11 ms·

I think it should be illuminating to balance narratives like this with simple questions along classical economic lines: 1. Why is private equity ending up with

I think it should be illuminating to balance narratives like this with simple questions along classical economic lines: 1. Why is private equity ending up with all these resources? Who is selling to them and why? Why didn't this happen before? It's not like PE is new. 2. When PE loads up a firm with supposedly unsustainable billions of debt, someone is on the other side of that transaction, lending the billions. Who does that and why? Are they perpetual suckers, unaware of the decades of experience we have doing this? I don't necessarily think the conventional prestige media narrative around PE is wrong, but it never seems to get around to asking these basic economic questions. It can't be as simple as some metaphor where bandits are roaming the economic countryside pillaging innocent victims. Voluntary transactions are occurring and we need to understand why to address any underlying issues. "Unpleasant things are happening, we need some sort of regulation" doesn't seem like a sufficient basis for socially beneficial action. Whatever underlying issues are making healthcare an attractive PE target will probably persist, and maybe get worse, if all we do is pass some kind of "PE bad, stop PE" law.

ericjmorey 3y ago
The victims never consent to the sale. They have no say in the transactions that victimize them. You're looking at two parties making a transaction and assume that those are the only two parties that are part of the transaction.
- civilized 3y ago
  This can be true of any corporate sale though. How do we distinguish sales that must be stopped because there are victims who must be protected from other sales?
- prepend 3y ago
  > The victims never consent to the sale. It’s extremely rare for a forced sale. Usually it’s a public company and shares are purchased on public exchanges, or for privately held companies the board and shareholders approve the sale. It’s not that these are the only people impacted by the sale, but it’s the best method possible to govern sales.
  - candiodari 3y ago
    I think the idea here is that the "victims" are people needing or wanting medical treatment, and find it's made impossible for them to get it. Yes, they're not really involved in the transaction but still have something taken away from them. You could argue that it's the government, medicaid and medicare especially that are taking away from them ... but that doesn't make as good a scapegoat as banks and pension funds. Sorry, not pension funds, I mean evil private equity investors ...
lordnacho 3y ago
My current working theory. Happy to hear from any of the actual PE people who are reading this. 1. As you can imagine, not everyone has the wherewithal to launch a PE firm. Only people who are well connected in the financial world will get access to the funds. People who have friends in the investment sector for instance. There's plenty of stories about how VC (which isn't the same thing) investment is hard to get a meeting for if you don't know someone in the firm. PE works in a similar way, certain people know the players and get the deals together. Of course a lot of it is a promise of future business. 2. When a firm is acquired, the M&A advisors that did the deal get paid. When a firm is restructured (from bankruptcy), the same happens. Lawyers as well. These people all get paid to make the deals happen. Part of what happens is the M&A people will talk someone in the lending department into doing the deal. And remember it isn't just one bank or one lawyer or one lender on each deal. The lenders will all take a piece of the debt, which can be sold on (eg packaged in various tranched products) to investors (pension funds etc). If you smooth out the poop enough it doesn't smell so bad. That's what I can glean from my far corner of the financial world, while I do work in finance I'm pretty removed from PE.
- YPCrumble 3y ago
  It feels like most answers to “who is at the losing end of any transaction” is pension funds, which are guaranteed by the government. So by your theory PE firms are sucking in taxpayer money by fleecing pension funds run by financiers who aren’t smart enough to get into PE. Basically until pension funds aren’t bailed out by the government this will continue.
  - horsawlarway 3y ago
    You don't stop making blood to get rid of leeches. You pull the leech off.
    - BSEdlMMldESB 3y ago
      you do if/when you have such a case of leeches that you die.
    - 3y ago
underlipton 3y ago
Ready for a fun conspiracy theory? Guess where most PE guys start (i.e., where their base professional network is developed, where their expertise is, etc.). If you correctly guessed "Ivy League undergrad and business schools" and "investment banking", you can probably tell where I'm going with this. The gameplan is simple: lend your buddy the money to buy the business. Now you have a line to the person who has the most access to data about, if not control over, the direction of the business. Wherever it happens to go, you can be ahead of the market. Long if it's going to survive and grow; short if it's doomed. He's happy because the decision to be lenient or aggressive about repayment lies with his own contact - you. How do you get businesses to agree to your terms? Well, they hired consultants at some point. Oh, those guys are your buddies, too. You have acquaintances on the BoD, too. Why go through all the trouble? Besides the fact that you're becoming filthy rich, you also have the opportunity to remove rivals and consolidate markets under an n-opoly. More money. More control. >"Unpleasant things are happening, we need some sort of regulation" doesn't seem like a sufficient basis for socially beneficial action. How about fraud and insider trading? I realize that this is a simplistic and somewhat paranoid take on the matter, but in a society with a broad and continuous history (distant and recent) of corruption at elite levels, maybe securities violations and revolving door employment aren't just for our politicians. I wonder if we're dealing with Occam's Razor: how are PE firms achieving phenomenal profits while the businesses they use to do so die? Easy: they're cheating.
- fiprofessor 3y ago
