8 ms·

Private equity groups that buy companies they own

89 points by cwwc 4y ago

alephnan 4y ago
Can family offices, idk maybe one with a big Roth IRA, lever this?
- FateOfNations 4y ago
  Family Offices and Roth IRAs don't exist in the same universe.
  - alephnan 4y ago
    A family office is simply a team of lawyers/financiers who manage an individual/family's money, rather than outside money. A Roth IRA is a just a bucket with rules about how money can go in and out. There is no reason they are mutually exclusive. Additionally, Roth IRAs can be self-directed which means they can use whatever exotic investment they choose, including private equity. Exhibit A: https://www.propublica.org/article/lord-of-the-roths-how-tech-mogul-peter-thiel-turned-a-retirement-account-for-the-middle-class-into-a-5-billion-dollar-tax-free-piggy-bank https://www.propublica.org/article/lord-of-the-roths-how-tec...
  - yieldcrv 4y ago
    They can and do exist in the same world. For funding, people with self-directed Roth accounts can pump $50,000-$60,000 into them via the annual 401k contributions (this is the slightly obscure higher annual limit when you can make employer contributions on your own behalf) and then get a couple 3,800% gains in some private equity investments tax free (a percentage from the article), and go from there Any retirement account can just be a distinct limited partner in the family office or fund
- collegeburner 4y ago
  You wouldn't "lever" this any different from how you would another PE fund. Yes accredited investors can invest in a PE fund with a Roth IRA. Just like any other PE fund they can invest in a continuation. But TBH I'd be careful before you do that, a few of the ones I've seen are good but a lot of these aren't really that great. Though that's a lot of PE these days with too much $ chasing too few companies.
CodeBeater 4y ago
Sounds like a mirror of wash trading of the crypto world.
goopthink 4y ago
https://archive.ph/N1blh https://archive.ph/N1blh
Centigonal 4y ago
Yeah, this is what happens when institutional investors decide to throw their money into poorly regulated private equity vehicles. If only we had some mechanism whereby companies' shares could be listed somewhere public, and people could buy and sell them to determine what a fair price for these companies would be! Oh, better yet - we could have a regulatory body that could prevent companies from selling the same asset back and forth to themselves to inflate the price. Crazy, right?
- collegeburner 4y ago
  Oh come on, a lot of good companies stay private bc the SEC makes it a pain in the ass (and expensive) to be public. And it's making it worse with stupid shit like ESG reporting or SOX compliance they just keep adding. And these days you run the risk of some social justice warrior micro fund buying 2 shares going to CALSTRS or whatever and running a proxy fight. I would not want to take a company public these days and I don't see problems with companies staying privately held. PE LPs are all accredited and know what they're doing, they're betting on a greater fool buying for a higher multiple later bc it worked for the past years, multiples kept rising. Blame the fed, blame congress, blame stupid people who somehow got money. Now people complain bc there's a downturn. I don't know how people are unironically painting them as victims.
  - lovich 4y ago
    > And these days you run the risk of some social justice warrior micro fund buying 2 shares going to CALSTRS or whatever and running a proxy fight. I would not want to take a company public these days and I don't see problems with companies staying privately held. If you’ve reached the size of being a public company, lawsuits are a Tuesday. If the flavor of the frivolous is driving executives and investors decision making, then it’s a cultural choice. > Oh come on, a lot of good companies stay private bc the SEC makes it a pain in the ass (and expensive) to be public. And it's making it worse with stupid shit like ESG reporting or SOX compliance they just keep adding. It does make it a pain but it also increases the trust investment has in your company to not do things like trade assets between two vehicles you control with no proof that it’s not to your benefit Generally agree that these aren’t victims though. To borrow a term from Eve, it seems like they decide to venture into null sec space and are surprised they could get hurt
rahimnathwani 4y ago
It seems like there are two issues: 1. The GP arranges for one of its funds to buy from another fund. These funds likely have a different mix of LPs. Because both funds are represented by the same GP, there's no competitive negotiation, and the valuation chosen may benefit one group of LPs (and possibly the GP) at the expense of the other. 2. Such a transaction can increase the total fees earned by the GP, even without additional effort or additional value being created or realized.
- collegeburner 4y ago
  Except LPs aren't stupid. They probably won't keep going with this if it doesn't pay off. They're not Joe Boomer deciding he needs to diversify from his 60/40 blue chips and bonds, they're high net worth individuals and institutional investors who are either 1. Being stupid and getting what's coming to them or 2. Getting greedy and getting what's coming to them.
  - pevey 4y ago
    The rationale that is usually given to LPs to make them go along is that the time to exit is not right, but the one fund that currently owns the interest is getting long in the tooth, so they need to move the interest to the newer vintage year fund. They spin it as, we thought it was a good investment before, and we think it is an even better investment now, so we want to hold onto it. But we still need to wind down the old fund. It's a nightmare from a valuation standpoint, because while many LPs may well be invested in both funds, making it a wash, some are not. The LPs that invest in both funds sign a check to fund the investment in the new fund, and then get the money back as the older vintage is winding down. The investment just essentially gets rolled forward. The investors who are only in the new fund are cashing out the previous investors, so this is much more of a concern. But they are new and still usually riding the feeling of wow, they let me invest in this awesome fund. PE firms are really good at creating an aura of exclusivity and luxury. A rolling loan gathers no loss. So long as the music keeps playing, valuations can be whatever number you can get your auditor to agree to. Nice dinners and event tickets for your audit partner can help with that.
