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Recently heard this description of PE: Private Equity is an arbitrage on bloated companies. Typical cycle is innovative startup -> efficient corporation -> bea

• snarfy 4y ago
  I've never seen it work that way. Typically they cut a bunch of expensive overhead, like employees, which juices the books to make it look much more profitable, then sell to someone else left holding the bag of a dead shell of a company. Cut long term viability for short term gains.
  • amanj41 4y ago
    Depending on the parent commenter's definition of cutting the fat, I don't see your understanding's of PE as being much different
  • pfdietz 4y ago
    Sometimes squeezing the last drops of juice out of a doomed lemon is the economically most efficient thing to do. The purpose of a company is to serve the interests of its shareholders (within the bounds of law), not to survive indefinitely. We all know cases of companies that squandered value in vain attempts to stay alive, when they just could have slowly put themselves out of business and returned the last years of profits to their shareholders. Kodak, I'm looking at you.
    • amelius 4y ago
      Sometimes bad things turn out to be good things. But most often, they are not.
      • chmod600 4y ago
        What's the alternative? If a company is essentially a zombie, what is the ideal outcome?
        • vkou 4y ago
          Ideal outcome for who? The owners? The customers? The employees? The country? Competitors? My 401K? The creditors? Some of these stakeholders net-win when zombies die, and some of them net-lose. The economy isn't a zero-sum game, but particular categories of actions in it can produce net-negative outcomes for one of these groups. You can't just wave a large brush and say that everyone net-wins when this happens. It's a case-by-case thing. Eddie Lampert's corporate plundering of Sears is an example of just about everyone but him (Maybe including him? It's hard to tell) losing.
          • pfdietz 4y ago
            It's likely to be positive for all of those, even the employees. Who gains from the destruction of value? > stakeholders I hate this term. It's a deliberate attempt to blur the boundaries of who owns something and who does not. It's not shoplifting if I'm a stakeholder in this pack of cigarettes, right?
            • vkou 4y ago
              Our society isn't, and shouldn't solely be structured around prioritising the comfort of the people who own it above all others, despite how much they wish that it would.
        • leaflets2 4y ago
          From what I'm reading, PE firms sometimes make zombies out of ok functioning companies, ... And sell the zombie, before others see what's happened (Eg fire too many employees to cut costs)
    • BeFlatXIII 4y ago
      On the flip side, losing money is a known risk of investing. Can't afford suboptimal returns because the C-suite tried to build a legacy by resurrecting the company? You had no business investing in the first place.
  • fdgsdfogijq 4y ago
    This definitely happens, but its up to the buyer to know what theyre buying. Thats how free markets work
  • twodave 4y ago
    I think it’s fair to assume both exist. The (small) company I work for sold to PE in 2019. They basically dumped a bunch of money in to help us scale up quickly. It hasn’t all been great, but revenue continues to grow and we have (many) more employees than before from top to bottom. I expect they’ll probably try and move on soon to realize their gains, but the next buyer definitely won’t be receiving a “dead shell” unless they somehow fail to retain the employees during the transition.
    • dhzhzjsbevs 4y ago
      We got juiced by PE. Hiring went to absolute shit. Nobody knows whos in charge anymore. Decision makers have all left the company. I just make everything up as I go along and people go with it because I've been around so long nobody will question it. Total shit show.
  • JackFr 4y ago
    Wild that what's obvious to ransom HN commenters hasn't been noticed by the guys buying the dead shells of companies. You'd think that it would be important to them. Or maybe that's anecdotal and not necessarily the brought trend.
    • StanislavPetrov 4y ago
      >Wild that what's obvious to ransom HN commenters hasn't been noticed by the guys buying the dead shells of companies. It isn't so wild when you consider cases like Sears, where Eddie Lampert in effect used a variety of shell companies to sell off the profitable parts to himself.
      • che_shirecat 4y ago
        obvious outlier skewing your perception of the market as a whole. if the sears/eddie lampert case was the norm, why would PE deals ever happen?
