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Right, and in that case I've made a bad decision and now I "own" a company that is not doing well and have more debt to service. The company declares bankruptc

Right, and in that case I've made a bad decision and now I "own" a company that is not doing well and have more debt to service. The company declares bankruptcy, gets restructured or folds. How does that help me? That is to say, if it ends this way frequently, or fair odds ending this way, why do PEs keep structuring leveraged buy-outs? (This thread makes it sound like it's frequent enough that one person can say, Debts? Lemme guess, PE? Right you are!) There's an incentive to do this and the edge is ... what?

whatok 6y ago
PE is very cyclical and rates have been very low. Massively levered PE transactions are usually tied to the business cycle. When the economy is doing well you're able to get away with larger and more levered transactions than normal. If you add on low rates to this, you can get away with larger transactions. All debt deals have covenants and covenant protection is at an all-time low right now; investors have decided that it is worth giving up this protection for whatever the potential investment happens to be. Covenants on the amount of leverage a company can take on are common but there's no universal formula for calculating leverage. It is not atypical to have multi-page definitions of how a company calculates EBITDA. Some firms are known for being very aggressive with this and are also very aggressive with issuing dividends shortly upon the close of a transaction. Aggressive dividend policies help PE derisk transactions substantially. The more money you are able to take out of the company (and sometimes able to issue debt to do so), the more you derisk your initial investment. I could go on for days about whether any of this is good or bad, blah blah but as far as your observation that this seems to happen with all PE deals, PE is a multi-trillion dollar industry. Just think about how the world would look if that happened with all PE-backed companies.

whatok 6y ago

PE is very cyclical and rates have been very low. Massively levered PE transactions are usually tied to the business cycle. When the economy is doing well you're able to get away with larger and more levered transactions than normal. If you add on low rates to this, you can get away with larger transactions. All debt deals have covenants and covenant protection is at an all-time low right now; investors have decided that it is worth giving up this protection for whatever the potential investment happens to be. Covenants on the amount of leverage a company can take on are common but there's no universal formula for calculating leverage. It is not atypical to have multi-page definitions of how a company calculates EBITDA. Some firms are known for being very aggressive with this and are also very aggressive with issuing dividends shortly upon the close of a transaction. Aggressive dividend policies help PE derisk transactions substantially. The more money you are able to take out of the company (and sometimes able to issue debt to do so), the more you derisk your initial investment. I could go on for days about whether any of this is good or bad, blah blah but as far as your observation that this seems to happen with all PE deals, PE is a multi-trillion dollar industry. Just think about how the world would look if that happened with all PE-backed companies.