moneywoes 4y ago
Is it true being acquired by PE is a death sentence for engineers at a company? With P.E introducing cuts & offshoring immediately to improve their bottomline
- seibelj 4y ago
  Totally depends. I declined to stay as part of a PE acquisition once as a middle manager, but a solid 6 figure pay day to stay a few years was promised. Just didn’t interest me.
- bpodgursky 4y ago
  There are growth-oriented PE firms, there are income-oriented PE firms. Completely depends on what kind bought you.
- TrackerFF 4y ago
  Death sentence for user experience.
- collegeburner 4y ago
  Nah. PE gets a bad reputation for asset stripping shit but that's not most of it. The LBO guys generally understand they need to maintain software for the business to cashflow and make payments and the growth equity funds obv want the business to improve. Another positive is PE has longer hold periods and less liquidity, public markets have a lot more pressure of "oh shit the share price is down 15% start firing and doing buybacks". And yeah there are distressed guys who will go in and gut a place but tbh they don't usually get involved unless something bad is coming regardless. Like if a distressed fund is trying to acquire your company somebody about to get laid off regardless of whether they buy it or not.
- mbesto 4y ago
  Tech guy who advises PE here(overseen 400+ PE deals, half of which are software companies). The "financial engineering" trope with PE is largely in the large cap space ($1B+ EV). Most middle market PE is all about value creation. Note - there are some notorious "death sentence" firms in the middle market...I won't name names but if you dig deep enough you'll see some PE shops (there's only 2 I can actually name off hand) that buy small tech cos and send all of the dev overseas.
joschmo 4y ago
To play devil's advocate, the reason a private equity firm should use a continuation is that it wants to hold an asset past the fund's 10-year life because the asset is continuing to perform very well. 10 years ago, many private equity firms felt heartburn from letting big software winners go after 5 years because that's the typical fund cycle. In reality, LPs and GPs would have been better off reliably holding the same growing asset for 15-20 years as the company went from $10M in EBITDA to $250M. Why take a 3x in 5 years when you can get a 25x in 15 years? The annual compounding works out to be roughly the same. The only issue is your fund structure so you trade it amongst yourself every 3-5 years at a 3-4x mark that makes you look good to your investors. The growth is usually there so it is not a lie though liberty may be taken with multiples which expanded rapidly over the last decade. This phenomenon has been used aggressively, perhaps too aggressively, in software and particularly software roll-ups where you can comfortably compound 20-30% EBITDA growth annually between 10-15% organic growth (half or more of which is just price increases) and an aggressive M&A strategy that drives higher margins. That said, this article is raising an early and important alarm bell to the broader public, who have a vested interest because their pensions are invested in these firms, that certain firms may be using it too aggressively. When I scan the broader PE landscape, the firm that has used it to the most success is Clearlake Capital. I don't have insight into their whole portfolio but have heard criticisms that they overuse it. Or that their is incestuous trading of assets between them, TA Associates, Hg, Insight Partners, FP, Thoma, and a handful of others.
- ahtihn 4y ago
  > Why take a 3x in 5 years when you can get a 25x in 15 years? 3x in 5 years is equivalent to 27x in 15 years. Obviously it's not that simple in practice but it's not like it's easy to predict growth over a 15 year period.
  - danielmarkbruce 4y ago
    "roughly" is in the next sentence...and if we are being so pedantic "equivalent" is the wrong phrasing for everyone except like 10 people.
SilverBirch 4y ago
It's kind of funny to me that this stuff happens. You can dress it up however you want, but it's fundamentally just putting these PE groups in an unethical position. You can't with a straight face say that you're getting the best price for both the investors you're selling it from and the investors you're buying it for. Firstly, there is no way you can correctly value these companies when you're selling them between your own funds. Just laying aside the mechanisms of how this is done, anyone investing in those groups should be taking a long hard look at whether you want people this unethical to manage your money. And of course that doesn't even start to consider the fact that by doing this the PE companies get to mark their own homework, fraudulently pumping valuations by self-dealing safe in the knowledge their valuations don't need to be tested against the public markets. This just seems like the exact same sort of absurd regulatory loophole that saw SPACS explode and then implode over 18 months. The fact that these firms have been forced to start chasing this style of innovation is not a good sign for the core business.
gidorah 4y ago
Tangentially, I had dealings with The Access Group when I was head of finance at a hospitality group. Access were full of lies. They bought up many category leaders for hospitality software, and tried to sell a single solution that then didn't really work together. Their sales teams were aggressive, but their solution "made sense" to other decision makers even though Access couldn't really deliver.
simonjgreen 4y ago
This reminds me in no small way of Max Fosh in his real-yet-satirical take https://youtu.be/iHfJRON3b-w https://youtu.be/iHfJRON3b-w
cestith 4y ago
If I bought a painting and sold it to myself for more money, I'd get investigated for money laundering. These people are taking things with no established market values and self-dealing with them. It reeks of fraud and misdirection.