  > The gameplan is simple: lend your buddy the money to buy the business. Now you have a line to the person who has the most access to data about, if not control over, the direction of the business. Wherever it happens to go, you can be ahead of the market. Long if it's going to survive and grow; short if it's doomed. He's happy because the decision to be lenient or aggressive about repayment lies with his own contact - you. But if the business is privately held (because the borrower used the loan to buy the business), then what market is the lender going long/short against in this hypothetical conspiracy? Other (public) businesses in the market? Potential investors when the PE firm sells and takes the business public?
  - 3y ago
AndrewKemendo 3y ago
>Voluntary transactions are occurring This is where discussions break down because there's broad disagreements on what is and is not considered "voluntary" - there are ethical/moral traditions that claim nothing is voluntary, while others that claim everything is. We can gain clarity by defining the opposite then: Involuntary So, what set of circumstances would be required to declare that someone is doing labor "Involuntarily?" and thus there is no "free market" for labor. For example, would you say that the person who is manually sorting trash out of recycling for <$40,000/yr [1] is doing so voluntarily? Maybe someone really loves that and wants to do it and would do it for free. That's possible but unlikely. Maybe someone made decisions such that this is the only job that they can get without moving or some other major life decision. Is that still voluntary simply because they are in that position? Assuming they aren't disabled, they can always put their things in a bag and walk to some place with more options. What of people that are disabled then? How much of what they do is voluntary? You get the point The challenge then is asking, given that there is no OBJECTIVE answer to the question of what is voluntary (Extreme example: You should be constantly trying to break out of prison, otherwise you doing what the guards tell you to is "voluntary") then "voluntary" shouldn't be a discriminator on whether society has something to say about a transaction between people. Extreme (unreasonably IMO) freemarketeers view individuals as atomic complete units and that's the end of the story. So irrespective of starting or current positions EVERYTHING is voluntary and the world is all-v-all pvp no hold barred competition. That's who is in PE and finance, so that's what you're up against. [1] https://www.talent.com/view?id=685b4384e8d6 https://www.talent.com/view?id=685b4384e8d6
- sgregnt 3y ago
  Volanturelly, in my mind, means that you can decide how to employ your resources as you wish (e.g., time education, capital, skills). If your resources allow you only ever a few options, like sorting garbage, you are still doing it voluntarily. If you have many resources (not necessarily material, e.g., education) this will give you more options. Your abilities are teaded agains all other ppl's abilities in a free market. There are complications to this view, but the example with sorting garbage, in my mind, is actually an easy case. Yes it is definitely voluntary.
disgruntledphd2 3y ago
Full disclosure, I don't work in finance, so I may be getting a bunch of this wrong. > Why is private equity ending up with all these resources? Because they have cash, mostly from pension funds and insurance companies. > Who is selling to them and why? The doctors running the practices, more generally they're rolling up companies in relatively dispersed industries where they believe they can make money. In the best case, this is because replicating administration across many SMEs is much less efficient than centralising it. In the worst case, it's a way to buy them companies with the cash flows of the company themselves, and pay out fat dividends while gutting the actual business. Why didn't this happen before? Really low interest rates super-charged the amount of money that PE could borrow , and helped them raise money because insurance and persion funds needed to get above premium returns which were hard to find because of said really low interest rates. Additionally, banks became much less likely to lend money since the 2008 crash (because of requirements around capital buffers) so PE was basically the only game in town. Honestly though, I think the good times are over for PE, as most of the industry (and finance in general) has been cushioned by a low interest rate world, and as debt starts to cost real money we're gonna see a _lot_ of these bets unwind. > When PE loads up a firm with supposedly unsustainable billions of debt, someone is on the other side of that transaction, lending the billions. Banks. Again, these loans are assets, and assuming that the business continues as normal and interest rates don't rise, these were OK(ish) risks. More importantly they built a bunch of relationships with the PE people, so it wasn't about any one individual loan, but rather the constant amount of deal flow.
- civilized 3y ago
  On the last point, interest rates aren't the only thing that matters to loans. The default rate also matters. If I borrow a billion dollars from you to pay myself and I have no good plan to pay you back, it doesn't matter how low interest rates are, you'll still be out a billion dollars.
  - fencepost 3y ago
    If the business is still viable with the debt load, the bank continues to get paid on the loan but whoever owns the company doesn't get much profit. There are plenty of businesses or there that exist but don't thrive or grow, the PE sucking of vitality just moves businesses that might have thrived into that category.
fakedang 3y ago
1.) PE is enabled by easy money. If you look at the PE industry, the entire sector was enabled initially through the rise of junk bonds in the 80s, bonds so "worthless" but cheap issued by high risk companies (everyone was issuing bonds back then) with high reward for the winners - kinda like VC as an investment. In recent history, it was the ZIRP and of late money-printing. Easy money with high returns always pulls out money from more conservative investments like government bonds or blue chip stocks, and into more risk-tolerant sectors like PE and VC. 2.) Underwriting banks issue the debt for the PEs. They get paid handily, both from the constant debt payments PE firms take out of cash flow and from repeat underwriting business as investment bankers for future deals. Banks have their own ways of disposing junk debt that fails, but usually PE debt doesn't fail - the only ones being shafted are the company employees and the company itself. The management of the company, the owners and shareholders of the company, and the PE firm itself all make out of it like bandits. Nowadays, the traditional bread and butter of PE, such as leveraged buyouts, are mostly gone, with most of the returns coming from other avenues such as Real Estate (like buying up homes in Western cities), Emerging Markets and more passive investments in family/practitioner-owned businesses, like the Healthcare space.
