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Every time I’ve seen a company bought by private equity, it spells the beginning of the end. The strategy always seems to milk every last drop of cash from the

Every time I’ve seen a company bought by private equity, it spells the beginning of the end. The strategy always seems to milk every last drop of cash from the business, without any long term sustainable plan. As an anecdotal case, I visited Sea World over the summer and half the concessions and shows were closed. It was still expensive and crowded and and there were service bottlenecks everywhere. Long lines for a bottle of water. Midday I said to myself, I bet this place was bought out by private equity. I looked up Sea World’s ownership structure when I got home and low and behold, private equity is involved.

harry8 5y ago
It's an issue in market information where regulation can't really work [1]. Vendors have a brand. They establish the value of the brand such that purchasers have a signal that they aren't going to be ripped off. For example you can be pretty sure coca-cola isn't going to cut costs to the point where they don't care about putting poison in the bottle - and you don't need regulation to know they won't do it. Zeus-Cola? Brand means nothing. On holiday in an unregulated land when it's only just launched do you advise your family it will be completely safe to drink? An entrepreneurial team comes along and puts their hearts and souls into setting up a business and establishing the brand with some high quality product. That brand becomes worth something. The easiest way to monetize that brand is to use it for a con job. It sucks. You thought you were getting quality, it's what you paid for, well you're getting cheap and nasty and we're taking excess profit for as long as the brand lasts. You took the bait and got the switch. Usually (but not always) the original entrepreneurial team is unwilling to do this, because they believed what they were doing was something more than just making money. Private equity is just making money and are extremely willing to do this. [1] I prefer unregulated markets as far as the alternative is usually worse. There are obvious exceptions at the extreme ends (monopoly, health and safety, fraud, adverse externality etc.) How far away from the extreme you think regulation stops working is a lot of interesting case-by-case discussion where intelligent, reasonable and informed people can disagree in good faith improving their understanding and the quality of suggested policy in the process. It would be nice to see a bit more of it in the media!
- lmm 5y ago
  I keep redrafting a blog post in my head about this cycle and how it means that even though the world is getting better, every specific brand is getting worse. (There was a wonderful post about Starbucks specifically that I now can't find, talking about how they grew their reputation by having hand-made coffee that people loved before switching to machine brewing that required less skill and people wouldn't hate). I suspect we're politically rather opposed, as I see this as a consequence of capitalism putting a price tag on everything, and something that regulation is appropriate for (some way of forcing brands to publicise when they've changed something, so that customers can know whether a review they read still applies, although the details of how to do that would be difficult). Indeed I'd argue that the only reason customers can trust a brand like Coca-Cola is strong regulation in the form of trademark law.
  - harry8 5y ago
    Yeah it's a reasonable point of view. The other way to go on that is you're in an country whose culture you don't understand which as a wildly corrupt, crony-riddled military dictator and nobody has any rights at all. Do you want locally bottled Coke(tm) with the red label and dynamic ribbon for your very thirsty child or locally bottled "Odin's Thirst Quencher! (est. 2021)"? Coke are going to enforce quality control and safety to protect their brand or get out of that market. There is no regulation you can rely on in this mythical country - but there are quite a few countries like that which you may know yourself from having visited them. In France, say, you have regulation that safety is not a concern. When you don't have it you have brands - the owner has the incentive to protect them. So it goes also in France, or the USA or other wealthy countries to the parts of commerce that are not regulated (whether they could be or whether that's because it's not feasible). But the higher issue is information. Should you be able to sell the same product with a very different quality under the same name? Let's say we agree the answer is ideally "no, you can't do that." Now we want to regulate that you can't do that. How is it enforced? There may be ways. There may be grey areas. The cost may be prohibitive in many instances or there might be new solutions to mitigate those problems. What is isn't is easy which you can see as soon as you apply it to the industry and case under discussion. Intensive industry training schools.
cwilkes 5y ago
Beginning of the end happened before that because most healthy companies don’t need private equity unless they need a lot of cash for an expansion. Part of the reason they got in that position is that they were charging to little to make money. It only follows that prices will go up and probably service down as the company stressed customer service in the hopes of attracting better future capital.
- Jensson 5y ago
  I'd assume the most common reason is that the owner wants to do something else, like retire or start another company. You can't really do that without selling, you can hire a CEO but you can never fully delegate the responsibility.
- webmaven 5y ago
  Too many companies end up in a leveraged buyout by PE that is ultimately based not on unprofitability, but just insufficient profitability to satisfy shareholders (some of which are buying in just to force the issue and then unload the stock before the bill comes due for the short-term thinking).
  - eru 5y ago
    Eh, that's fine, I guess? Bob founds a company that makes widgets. Bob sells the company to a PE company. The PE company runs the company into the ground. That opens a gap in the market for (a new) Bob to open a new company that makes widgets. If shareholders or private equity or private equity's debtors are willing to subsidise Bob this way, who are we to complain?
zwily 5y ago
I would guess most of your SeaWorld experience is covid economy related. Even the big parks like Disney aren’t fully staffed.
mbesto 5y ago
> Every time I’ve seen a company bought by private equity, it spells the beginning of the end. I regularly work with PE firms. You can't paint the whole industry with one brush stroke. I've seen more than a handful of companies get bought by PE to become very successful for everyone involved (PE, management, customers)...and the opposite. That being said - it's very common to see companies in the large cap space ($5B~$10B in enterprise value) to be repositioned to match the market dynamics or financially engineered. While you might have had a poor experience, the rest of the market may have been willing to wait in 15 minute lines for $10 bottles of water. If you disagree with PE, the easiest way to "stick it to them" is to vote with your wallet. Simply stop going to Sea World and you'll see PE change their tune pretty quickly.
- downWidOutaFite 5y ago
  > the rest of the market may have been willing to wait in 15 minute lines for $10 bottles of water Yep, I can definitely believe you've worked with PE firms.
- blululu 5y ago
  > While you might have had a poor experience, the rest of the market may have been willing to wait in 15 minute lines for $10 bottles of water. If you disagree with PE, the easiest way to "stick it to them" is to vote with your wallet. Simply stop going to Sea World and you'll see PE change their tune pretty quickly. Ironically this is exactly the sort of attitude that the parent is complaining about. You could never grow a business with this mindset, but you can coast and cannibalize one just fine. Nobody likes 15 min lines or $10 water bottles; they tolerate them because there are other experiences that are worthwhile along the way. You remove these experiences and you are basically just screwing people who are going off outdated information about the quality of the experience. Voting with dollars is fine but there is a big information asymmetry and a hysteresis effect of having a quality brand reputation (built over years of not trying to screw people). Any voting with dollars is years removed from the results.
  - eru 5y ago
    Why? I've never been to SeaWorld, and it's really easy for me to look up up-to-date reviews before I plan a trip. Easier than ever, in fact. The hysteresis effect you mention requires that people would stupid when spending their own dollars. > Nobody likes 15 min lines or $10 water bottles; they tolerate them because there are other experiences that are worthwhile along the way. You remove these experiences and you are basically just screwing people who are going off outdated information about the quality of the experience. Perhaps other people just have different preferences from you and make different trade-offs?

