the purchase. PE firms are no different than any VC, hedge fund or investment partnership. They usually have their own investors and get paid a yearly percentage for managing the investments, and a share of the profits. Some of their investments will fail, some will succeed. If they make good profits for their investors they’ll get rich and do it as long as they want. If they lose money or struggle, they’ll lose their investors and have to close shop.
- JamesBarney 7y agoOne of the articles he linked to is #7. It describes a PE firm that buys a hospitals and immediately makes a profit selling the land in a sale-leaseback. Then the article goes into how the hospital is failing because of this. No what you had a failing hospital and a successful real estate company masquerading as a mildly profitable hospital.
- superqd 7y agoWhy in the name of Satan is something like this written on Twitter? I stopped after the first 10. Twitter is not a platform for long form articles, or even relatively short form, honestly. I cannot understand why people write things like this on a platform not designed for it. I mean, when they're writing, I bet they think things like, "man, I wish there was a better way to write all my words at once and publish it for everyone"
- robjan 7y agoSame answer as always: audience acquisition. This guy has nearly 500k followers on Twitter so more people will see his idea if he just posts a tweetstorm there. If you just post a link to a blog most people won't click through and fewer people will join the discussion. But here's an unrolled version: https://threadreaderapp.com/thread/1246445485860118528.html https://threadreaderapp.com/thread/1246445485860118528.html
- altmind 7y agoThis seems like criticism of leveraged buyouts, than criticism of PE. Many good companies were driven into bankruptcies when purchased for their own money and there were a lot of talks about Bain Capital in 2012 pres elections cycle. Actually, i was expecting a thread about how PE scams their investors, not how buyouts are destroying busineses
- Lazare 7y agoSo, the author claims that PE is a scam where PE firms profit at the expense of lenders. If this was true, you could easily check to see how well lenders have done, on average, lending to PE firms. The author has not done this. You could also look at lawsuits between lenders and PE firms (there have been a few interesting ones, I believe), and see how they've ended up. You could also look at the terms of loan covenants (agreements between lenders and borrowers intended to stop this precise sort of thing), and how their wording has changed during the rise of PE firms, or after high profile PE failures. The author hasn't done this either. You could also look at what sort of rates PE firms pay, or what difficulty they have raising loans, or if PE firms which have failed to repay loans have faced any consequences compared to ones which have not, but...well, you can probably guess. In short, the author has identified a somewhat interesting topic (is there something systematically wrong with the loans PE firms take out with large lenders, and if so, why is the legal system and/or financial system not dealing with it as you would expect?), but failed to provide any information about any part of it, presumably because research is hard, and writing tweets is easy. If you know so little about your topic, you're not really going to be able to provide any value when you try and explain it to others.
- zzleeper 7y agoIt's not just lending to PE firms but to the original businesses before they get bought. Say Basecamp gets a ~ small 100m loan from syndicate. Basecamp is quite healthy, well managed, low leveraged, so they secure 4% rate for 5yrs, without many covenants. Then PE buys Basecamp, leverages it to the sky and beyond, Basecamp sells, and suddenly the original 100m loan is now junk-grade. The original lenders never interacted with the PE firm, but they still got screwed. Could they have prevented it? Sure, with lots of covenants, but they have lots of added costs for all parties and often have ways around them. Which means every possible firm that might get bought by PE is now a) having to deal with lots of covenants, and b) paying 6-7% instead of the 5% they would get if the likelihood of PE acquisitions was lower.
- travisoneill1 7y agoWhen a company is recapitalized in a PE buy the existing lenders need to either be paid back in full or explicitly approve of having their debt rolled over into the new structure. They can't be forced.
- LatteLazy 7y agoCan we ban these dumb twitter rants please? They're all just examples of "Brandolinis law": The amount of energy necessary to refute bullshit is an order of magnitude bigger than to produce it.
- travisoneill1 7y agoThe author lays out a general rule that if a bet has a complex payout structure, then it is a scam. Them he applies this to PE deals without giving an example of a complex payoff structure. The reason that he doesn't give an example is because the payoff structure to PE deals is simple. If the company increases in value, the PE firm wins. If it goes down, they lose. I think the author here means "scam" in the sense of "a bunch of people are making a lot of money doing something I don't understand, and I'm not getting any of it."
- toolslive 7y agoWhat a coincidence: I have that book on my night stand. Now 75% of it is card games, loaded dice and carnivals, but the same patterns emerge over and over.
- smabie 7y agoSounds like everything is a scam then.