- eaenki 3y ago
  how is “emerging markets” even a sector? it’s not like you can call PE buying a bond in India. so what does that even mean? do you mean that they are doing traditional LBOs in emerging markets?
  - fakedang 3y ago
    So emerging market investing is quite different from normal developed market investing, simply because each dollar goes for a lot more in an emerging market. To give an example, the RJR Nabisco takeover cost KKR north of $30B in the 80s. Massively leveraged takeover that ended up flopping so hard because of the amount of debt that KKR loaded up Nabisco with. But if a PE firm were to seek a similar Emerging Market equivalent opportunity, say Ulker Biskuvi in Turkey, it would only cost it $500 million. The PE firm does not need to load the company with debt - they can simply cut costs in the company, increase cash flow and make pay from that, eventually listing/selling off the asset on the local market (on the other hand, a Nabisco relisting would have been a nightmare for banks). A similar thing is happening in India currently - Blackstone is buying up commercial real estate by the boatload in India. Expensive for local PE firms, but relatively much cheaper for Blackstone compared to buying stuff in Europe for instance.
deleted 3y ago
[deleted]
chewz 3y ago
1) NIRP and search for yield 2) Older doctors, stomatologists etc... Running an individual practice is a challenge, requires constant investment and learning and at some point in life there is an incentive of larger cash out. And why? Because as West deindustrialized potenial for profit lays in high-value services. Instead of an aluminium smelter you purchase 100 of orthodontist practices. After purchase you cut on costs, raise prices and the investment pays out rather quickly....
amelius 3y ago
> Why is private equity ending up with all these resources? Who is selling to them and why? Why didn't this happen before? It's not like PE is new. Exploiting financial loopholes is like hacking. We see more hacking these days because more people depend on these systems, and more exploits are found. Note: "hacking" can be defined as using a system in a way it was not intended to be used. Hacking is also punishable by law. PE firms and the like should not get away simply because they are following the law, as they are abusing the law in the same way as hackers abuse computer systems.
everybodyknows 3y ago
> ... someone is on the other side of that transaction, lending the billions. Who does that and why? Are they perpetual suckers, unaware of the decades of experience we have doing this? I listened to a podcast interview with a financial professional who advises public pension fund boards. What he said in all but words was that, yes, the political appointees who actually vote on decisions are perpetual suckers.
- ahzhou 3y ago
  Pensions are very rarely lenders. They may invest in lenders but tend to look at historical performance. Political appointees are not the ones making investment decisions. At most they are setting very broad themes. For example, political appointees are the ones that say all investments must be carbon-neutral.
  - pessimizer 3y ago
    > Political appointees are not the ones making investment decisions. Political appointees are making investment decisions by choosing the people who make investment decisions.
ahzhou 3y ago
> Why is private equity ending up with all these resources? Who is selling to them and why? Why didn't this happen before? It's not like PE is new. PE as an investment strategy was pioneered by KKR in the 60's, beginning with the acquisition of family-owned businesses facing succession issues. The strategy exists because there's really poor liquidity for private companies. If you're a founder who wants to sell your stake, you either: 1. Sell to a strategic buyer 2. Sell to an individual 3. IPO 4. Sell to PE The first three options may not be always viable at a given point in time (aka illiquidity). Strategic buyers aren't always looking to buy, an individual may not have enough capital, and IPOs place a huge amount of reporting burden on a company. PE is the only reasonable exit option for a huge swath of private companies. Take a hypothetical family-owned supermarket chain with 10 locations across 3 cities in the midwest. All the kids are terrible successors. Who's going to buy it? 1. A strategic buyer, such as Walmart, may not be interested right now. 2. An individual probably doesn't have enough enough money to buy the whole thing 3. An IPO saddles the business with reporting requirements that simply don't make sense for a supermarket with only 10 locations People sell to PE because it's often the only way to exit. Almost all bootstrapped companies belong in this category. At the end of the day, PE funds are simply groups of professional investors that specialize in buying out companies. If they are poor investors or poor operators, they will tank the company. If they are good investors and good operators, they will sell the firm for a profit in the future. -------- > When PE loads up a firm with supposedly unsustainable billions of debt, someone is on the other side of that transaction, lending the billions. Who does that and why? Are they perpetual suckers, unaware of the decades of experience we have doing this? Many people offer debt, from private credit funds such as Golub Capital to bank syndicates. The best lenders are not suckers and the best PE funds almost never default. Oftentimes, the PE fund itself is collateral. PE funds that regularly default will have a difficult time finding a lender. People also misunderstand the purpose of debt. It's simple math: You want to buy a company for $100M. You can buy the entire thing with cash and sell it again after it doubles in 5 years, netting yourself $100M, giving you a 1x return. Alternatively, you can pay $20M down and borrow $80M at a 10% interest rate (simple interest for ease of calculation). When you sell it for $200M in 5 years, you net $200M - $20M - $80M * 1.5 = $60M, giving you a 3x return. Obviously, you've also increased the risk - your business must be capable of paying off an extra $8M a year in interest.