89 points by cwwc 4y ago

alephnan 4y ago

Can family offices, idk maybe one with a big Roth IRA, lever this?

FateOfNations 4y ago
Family Offices and Roth IRAs don't exist in the same universe.
- alephnan 4y ago
  A family office is simply a team of lawyers/financiers who manage an individual/family's money, rather than outside money. A Roth IRA is a just a bucket with rules about how money can go in and out. There is no reason they are mutually exclusive. Additionally, Roth IRAs can be self-directed which means they can use whatever exotic investment they choose, including private equity. Exhibit A: https://www.propublica.org/article/lord-of-the-roths-how-tech-mogul-peter-thiel-turned-a-retirement-account-for-the-middle-class-into-a-5-billion-dollar-tax-free-piggy-bank https://www.propublica.org/article/lord-of-the-roths-how-tec...
- yieldcrv 4y ago
  They can and do exist in the same world. For funding, people with self-directed Roth accounts can pump $50,000-$60,000 into them via the annual 401k contributions (this is the slightly obscure higher annual limit when you can make employer contributions on your own behalf) and then get a couple 3,800% gains in some private equity investments tax free (a percentage from the article), and go from there Any retirement account can just be a distinct limited partner in the family office or fund
collegeburner 4y ago
You wouldn't "lever" this any different from how you would another PE fund. Yes accredited investors can invest in a PE fund with a Roth IRA. Just like any other PE fund they can invest in a continuation. But TBH I'd be careful before you do that, a few of the ones I've seen are good but a lot of these aren't really that great. Though that's a lot of PE these days with too much $ chasing too few companies.