harry8 5y ago

It's an issue in market information where regulation can't really work [1]. Vendors have a brand. They establish the value of the brand such that purchasers have a signal that they aren't going to be ripped off. For example you can be pretty sure coca-cola isn't going to cut costs to the point where they don't care about putting poison in the bottle - and you don't need regulation to know they won't do it. Zeus-Cola? Brand means nothing. On holiday in an unregulated land when it's only just launched do you advise your family it will be completely safe to drink? An entrepreneurial team comes along and puts their hearts and souls into setting up a business and establishing the brand with some high quality product. That brand becomes worth something. The easiest way to monetize that brand is to use it for a con job. It sucks. You thought you were getting quality, it's what you paid for, well you're getting cheap and nasty and we're taking excess profit for as long as the brand lasts. You took the bait and got the switch. Usually (but not always) the original entrepreneurial team is unwilling to do this, because they believed what they were doing was something more than just making money. Private equity is just making money and are extremely willing to do this. [1] I prefer unregulated markets as far as the alternative is usually worse. There are obvious exceptions at the extreme ends (monopoly, health and safety, fraud, adverse externality etc.) How far away from the extreme you think regulation stops working is a lot of interesting case-by-case discussion where intelligent, reasonable and informed people can disagree in good faith improving their understanding and the quality of suggested policy in the process. It would be nice to see a bit more of it in the media!