        • StanislavPetrov 4y ago
          Because there is an immense of amount of money to be made by people with access to cheap money at the expense of people without that sort of access.
  • speed_spread 4y ago
    One view does not exclude the other. Predators have a role in ecosystems, culling the weak and the sick from the herd. PEs are corporate predators, preying on bloated orgs, killing them, returning whatever value still held (trademarks, patents) back to the "environment". But of course that "pure market" viewpoint doesn't take into account the social costs and individual pains these operations entail.
    • kolbe 4y ago
      That's not what he's talking about. Ruthlessness has its role in a robust ecosystem, but screwing with a company in a way that destroys its viability simply to trick some retail investors and pension funds into buying the worthless shell is not part of a robust ecosystem.
      • lmz 4y ago
        Maybe it weeds out the more stupid investors.
        • che_shirecat 4y ago
          unironically, yes. in an ideal capitalist system, money should flow to those who can best allocate it, so stupid investors losing $$$ to more savvy investors in financial pvp is the market working as intended.
        • kolbe 4y ago
          In a libertarian world, you're right. But in the USA today, those "stupid investors" are often pension funds who will just tax you more when they lose it all.
    • youngtaff 4y ago
      Apart from they wreck perfectly viable businesses… Let’s take Debenhams in the UK as an example - Used to own all it’s stores - Got bought by PE (who attached the debt they used to buy Debenhams to Debenhams so the PE group now owe zero) - Split the stores from the retail operation but made the retail operation lease them on ever increasing rents - Sold the stores to British Land - Eventually Debenhams retail can’t afford the rents (as they only ever increase), and the debt payments so goes bust Similar patterns with PE acquired companies not being able to afford their debt payments is common, coupled with PE companies extracting any free cash as a dividend shortly after purchase What PE companies are doing isn’t culling the weak but extracting the most they can from businesses and then leaving suppliers, employees, pension scheme members to pick up the cost
  • RajT88 4y ago
    I've seen both. A place I worked once got bought by PE, and they cut development costs for a product which was becoming less and less relevant anyways. There's a variety of opinions about that. You look at Toys R Us, and a few other major retailers, it is as you say.
    • kgwgk 4y ago
      Even the successful PE stories get bad press - as they often involve painful restructuring. But the big failures do get much more coverage for obvious reasons.
  • listenallyall 4y ago
    If this were commonly true, who are the dumbasses buying companies from private equity funds, and why would they continue to buy them? And, whether your statement is true or not, why should I (or anyone else) feel bad for anyone who would buy back a company that has been gutted and has no future? This is business, people are supposed to be professional and to differentiate opportunity from disaster. Lastly, "Cutting long term viability for short term gains." actually sounds somewhat noble. Why should a company exist for 50 years when all of its usefulness (i.e. profit) can be extracted in 5? Let everyone move on to something else productive. If you owned an oil well you could exhaust in 5 years, you'd do it, not sip at it for the next 50.
    • youngtaff 4y ago
      Other PE funds… it gives the original fund a way out and typically a gain to show for it while bumping the problem to the next fund Was an article about this in the Financial Times recently
      • listenallyall 4y ago
        Since people hate PE funds so much (after all, they are usually led by billionaires), why is there so much despair over one PE fund selling another PE fund a lump of garbage? I'd think many people would celebrate.
        • youngtaff 4y ago
          Because the PE partners get to take their profit from the first sale And whoever invested in the second fund, which for example may be your pension scheme, is left carrying the cost
    • selimthegrim 4y ago
      >If you owned an oil well you could exhaust in 5 years, you'd do it, not sip at it for the next 50. a) why when you can hold back and affect the price b) this logic had better change soon or we are all screwed with climate
  • mbesto 4y ago
    > Typically they cut a bunch of expensive overhead, like employees, which juices the books to make it look much more profitable, then sell to someone else left holding the bag of a dead shell of a company. Cut long term viability for short term gains. This really only exists in large cap deals. Most middle market deals are actually about long term viability...mainly because they have to sell to other PEs or strategics that will underwrite the long term viability during diligence when they go to buy. Large cap on the other hand will typically try to IPO it where the public investor might be left holding the bag (or creditors, or employees).