CodeBeater 4y ago

Sounds like a mirror of wash trading of the crypto world.

goopthink 4y ago

https://archive.ph/N1blh https://archive.ph/N1blh

Centigonal 4y ago

Yeah, this is what happens when institutional investors decide to throw their money into poorly regulated private equity vehicles. If only we had some mechanism whereby companies' shares could be listed somewhere public, and people could buy and sell them to determine what a fair price for these companies would be! Oh, better yet - we could have a regulatory body that could prevent companies from selling the same asset back and forth to themselves to inflate the price. Crazy, right?

collegeburner 4y ago
Oh come on, a lot of good companies stay private bc the SEC makes it a pain in the ass (and expensive) to be public. And it's making it worse with stupid shit like ESG reporting or SOX compliance they just keep adding. And these days you run the risk of some social justice warrior micro fund buying 2 shares going to CALSTRS or whatever and running a proxy fight. I would not want to take a company public these days and I don't see problems with companies staying privately held. PE LPs are all accredited and know what they're doing, they're betting on a greater fool buying for a higher multiple later bc it worked for the past years, multiples kept rising. Blame the fed, blame congress, blame stupid people who somehow got money. Now people complain bc there's a downturn. I don't know how people are unironically painting them as victims.
- lovich 4y ago
  > And these days you run the risk of some social justice warrior micro fund buying 2 shares going to CALSTRS or whatever and running a proxy fight. I would not want to take a company public these days and I don't see problems with companies staying privately held. If you’ve reached the size of being a public company, lawsuits are a Tuesday. If the flavor of the frivolous is driving executives and investors decision making, then it’s a cultural choice. > Oh come on, a lot of good companies stay private bc the SEC makes it a pain in the ass (and expensive) to be public. And it's making it worse with stupid shit like ESG reporting or SOX compliance they just keep adding. It does make it a pain but it also increases the trust investment has in your company to not do things like trade assets between two vehicles you control with no proof that it’s not to your benefit Generally agree that these aren’t victims though. To borrow a term from Eve, it seems like they decide to venture into null sec space and are surprised they could get hurt

rahimnathwani 4y ago

It seems like there are two issues: 1. The GP arranges for one of its funds to buy from another fund. These funds likely have a different mix of LPs. Because both funds are represented by the same GP, there's no competitive negotiation, and the valuation chosen may benefit one group of LPs (and possibly the GP) at the expense of the other. 2. Such a transaction can increase the total fees earned by the GP, even without additional effort or additional value being created or realized.

collegeburner 4y ago
Except LPs aren't stupid. They probably won't keep going with this if it doesn't pay off. They're not Joe Boomer deciding he needs to diversify from his 60/40 blue chips and bonds, they're high net worth individuals and institutional investors who are either 1. Being stupid and getting what's coming to them or 2. Getting greedy and getting what's coming to them.
- pevey 4y ago
  The rationale that is usually given to LPs to make them go along is that the time to exit is not right, but the one fund that currently owns the interest is getting long in the tooth, so they need to move the interest to the newer vintage year fund. They spin it as, we thought it was a good investment before, and we think it is an even better investment now, so we want to hold onto it. But we still need to wind down the old fund. It's a nightmare from a valuation standpoint, because while many LPs may well be invested in both funds, making it a wash, some are not. The LPs that invest in both funds sign a check to fund the investment in the new fund, and then get the money back as the older vintage is winding down. The investment just essentially gets rolled forward. The investors who are only in the new fund are cashing out the previous investors, so this is much more of a concern. But they are new and still usually riding the feeling of wow, they let me invest in this awesome fund. PE firms are really good at creating an aura of exclusivity and luxury. A rolling loan gathers no loss. So long as the music keeps playing, valuations can be whatever number you can get your auditor to agree to. Nice dinners and event tickets for your audit partner can help with that.

moneywoes 4y ago

Is it true being acquired by PE is a death sentence for engineers at a company? With P.E introducing cuts & offshoring immediately to improve their bottomline