jameshart 3y ago
> someone is on the other side of that transaction, lending the billions. Who does that and why? Are they perpetual suckers, unaware of the decades of experience we have doing this? The lenders in a PE buyout are securing that loan on the assets of the purchased company. Real estate, brand names, IP, capital equipment. Their worst case scenario is that stuff all gets sold off and they get paid back from the firesale proceeds.
- s1artibartfast 3y ago
  If that's the case then there are no losers left holding a loss, what seems to be the problem? That's just a group of people buying a company and selling it off the assets for a profit.
  - AlexandrB 3y ago
    The losers are the customers and employees of the company. When we talk about company efficiency, we generally mean ROI. But an inefficient company may be inefficient because it's providing surplus value to either its employees or its customers. When such a company is bought by PE and sold for parts, customers/employers are forced to deal with more "efficient" companies that are better at "capturing value". If you zoom out a bit stuff like this is, I think, why modern products tend towards increasing monetization, selling of data, rental instead of ownership, etc. You either treat your customer like garbage, or you get bought by PE and replaced by someone who does.
IG_Semmelweiss 3y ago
1 - why didnt this happen before? Thwre was never this much of money created in the system, and Capital was never this cheap. 2 - its usually employees, and sometimes even customers, who are non equity shareholders but long term beneficiaries of the health of the company. Workers usually are not organized well enough to repel a a saavy PE firm. But careful, in some cases, PE may be liberating a firm being sucked dry from low-productivity workers or richly paid pensioners. Its hard to know which is which unless you are diving into the details. PE is not wrong, just like unions are not wrong, but what matters is what is their management style. Parasite, or builder?
ComputerGuru 3y ago
> When PE loads up a firm with supposedly unsustainable billions of debt, someone is on the other side of that transaction, lending the billions. Who does that and why? Are they perpetual suckers, unaware of the decades of experience we have doing this? In at least some of the cases, the answer is absolute corruption with PE paying the other party “on the side” to sign off on a deal only a sucker would agree to. See for example this piece of investigative journalism into Medical Properties Trust and just how many red flags and obvious bribes were involved (not to mention potential murder to cover up their misdeeds!!): https://prospect.org/health/2023-05-23-quackonomics-medical-properties-trust/ https://prospect.org/health/2023-05-23-quackonomics-medical-...
- multicast 3y ago
  Wrong. Banks who provided billions in loans to PE firms for decades, are now getting more cautious. But not because they fear of a failed investment, but certain investors of the bank do and that means problem for the bank. The Banks actually don't care what happens to the company being bought. An investment bank which provides a loan never sits on its debt. They are bundled into financial products like CDO, CLO etc and sold to institutional and wealthy private investors. This bought the rise to a new ''era'' recently, where PE firms set up special investment funds to fund big acquisitions of other PE firms. The reason being the current situation of the financial markets and the general negative mood in the markets. Example with a retailer from the UK, which turned costly for the investment bank: https://www.youtube.com/watch?v=DKYKT4pvYYA&pp=ygUTZnQuY29tIGdvbGRtYSBzYWNocw%3D%3D https://www.youtube.com/watch?v=DKYKT4pvYYA&pp=ygUTZnQuY29tI...
  - ComputerGuru 3y ago
    I wasn’t referring to the banks but the owners (or rather, the controllers) of the businesses that can obtain cash against the value of their property/assets or from the value of their business. These aren’t always individual loans in the hundreds of millions of dollars; the debt can be accrued piecemeal. (I’m also not talking in general but rather about certain specific cases/forms.)
boppo1 3y ago
>1. Why is private equity ending up with all these resources? Who is selling to them and why? Why didn't this happen before? It's not like PE is new. Centrally planned benchmark interest rates below market equilibrium took capital away from activities that produced value today and handed it to people who promised unrealistically optimistic future growth. Central planning doesn't work. People have gone from criticising the FOMC to openly mocking it. Google 'transitory meme'.
silencethendang 3y ago
For #2 - I'm not a PE insider, but I'm pretty aware of a lot of corporate dynamics in big tech, which increasingly seems like it's indistinguishable from any other corporate sector. I think we have a habit of thinking of companies/firms as individual actors deciding what's in their best interest, when in reality it's basically an oligarchy of either C-suite execs or boards of directors determining what's going to happen to the rest of the company. If these people want to get rich quick, and I'm guessing they do, since this is probably the end game for 99% of them, then private equity is their answer. They likely don't really care about the employees or the future of the company as an end in itself, just a means to enrich themselves, and so if PE presents this opportunity without those strings attached (i.e. by splitting the dividend recapitalization or the real estate leasebacks with the execs in the form of 'bonuses') the execs/boards will likely take it. TL;DR - PE can't exist in its current form without extreme power/ownership imbalances within the firms they take over and run into the ground. This has probably been increasing over time, hence why PE has been getting worse over time.

