3 ms·

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 de

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?
  - nostrademons 4y ago
    In the presence of competition "optimal for owner" equates to "optimal for the system at large", because competition between PE firms will bid up the price they pay for the initial company until it's fair, it'll bid down the interest rate the bank charges, it ensures that the assets actually go to the firm best able to make use of them, it provides landing positions for the employees who are let go and then can get the best salary possible, etc. In the absence of competition misallocation can occur, and that's why it's the governments job to stomp out monopolies. (Something that they've been sucking at, but if you want to argue for better anti-monopoly enforcement I'm all for it.) There's wide-ranging literature on why companies exist [1], but it's not for production. Individual laborers independently contracting with each other can produce value, and do so without the monopoly risks mentioned in the last paragraph. Usually theories of the firm center around transaction costs: it takes money to identify, review, trust, and collect payment from other firms you do business with, and so you can improve efficiency (up to a point) by centralizing all the producers in one firm under a management hierarchy that doesn't pay them directly but is tasked with optimizing output. Other theories of the firm have shown that management doesn't actually optimize output and (surprise surprise) optimizes for their own status, promotions, and other human motivations instead, but as long as the deadweight loss from them being self-interested is less than the search costs of contracting with another company, it's economically rational. P/E operates essentially by taking on that search cost of dismantling the company and selling it on the open market, and pockets the difference between the deadweight loss of manager principal-agent problems and those search costs. Cost of capital being 0 is a separate issue. The effect of this is to make any investment with positive returns a good one, regardless of how good it is, which creates a lot of bloat and misguided investments in companies. It's essentially making the economy a target-rich environment for P/E. [1] https://en.wikipedia.org/wiki/Theory_of_the_firm https://en.wikipedia.org/wiki/Theory_of_the_firm
- nonameiguess 4y ago
  I was thinking something like this yesterday when someone posted a blog post about an evolutionary perspective on product market fit. That ended up being a bit of a misnomer and it was really an article about the observation that sex sells, and people are motivated by sex because of evolution, but I was thinking what the article should have been is the real evolutionary perspective is competition itself. Nobody other than you as a founder gives a shit if your specific company succeeds. All that matters is that a need is addressed, some product fits some market. As a consumer, I don't give a crap who is at the other end of a transaction profiting just so long as I get the product I need. As an investor, thanks to diversification, I don't really give a shit which companies make it and which don't just so long as an entire sector grows. Even as an employee in an industry where it is very easy and quick to find a new job and it usually involves a pay raise, I'm not sure I care all that much if my employer continues to exist. I'm not even really sure you should care that much as a founder. As long as funding sources continue to give you money and you use some of that to pay yourself, if one idea fails, try another. Don't get too attached to whatever you're working on right this minute, just so long as at least one thing you try eventually works. Think of like the commercial equivalent of the United States and every constitutional republic that has followed. We don't have kings. Institutions should outlive regimes. Dynamic markets are healthy markets. Chaos is a ladder or something like that.
- deleted 4y ago
  [deleted]
- grey-area 4y ago
  That’s a nice fairytale. Let’s be honest here, PE firms exist to make partners rich, not to reallocate misused capital and force people to get a productive job. Their mechanisms are described by the OP and may sometimes result in those things but those are not the goal or the motivation. Bankruptcies are a necessary evil but they are always awful, traumatic experiences for employees, and often PE will force reorgs, acquisitions and layoffs not because they are best for the economy or employees but because they are best for the new owners.
zjaffee 4y ago
There's another type of PE out there beyond what you've described which is, the owner of a moderately sized privately owned firm (doing somewhere between 10-100 mil revenue a year) wants to retire and sell it off, and PE firms are the only ones who can afford to buy it for the 100mil+ price tag it warrants.

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?
- nostrademons 4y ago
  In the presence of competition "optimal for owner" equates to "optimal for the system at large", because competition between PE firms will bid up the price they pay for the initial company until it's fair, it'll bid down the interest rate the bank charges, it ensures that the assets actually go to the firm best able to make use of them, it provides landing positions for the employees who are let go and then can get the best salary possible, etc. In the absence of competition misallocation can occur, and that's why it's the governments job to stomp out monopolies. (Something that they've been sucking at, but if you want to argue for better anti-monopoly enforcement I'm all for it.) There's wide-ranging literature on why companies exist [1], but it's not for production. Individual laborers independently contracting with each other can produce value, and do so without the monopoly risks mentioned in the last paragraph. Usually theories of the firm center around transaction costs: it takes money to identify, review, trust, and collect payment from other firms you do business with, and so you can improve efficiency (up to a point) by centralizing all the producers in one firm under a management hierarchy that doesn't pay them directly but is tasked with optimizing output. Other theories of the firm have shown that management doesn't actually optimize output and (surprise surprise) optimizes for their own status, promotions, and other human motivations instead, but as long as the deadweight loss from them being self-interested is less than the search costs of contracting with another company, it's economically rational. P/E operates essentially by taking on that search cost of dismantling the company and selling it on the open market, and pockets the difference between the deadweight loss of manager principal-agent problems and those search costs. Cost of capital being 0 is a separate issue. The effect of this is to make any investment with positive returns a good one, regardless of how good it is, which creates a lot of bloat and misguided investments in companies. It's essentially making the economy a target-rich environment for P/E. [1] https://en.wikipedia.org/wiki/Theory_of_the_firm https://en.wikipedia.org/wiki/Theory_of_the_firm
nonameiguess 4y ago
I was thinking something like this yesterday when someone posted a blog post about an evolutionary perspective on product market fit. That ended up being a bit of a misnomer and it was really an article about the observation that sex sells, and people are motivated by sex because of evolution, but I was thinking what the article should have been is the real evolutionary perspective is competition itself. Nobody other than you as a founder gives a shit if your specific company succeeds. All that matters is that a need is addressed, some product fits some market. As a consumer, I don't give a crap who is at the other end of a transaction profiting just so long as I get the product I need. As an investor, thanks to diversification, I don't really give a shit which companies make it and which don't just so long as an entire sector grows. Even as an employee in an industry where it is very easy and quick to find a new job and it usually involves a pay raise, I'm not sure I care all that much if my employer continues to exist. I'm not even really sure you should care that much as a founder. As long as funding sources continue to give you money and you use some of that to pay yourself, if one idea fails, try another. Don't get too attached to whatever you're working on right this minute, just so long as at least one thing you try eventually works. Think of like the commercial equivalent of the United States and every constitutional republic that has followed. We don't have kings. Institutions should outlive regimes. Dynamic markets are healthy markets. Chaos is a ladder or something like that.
deleted 4y ago
[deleted]
grey-area 4y ago
That’s a nice fairytale. Let’s be honest here, PE firms exist to make partners rich, not to reallocate misused capital and force people to get a productive job. Their mechanisms are described by the OP and may sometimes result in those things but those are not the goal or the motivation. Bankruptcies are a necessary evil but they are always awful, traumatic experiences for employees, and often PE will force reorgs, acquisitions and layoffs not because they are best for the economy or employees but because they are best for the new owners.

zjaffee 4y ago

There's another type of PE out there beyond what you've described which is, the owner of a moderately sized privately owned firm (doing somewhere between 10-100 mil revenue a year) wants to retire and sell it off, and PE firms are the only ones who can afford to buy it for the 100mil+ price tag it warrants.