lmm 5y ago
I keep redrafting a blog post in my head about this cycle and how it means that even though the world is getting better, every specific brand is getting worse. (There was a wonderful post about Starbucks specifically that I now can't find, talking about how they grew their reputation by having hand-made coffee that people loved before switching to machine brewing that required less skill and people wouldn't hate). I suspect we're politically rather opposed, as I see this as a consequence of capitalism putting a price tag on everything, and something that regulation is appropriate for (some way of forcing brands to publicise when they've changed something, so that customers can know whether a review they read still applies, although the details of how to do that would be difficult). Indeed I'd argue that the only reason customers can trust a brand like Coca-Cola is strong regulation in the form of trademark law.
- harry8 5y ago
  Yeah it's a reasonable point of view. The other way to go on that is you're in an country whose culture you don't understand which as a wildly corrupt, crony-riddled military dictator and nobody has any rights at all. Do you want locally bottled Coke(tm) with the red label and dynamic ribbon for your very thirsty child or locally bottled "Odin's Thirst Quencher! (est. 2021)"? Coke are going to enforce quality control and safety to protect their brand or get out of that market. There is no regulation you can rely on in this mythical country - but there are quite a few countries like that which you may know yourself from having visited them. In France, say, you have regulation that safety is not a concern. When you don't have it you have brands - the owner has the incentive to protect them. So it goes also in France, or the USA or other wealthy countries to the parts of commerce that are not regulated (whether they could be or whether that's because it's not feasible). But the higher issue is information. Should you be able to sell the same product with a very different quality under the same name? Let's say we agree the answer is ideally "no, you can't do that." Now we want to regulate that you can't do that. How is it enforced? There may be ways. There may be grey areas. The cost may be prohibitive in many instances or there might be new solutions to mitigate those problems. What is isn't is easy which you can see as soon as you apply it to the industry and case under discussion. Intensive industry training schools.

cwilkes 5y ago

Beginning of the end happened before that because most healthy companies don’t need private equity unless they need a lot of cash for an expansion. Part of the reason they got in that position is that they were charging to little to make money. It only follows that prices will go up and probably service down as the company stressed customer service in the hopes of attracting better future capital.

Jensson 5y ago
I'd assume the most common reason is that the owner wants to do something else, like retire or start another company. You can't really do that without selling, you can hire a CEO but you can never fully delegate the responsibility.
webmaven 5y ago
Too many companies end up in a leveraged buyout by PE that is ultimately based not on unprofitability, but just insufficient profitability to satisfy shareholders (some of which are buying in just to force the issue and then unload the stock before the bill comes due for the short-term thinking).
- eru 5y ago
  Eh, that's fine, I guess? Bob founds a company that makes widgets. Bob sells the company to a PE company. The PE company runs the company into the ground. That opens a gap in the market for (a new) Bob to open a new company that makes widgets. If shareholders or private equity or private equity's debtors are willing to subsidise Bob this way, who are we to complain?

zwily 5y ago

I would guess most of your SeaWorld experience is covid economy related. Even the big parks like Disney aren’t fully staffed.

mbesto 5y ago

> Every time I’ve seen a company bought by private equity, it spells the beginning of the end. I regularly work with PE firms. You can't paint the whole industry with one brush stroke. I've seen more than a handful of companies get bought by PE to become very successful for everyone involved (PE, management, customers)...and the opposite. That being said - it's very common to see companies in the large cap space ($5B~$10B in enterprise value) to be repositioned to match the market dynamics or financially engineered. While you might have had a poor experience, the rest of the market may have been willing to wait in 15 minute lines for $10 bottles of water. If you disagree with PE, the easiest way to "stick it to them" is to vote with your wallet. Simply stop going to Sea World and you'll see PE change their tune pretty quickly.

downWidOutaFite 5y ago
> the rest of the market may have been willing to wait in 15 minute lines for $10 bottles of water Yep, I can definitely believe you've worked with PE firms.
blululu 5y ago
> While you might have had a poor experience, the rest of the market may have been willing to wait in 15 minute lines for $10 bottles of water. If you disagree with PE, the easiest way to "stick it to them" is to vote with your wallet. Simply stop going to Sea World and you'll see PE change their tune pretty quickly. Ironically this is exactly the sort of attitude that the parent is complaining about. You could never grow a business with this mindset, but you can coast and cannibalize one just fine. Nobody likes 15 min lines or $10 water bottles; they tolerate them because there are other experiences that are worthwhile along the way. You remove these experiences and you are basically just screwing people who are going off outdated information about the quality of the experience. Voting with dollars is fine but there is a big information asymmetry and a hysteresis effect of having a quality brand reputation (built over years of not trying to screw people). Any voting with dollars is years removed from the results.
- eru 5y ago
  Why? I've never been to SeaWorld, and it's really easy for me to look up up-to-date reviews before I plan a trip. Easier than ever, in fact. The hysteresis effect you mention requires that people would stupid when spending their own dollars. > Nobody likes 15 min lines or $10 water bottles; they tolerate them because there are other experiences that are worthwhile along the way. You remove these experiences and you are basically just screwing people who are going off outdated information about the quality of the experience. Perhaps other people just have different preferences from you and make different trade-offs?