ericjmorey 3y ago

The victims never consent to the sale. They have no say in the transactions that victimize them. You're looking at two parties making a transaction and assume that those are the only two parties that are part of the transaction.

civilized 3y ago
This can be true of any corporate sale though. How do we distinguish sales that must be stopped because there are victims who must be protected from other sales?
prepend 3y ago
> The victims never consent to the sale. It’s extremely rare for a forced sale. Usually it’s a public company and shares are purchased on public exchanges, or for privately held companies the board and shareholders approve the sale. It’s not that these are the only people impacted by the sale, but it’s the best method possible to govern sales.
- candiodari 3y ago
  I think the idea here is that the "victims" are people needing or wanting medical treatment, and find it's made impossible for them to get it. Yes, they're not really involved in the transaction but still have something taken away from them. You could argue that it's the government, medicaid and medicare especially that are taking away from them ... but that doesn't make as good a scapegoat as banks and pension funds. Sorry, not pension funds, I mean evil private equity investors ...

lordnacho 3y ago

My current working theory. Happy to hear from any of the actual PE people who are reading this. 1. As you can imagine, not everyone has the wherewithal to launch a PE firm. Only people who are well connected in the financial world will get access to the funds. People who have friends in the investment sector for instance. There's plenty of stories about how VC (which isn't the same thing) investment is hard to get a meeting for if you don't know someone in the firm. PE works in a similar way, certain people know the players and get the deals together. Of course a lot of it is a promise of future business. 2. When a firm is acquired, the M&A advisors that did the deal get paid. When a firm is restructured (from bankruptcy), the same happens. Lawyers as well. These people all get paid to make the deals happen. Part of what happens is the M&A people will talk someone in the lending department into doing the deal. And remember it isn't just one bank or one lawyer or one lender on each deal. The lenders will all take a piece of the debt, which can be sold on (eg packaged in various tranched products) to investors (pension funds etc). If you smooth out the poop enough it doesn't smell so bad. That's what I can glean from my far corner of the financial world, while I do work in finance I'm pretty removed from PE.