seibelj 4y ago
Totally depends. I declined to stay as part of a PE acquisition once as a middle manager, but a solid 6 figure pay day to stay a few years was promised. Just didn’t interest me.
bpodgursky 4y ago
There are growth-oriented PE firms, there are income-oriented PE firms. Completely depends on what kind bought you.
TrackerFF 4y ago
Death sentence for user experience.
collegeburner 4y ago
Nah. PE gets a bad reputation for asset stripping shit but that's not most of it. The LBO guys generally understand they need to maintain software for the business to cashflow and make payments and the growth equity funds obv want the business to improve. Another positive is PE has longer hold periods and less liquidity, public markets have a lot more pressure of "oh shit the share price is down 15% start firing and doing buybacks". And yeah there are distressed guys who will go in and gut a place but tbh they don't usually get involved unless something bad is coming regardless. Like if a distressed fund is trying to acquire your company somebody about to get laid off regardless of whether they buy it or not.
mbesto 4y ago
Tech guy who advises PE here(overseen 400+ PE deals, half of which are software companies). The "financial engineering" trope with PE is largely in the large cap space ($1B+ EV). Most middle market PE is all about value creation. Note - there are some notorious "death sentence" firms in the middle market...I won't name names but if you dig deep enough you'll see some PE shops (there's only 2 I can actually name off hand) that buy small tech cos and send all of the dev overseas.

joschmo 4y ago

To play devil's advocate, the reason a private equity firm should use a continuation is that it wants to hold an asset past the fund's 10-year life because the asset is continuing to perform very well. 10 years ago, many private equity firms felt heartburn from letting big software winners go after 5 years because that's the typical fund cycle. In reality, LPs and GPs would have been better off reliably holding the same growing asset for 15-20 years as the company went from $10M in EBITDA to $250M. Why take a 3x in 5 years when you can get a 25x in 15 years? The annual compounding works out to be roughly the same. The only issue is your fund structure so you trade it amongst yourself every 3-5 years at a 3-4x mark that makes you look good to your investors. The growth is usually there so it is not a lie though liberty may be taken with multiples which expanded rapidly over the last decade. This phenomenon has been used aggressively, perhaps too aggressively, in software and particularly software roll-ups where you can comfortably compound 20-30% EBITDA growth annually between 10-15% organic growth (half or more of which is just price increases) and an aggressive M&A strategy that drives higher margins. That said, this article is raising an early and important alarm bell to the broader public, who have a vested interest because their pensions are invested in these firms, that certain firms may be using it too aggressively. When I scan the broader PE landscape, the firm that has used it to the most success is Clearlake Capital. I don't have insight into their whole portfolio but have heard criticisms that they overuse it. Or that their is incestuous trading of assets between them, TA Associates, Hg, Insight Partners, FP, Thoma, and a handful of others.

ahtihn 4y ago
> Why take a 3x in 5 years when you can get a 25x in 15 years? 3x in 5 years is equivalent to 27x in 15 years. Obviously it's not that simple in practice but it's not like it's easy to predict growth over a 15 year period.
- danielmarkbruce 4y ago
  "roughly" is in the next sentence...and if we are being so pedantic "equivalent" is the wrong phrasing for everyone except like 10 people.

SilverBirch 4y ago

It's kind of funny to me that this stuff happens. You can dress it up however you want, but it's fundamentally just putting these PE groups in an unethical position. You can't with a straight face say that you're getting the best price for both the investors you're selling it from and the investors you're buying it for. Firstly, there is no way you can correctly value these companies when you're selling them between your own funds. Just laying aside the mechanisms of how this is done, anyone investing in those groups should be taking a long hard look at whether you want people this unethical to manage your money. And of course that doesn't even start to consider the fact that by doing this the PE companies get to mark their own homework, fraudulently pumping valuations by self-dealing safe in the knowledge their valuations don't need to be tested against the public markets. This just seems like the exact same sort of absurd regulatory loophole that saw SPACS explode and then implode over 18 months. The fact that these firms have been forced to start chasing this style of innovation is not a good sign for the core business.

gidorah 4y ago

Tangentially, I had dealings with The Access Group when I was head of finance at a hospitality group. Access were full of lies. They bought up many category leaders for hospitality software, and tried to sell a single solution that then didn't really work together. Their sales teams were aggressive, but their solution "made sense" to other decision makers even though Access couldn't really deliver.

simonjgreen 4y ago

This reminds me in no small way of Max Fosh in his real-yet-satirical take https://youtu.be/iHfJRON3b-w https://youtu.be/iHfJRON3b-w

cestith 4y ago

If I bought a painting and sold it to myself for more money, I'd get investigated for money laundering. These people are taking things with no established market values and self-dealing with them. It reeks of fraud and misdirection.