  • unity1001 4y ago
    You missed another step - after cutting the employees, they make the rest work two or three times more. Instant profit.
  • jankyxenon 4y ago
    The goal of PE firms is to exit their investments. Do you think PE is a long running greater fool scam, where there’s always a foolish buyer available. Or, do you think sometimes the buyers are not getting a dead shell?
• curiousllama 4y ago
  Out of curiosity - did a PE person tell you that? It's a bit of a romanticized view. Like a junk yard mechanic opining on the circle of life. Some PE firms definitely resurrect companies. But a lot are junk yards for companies: they buy to divest & accelerate lifetime profits to today, knowing they'll just dispose the husk at the end. Others are monopoly plays: "roll ups" of local/regional players until there's just one option left and they can raise prices. Still others are growth plays: they're willing/able to take bigger risks, for bigger rewards. And others exist too. Notably, all would likely describe themselves as arbitrage on bloated/mismanaged companies. But that doesn't make it true, really
  • nostrademons 4y ago
    That's the point. A lot of people view companies as fundamental and bankruptcy as bad because companies are the biggest "things" you can point to in the economy. But the economy itself doesn't think in those terms (it doesn't really think in any terms, not being alive). The fundamental assets in the economy are land, labor, capital, and information, and a firm is just a way to organize those factors of production to do something useful. Over time the optimal way to do things often shifts so that whole companies become obsolete, but the incentive of everyone involved in a company is to make sure the company keeps existing. The role of a P/E firm or corporate raider is to buy the company, strip all the assets off, sell them to other companies that will use them more efficiently, lay off all the employees, and force them to get other jobs. Which sounds utterly cruel if you think of the company itself as a thing whose existence you want to preserve, but if you think of the company as an organization of convenience which should be dismantled and reconfigured when economic & technological conditions change, you are just paving the way for other companies to flourish.
    • hestefisk 4y ago
      Beautiful articulation. Very clinical though. You should become a writer.
    • curiousllama 4y ago
      > the optimal way to do things often shifts My only quibble is how you frame "optimality" as an objective parameter, shifting with the tides of time. Monopolies are usually optimal for the owner. Similarly, PE rollups are optimal for the owners. You're right, of course, that when you value a company in terms of "fundamental assets" then PE strategies make total sense. But if these companies are simply organizations of assets, then why create them? The general purpose of companies is production: to make a profit, yes, but also to provide a value surplus to customers. People dislike PE not because they're cruel, but because people get that they "optimize" for owner profit over customer surplus. A necessary tool? Certainly, it often is. But optimal use is important too. With a cost of capital near 0 ... why wouldn't the tool be overused, destroying economic value it was meant to create?
• kmeisthax 4y ago
  Theoretically, yes; in practice most private equity is no better at management than the people they are replacing. Often times they miss the fat and cut the bone instead. It's hard to actually see what provides company value and what is actually expendable. Remember that the whole idea behind free markets is that you can't perfectly know and precalculate every input and output of an economy; you want a distributed set of economic actors making decisions for themselves. And large businesses are not immune to this - they operate not like tribes, but like little mini-economies unto themselves. If we actually could "cut the fat", command economies would have worked and America would have collapsed instead of the Soviet Union.
• CPLX 4y ago
  This is not an accurate description/metaphor. The best way to describe PE is as a means of exploiting principal/agent issues: https://en.wikipedia.org/wiki/Principal–agent_problem https://en.wikipedia.org/wiki/Principal–agent_problem People take over organizations and loot them for personal gain. It's the simplest business model imaginable. In fairness that's not the only PE model. The other model is to buy up competing businesses, engage in anti-competitive practices, and extract monopoly rents from a sector.
• niffydroid 4y ago
  In my view, someone from the uk, they generally buy companies and strip as much money as they can out of the company by selling bits off or they buy it and load it up with debt and then take as much money as they can out.