YPCrumble 3y ago
It feels like most answers to “who is at the losing end of any transaction” is pension funds, which are guaranteed by the government. So by your theory PE firms are sucking in taxpayer money by fleecing pension funds run by financiers who aren’t smart enough to get into PE. Basically until pension funds aren’t bailed out by the government this will continue.
- horsawlarway 3y ago
  You don't stop making blood to get rid of leeches. You pull the leech off.
  - BSEdlMMldESB 3y ago
    you do if/when you have such a case of leeches that you die.
  - 3y ago

underlipton 3y ago

Ready for a fun conspiracy theory? Guess where most PE guys start (i.e., where their base professional network is developed, where their expertise is, etc.). If you correctly guessed "Ivy League undergrad and business schools" and "investment banking", you can probably tell where I'm going with this. The gameplan is simple: lend your buddy the money to buy the business. Now you have a line to the person who has the most access to data about, if not control over, the direction of the business. Wherever it happens to go, you can be ahead of the market. Long if it's going to survive and grow; short if it's doomed. He's happy because the decision to be lenient or aggressive about repayment lies with his own contact - you. How do you get businesses to agree to your terms? Well, they hired consultants at some point. Oh, those guys are your buddies, too. You have acquaintances on the BoD, too. Why go through all the trouble? Besides the fact that you're becoming filthy rich, you also have the opportunity to remove rivals and consolidate markets under an n-opoly. More money. More control. >"Unpleasant things are happening, we need some sort of regulation" doesn't seem like a sufficient basis for socially beneficial action. How about fraud and insider trading? I realize that this is a simplistic and somewhat paranoid take on the matter, but in a society with a broad and continuous history (distant and recent) of corruption at elite levels, maybe securities violations and revolving door employment aren't just for our politicians. I wonder if we're dealing with Occam's Razor: how are PE firms achieving phenomenal profits while the businesses they use to do so die? Easy: they're cheating.

fiprofessor 3y ago
> The gameplan is simple: lend your buddy the money to buy the business. Now you have a line to the person who has the most access to data about, if not control over, the direction of the business. Wherever it happens to go, you can be ahead of the market. Long if it's going to survive and grow; short if it's doomed. He's happy because the decision to be lenient or aggressive about repayment lies with his own contact - you. But if the business is privately held (because the borrower used the loan to buy the business), then what market is the lender going long/short against in this hypothetical conspiracy? Other (public) businesses in the market? Potential investors when the PE firm sells and takes the business public?
- 3y ago

AndrewKemendo 3y ago

>Voluntary transactions are occurring This is where discussions break down because there's broad disagreements on what is and is not considered "voluntary" - there are ethical/moral traditions that claim nothing is voluntary, while others that claim everything is. We can gain clarity by defining the opposite then: Involuntary So, what set of circumstances would be required to declare that someone is doing labor "Involuntarily?" and thus there is no "free market" for labor. For example, would you say that the person who is manually sorting trash out of recycling for <$40,000/yr [1] is doing so voluntarily? Maybe someone really loves that and wants to do it and would do it for free. That's possible but unlikely. Maybe someone made decisions such that this is the only job that they can get without moving or some other major life decision. Is that still voluntary simply because they are in that position? Assuming they aren't disabled, they can always put their things in a bag and walk to some place with more options. What of people that are disabled then? How much of what they do is voluntary? You get the point The challenge then is asking, given that there is no OBJECTIVE answer to the question of what is voluntary (Extreme example: You should be constantly trying to break out of prison, otherwise you doing what the guards tell you to is "voluntary") then "voluntary" shouldn't be a discriminator on whether society has something to say about a transaction between people. Extreme (unreasonably IMO) freemarketeers view individuals as atomic complete units and that's the end of the story. So irrespective of starting or current positions EVERYTHING is voluntary and the world is all-v-all pvp no hold barred competition. That's who is in PE and finance, so that's what you're up against. [1] https://www.talent.com/view?id=685b4384e8d6 https://www.talent.com/view?id=685b4384e8d6

sgregnt 3y ago
Volanturelly, in my mind, means that you can decide how to employ your resources as you wish (e.g., time education, capital, skills). If your resources allow you only ever a few options, like sorting garbage, you are still doing it voluntarily. If you have many resources (not necessarily material, e.g., education) this will give you more options. Your abilities are teaded agains all other ppl's abilities in a free market. There are complications to this view, but the example with sorting garbage, in my mind, is actually an easy case. Yes it is definitely voluntary.

