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This was helpful to me. How does the PE company fare in the bankruptcy scenario? Have they put up collateral or are somehow on the hook to the lenders? It's my

This was helpful to me. How does the PE company fare in the bankruptcy scenario? Have they put up collateral or are somehow on the hook to the lenders? It's my understanding that the bankruptcy applies only to the purchased subsidiary, so the PE firm only stands to lose the principal they put in at the start. If so, it sounds like the PE firm gets all the upside, but is less exposed to the downside. So they are incentivized to rachet up the risk.

topkai22 6y ago
You are at the limits of my understanding- in my simple example, the entity that took the company private is only on the hook for the principal, but these deals can be super complicated- multiple layers of companies transfering or lending money to each, and PE companies can be both a lender and an owner through these arrangements.
whatok 6y ago
> This was helpful to me. How does the PE company fare in the bankruptcy scenario? Have they put up collateral or are somehow on the hook to the lenders? All deals are different. You're probably not going to have any collateral put up by the actual PE firm in most cases. > It's my understanding that the bankruptcy applies only to the purchased subsidiary, so the PE firm only stands to lose the principal they put in at the start. In most cases this is true. Depending on how aggressive the firm has been and how long they've been involved, they might have already dividended out their principal. > If so, it sounds like the PE firm gets all the upside, but is less exposed to the downside. So they are incentivized to rachet up the risk. This is a correct but simplified conclusion. They're incentivized but there's usually a set of checks and balances in the form of banks providing financing and investors willing to finance deals. This system of checks and balances typically erodes as the business cycle/bull market rides on. The binding constraint in most of these deals is how much leverage you're able to get away with.

topkai22 6y ago

You are at the limits of my understanding- in my simple example, the entity that took the company private is only on the hook for the principal, but these deals can be super complicated- multiple layers of companies transfering or lending money to each, and PE companies can be both a lender and an owner through these arrangements.

whatok 6y ago

> This was helpful to me. How does the PE company fare in the bankruptcy scenario? Have they put up collateral or are somehow on the hook to the lenders? All deals are different. You're probably not going to have any collateral put up by the actual PE firm in most cases. > It's my understanding that the bankruptcy applies only to the purchased subsidiary, so the PE firm only stands to lose the principal they put in at the start. In most cases this is true. Depending on how aggressive the firm has been and how long they've been involved, they might have already dividended out their principal. > If so, it sounds like the PE firm gets all the upside, but is less exposed to the downside. So they are incentivized to rachet up the risk. This is a correct but simplified conclusion. They're incentivized but there's usually a set of checks and balances in the form of banks providing financing and investors willing to finance deals. This system of checks and balances typically erodes as the business cycle/bull market rides on. The binding constraint in most of these deals is how much leverage you're able to get away with.