- etrabroline 7y agoNone of the dismissive comments here are addressing the actual points raised by @doctorow. The scam is that people on wall street who know nothing about building or running a business have used their political connections and existing cash to become even richer and more powerful through government bailouts, selling off assets whose long-term value they don't understand and defaulting on pensions -- in other words, without actually creating any new wealth. Blackstone/Schwarzman is abusing the fact that starting a new hospital is difficult, even if the only one in the city is incompetently managed. They are not creating new value, and so should not be getting so rich. The people who do the actual work of starting and running successful businesses should be. EDIT: Specifically, Schwarzman et al are abusing what economists call short-term "stickiness." It is not economically productive, as the firms with artificially high profit margins are not competitive and so a new equilibrium will eventually be established, putting them out of business. (That's why so many ultimately do) This property makes Schwarzman's behavior a form of rent-seeking, and not capital investment as he would probably have you believe. Anti-trust law is designed to limit the abuse of stickiness in the economy, but as rent seeking becomes the source of wealth for an increasing percentage of western elites, anti-trust and other financial regulations designed to combat abuses have become increasingly difficult to enforce.
- nojvek 7y agoThe problem is anti-trust is sleeping with PE folks. Our government has people coming in and out of corporations with conflict of interests. Here is Matt Stroller’s take on Private Equity. https://mattstoller.substack.com/ https://mattstoller.substack.com/ The reason why US is being decimated by COVID-19 is we’ve lost a ton of our competitive edge by offshoring and the rich wankers want to profit at any cost. Even if it means other people die.
- valuearb 7y agoOff-shoring has greatly increased the wealth of the United States by allowing us to focus on higher value work, while at the same time providing poorer countries higher value work themselves. It's the law of comparative advantage in action. U.S. workers might be better at assembling iPhones than Chinese people, but if we let them assemble while we design iPhones, build it's software systems and apps, and accessories both countries come out far ahead. Chinese get paid far more while escaping brutal rural labor jobs, we develop far more software developers and designers, who get to work remotely during COVID-19 and are in higher demand than ever.
- cryptica 7y agoThe financial system is made intentionally complicated to obscure the simple fact that businesses use new loan money to pay for their old loans. The critical piece of information which is omitted is that the activities of the businesses through which money flows doesn't actually matter. This becomes obvious when you consider that: - All new money enters the economy as bank loans. - The total amount of money in circulation in the economy always goes up every year as inflation (only some years it goes up faster than other years). - The inflation rate is higher than the interest rate. Clearly, the inflation rate is sufficient to cover the interest rate. Think about it: 2% inflation rate means that the total money supply in existence increased by AT LEAST 2% over the cost of a year. If there was $1000 in the economy at the beginning, it means that at the end of the year, there would be $1020 in the economy. Now imagine that you are a bank and at the beginning of the year, there is $1000 in total in the economy and you print $100 out of thin air and loan it out to people at 1% interest rate. After you do that, the economy will have $1100 in circulation. $100 of this amount, people will have to pay back to you PLUS 1% interest rate per year. Throughout the year, you make more loans into the economy such that the inflation ends u being 2%. So for that year, it means that you injected AT LEAST $20 of new money in the economy as loans. OK o at the end of the year, your borrowers need to pay you back $10 in interest (for simplicity, we will assume that the minimum repayment is interest only). But remember, you (as the bank) injected $20 of new money into the economy that year... So if your borrowers managed to extract just half of that new money from the economy, they will be able to meet their loan repayment for that year and still make $10 profit on top! Note that the borrowers don't need to work or deliver any real economic value in order to get their hands on that newly created money, they just need to setup some intermediaries to take out new loans each year then forward the money to them through any make-believe business activity. It does not matter if the intermediaries go bankrupt later; new intermediaries can constantly be created. From the perspective of the borrower, intermediaries don't even have to be directly controlled by you. If they can be fooled or coerced into taking out loans from the bank and paying you at least $10 of what they borrowed - In an expansionary monetary environment, that's all you need to be profitable.
- valuearb 7y agoHere is a link to Bank of America's annual report, the balance sheet is on page 25. https://www.sec.gov/ix?doc=/Archives/edgar/data/70858/000007085820000011/bac-1231201910xk.htm#s3D739B2812375B5E8CBEF24D379EE4F7 https://www.sec.gov/ix?doc=/Archives/edgar/data/70858/000007... Read it and learn, maybe you'll better understand how banks work. They don't make money up out of the thin air. They can loan out only in proportion to what they have already. BOA is levered about 9 to 1, so they use around $11 from investors or retained earnings and $89 in deposits and loans from the fed or others to be able to loan out $100. Now, they can create demand deposits to make new loans, but even then in proportion to their equity. Some of the Deposits liability is likely Demand Deposit line item created from loans, not sure how much. But it appears they support their loans with mostly customer deposits and invested funds.
- pragmatic 7y agoWhy oh why must this be written in tweet format? Is this some kind of meta self referential post-modern exercise that I just don't understand?
- nojvek 7y agoBecause Twitter is where everyone hangs out. It’s a low friction tool.
- deleted 7y ago[deleted]