disgruntledphd2 3y ago

Full disclosure, I don't work in finance, so I may be getting a bunch of this wrong. > Why is private equity ending up with all these resources? Because they have cash, mostly from pension funds and insurance companies. > Who is selling to them and why? The doctors running the practices, more generally they're rolling up companies in relatively dispersed industries where they believe they can make money. In the best case, this is because replicating administration across many SMEs is much less efficient than centralising it. In the worst case, it's a way to buy them companies with the cash flows of the company themselves, and pay out fat dividends while gutting the actual business. Why didn't this happen before? Really low interest rates super-charged the amount of money that PE could borrow , and helped them raise money because insurance and persion funds needed to get above premium returns which were hard to find because of said really low interest rates. Additionally, banks became much less likely to lend money since the 2008 crash (because of requirements around capital buffers) so PE was basically the only game in town. Honestly though, I think the good times are over for PE, as most of the industry (and finance in general) has been cushioned by a low interest rate world, and as debt starts to cost real money we're gonna see a _lot_ of these bets unwind. > When PE loads up a firm with supposedly unsustainable billions of debt, someone is on the other side of that transaction, lending the billions. Banks. Again, these loans are assets, and assuming that the business continues as normal and interest rates don't rise, these were OK(ish) risks. More importantly they built a bunch of relationships with the PE people, so it wasn't about any one individual loan, but rather the constant amount of deal flow.

civilized 3y ago
On the last point, interest rates aren't the only thing that matters to loans. The default rate also matters. If I borrow a billion dollars from you to pay myself and I have no good plan to pay you back, it doesn't matter how low interest rates are, you'll still be out a billion dollars.
- fencepost 3y ago
  If the business is still viable with the debt load, the bank continues to get paid on the loan but whoever owns the company doesn't get much profit. There are plenty of businesses or there that exist but don't thrive or grow, the PE sucking of vitality just moves businesses that might have thrived into that category.

fakedang 3y ago

1.) PE is enabled by easy money. If you look at the PE industry, the entire sector was enabled initially through the rise of junk bonds in the 80s, bonds so "worthless" but cheap issued by high risk companies (everyone was issuing bonds back then) with high reward for the winners - kinda like VC as an investment. In recent history, it was the ZIRP and of late money-printing. Easy money with high returns always pulls out money from more conservative investments like government bonds or blue chip stocks, and into more risk-tolerant sectors like PE and VC. 2.) Underwriting banks issue the debt for the PEs. They get paid handily, both from the constant debt payments PE firms take out of cash flow and from repeat underwriting business as investment bankers for future deals. Banks have their own ways of disposing junk debt that fails, but usually PE debt doesn't fail - the only ones being shafted are the company employees and the company itself. The management of the company, the owners and shareholders of the company, and the PE firm itself all make out of it like bandits. Nowadays, the traditional bread and butter of PE, such as leveraged buyouts, are mostly gone, with most of the returns coming from other avenues such as Real Estate (like buying up homes in Western cities), Emerging Markets and more passive investments in family/practitioner-owned businesses, like the Healthcare space.

eaenki 3y ago
how is “emerging markets” even a sector? it’s not like you can call PE buying a bond in India. so what does that even mean? do you mean that they are doing traditional LBOs in emerging markets?
- fakedang 3y ago
  So emerging market investing is quite different from normal developed market investing, simply because each dollar goes for a lot more in an emerging market. To give an example, the RJR Nabisco takeover cost KKR north of $30B in the 80s. Massively leveraged takeover that ended up flopping so hard because of the amount of debt that KKR loaded up Nabisco with. But if a PE firm were to seek a similar Emerging Market equivalent opportunity, say Ulker Biskuvi in Turkey, it would only cost it $500 million. The PE firm does not need to load the company with debt - they can simply cut costs in the company, increase cash flow and make pay from that, eventually listing/selling off the asset on the local market (on the other hand, a Nabisco relisting would have been a nightmare for banks). A similar thing is happening in India currently - Blackstone is buying up commercial real estate by the boatload in India. Expensive for local PE firms, but relatively much cheaper for Blackstone compared to buying stuff in Europe for instance.

deleted 3y ago

[deleted]

chewz 3y ago

1) NIRP and search for yield 2) Older doctors, stomatologists etc... Running an individual practice is a challenge, requires constant investment and learning and at some point in life there is an incentive of larger cash out. And why? Because as West deindustrialized potenial for profit lays in high-value services. Instead of an aluminium smelter you purchase 100 of orthodontist practices. After purchase you cut on costs, raise prices and the investment pays out rather quickly....

amelius 3y ago

> Why is private equity ending up with all these resources? Who is selling to them and why? Why didn't this happen before? It's not like PE is new. Exploiting financial loopholes is like hacking. We see more hacking these days because more people depend on these systems, and more exploits are found. Note: "hacking" can be defined as using a system in a way it was not intended to be used. Hacking is also punishable by law. PE firms and the like should not get away simply because they are following the law, as they are abusing the law in the same way as hackers abuse computer systems.

everybodyknows 3y ago

> ... someone is on the other side of that transaction, lending the billions. Who does that and why? Are they perpetual suckers, unaware of the decades of experience we have doing this? I listened to a podcast interview with a financial professional who advises public pension fund boards. What he said in all but words was that, yes, the political appointees who actually vote on decisions are perpetual suckers.

ahzhou 3y ago
Pensions are very rarely lenders. They may invest in lenders but tend to look at historical performance. Political appointees are not the ones making investment decisions. At most they are setting very broad themes. For example, political appointees are the ones that say all investments must be carbon-neutral.
- pessimizer 3y ago
  > Political appointees are not the ones making investment decisions. Political appointees are making investment decisions by choosing the people who make investment decisions.

ahzhou 3y ago

> Why is private equity ending up with all these resources? Who is selling to them and why? Why didn't this happen before? It's not like PE is new. PE as an investment strategy was pioneered by KKR in the 60's, beginning with the acquisition of family-owned businesses facing succession issues. The strategy exists because there's really poor liquidity for private companies. If you're a founder who wants to sell your stake, you either: 1. Sell to a strategic buyer 2. Sell to an individual 3. IPO 4. Sell to PE The first three options may not be always viable at a given point in time (aka illiquidity). Strategic buyers aren't always looking to buy, an individual may not have enough capital, and IPOs place a huge amount of reporting burden on a company. PE is the only reasonable exit option for a huge swath of private companies. Take a hypothetical family-owned supermarket chain with 10 locations across 3 cities in the midwest. All the kids are terrible successors. Who's going to buy it? 1. A strategic buyer, such as Walmart, may not be interested right now. 2. An individual probably doesn't have enough enough money to buy the whole thing 3. An IPO saddles the business with reporting requirements that simply don't make sense for a supermarket with only 10 locations People sell to PE because it's often the only way to exit. Almost all bootstrapped companies belong in this category. At the end of the day, PE funds are simply groups of professional investors that specialize in buying out companies. If they are poor investors or poor operators, they will tank the company. If they are good investors and good operators, they will sell the firm for a profit in the future. -------- > When PE loads up a firm with supposedly unsustainable billions of debt, someone is on the other side of that transaction, lending the billions. Who does that and why? Are they perpetual suckers, unaware of the decades of experience we have doing this? Many people offer debt, from private credit funds such as Golub Capital to bank syndicates. The best lenders are not suckers and the best PE funds almost never default. Oftentimes, the PE fund itself is collateral. PE funds that regularly default will have a difficult time finding a lender. People also misunderstand the purpose of debt. It's simple math: You want to buy a company for $100M. You can buy the entire thing with cash and sell it again after it doubles in 5 years, netting yourself $100M, giving you a 1x return. Alternatively, you can pay $20M down and borrow $80M at a 10% interest rate (simple interest for ease of calculation). When you sell it for $200M in 5 years, you net $200M - $20M - $80M * 1.5 = $60M, giving you a 3x return. Obviously, you've also increased the risk - your business must be capable of paying off an extra $8M a year in interest.

jameshart 3y ago

> someone is on the other side of that transaction, lending the billions. Who does that and why? Are they perpetual suckers, unaware of the decades of experience we have doing this? The lenders in a PE buyout are securing that loan on the assets of the purchased company. