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Banks, and in the last decade private lenders. The simple answer is "because they're generally good for it." No one would invest if these companies immediately
by netcan 6y ago
Banks, and in the last decade private lenders.
The simple answer is "because they're generally good for it." No one would invest if these companies immediately went bankrupt.
First.. lenders generally get a premium if it's a risky deal. Low risk rates are exceptionally low. There's always some demand for higher yield bonds. Supply and demand are generally unresponsive to eachother. In the current market,
Second, think "bondholders" moreso than lenders. The people who structure the deal are the initial financiers, including the PE firm. They just borrow/invest enough to ensure solvency in the first few years. Long term, bonds trade. They trade at market rates.
Also note that all these bankruptcies happened during the dotcom bust, regardless of when Bain got involved. At that point, demand for risky bonds is terrible. Business is hard, and a highly leveraged company is at risk. Highly leveraged companies tend to stay highly leveraged, so even if Bain did this to them 15 year prior... it's hard to survive bad times.
People who understand business from a purely SV/tech perspective forget that software is not normal. Outside of software, large companies usually owe money. They don't have billions of dollars lying around like FB or Google.
- formercoder 6y agoExactly. These looks are made all the timer because lenders make money on them. LBOs happen all the time because most parties make money.
- netcan 6y agoI would throw in a bunch of caveats... I'm OK with "because lenders make money on them" as a generality. ...As long as we are honest about what an LBO is. It is an arbitrage, of sorts. The deals are, by definition and in practice, structured to give the acquiring PE a free option. Their risk lasts only as long as they have skin in the game, usually a short period. Since they structure the deal, they structure it in a way that eliminates (as much as they can) short term risks. The old fashioned way of doing this is took a few years. (a) Raise enough debt and run extreme short-term management strategies. (b) make interest payments religiously. (c) Use this history of payments to raise enough money to pay yourself out fully. (d) sell the now indebted company, run it, or whatever. Any dollar you make is profit on a zero dollar investment. It's a risk arbitrage, more specifically. In a liquid market, this arbitrage wouldn't exist, but if it did it would look like this: (1)Buy shares in Tesla. Put it in a LLC (2) Borrow money under LLC, interest only (3) Pay this money to yourself. (4) Sell shares as necessary to pay interest (5) pay yourself when you deserve a treat (6) If you run out of shares and no one is willing to lend you more money... the game is now finished.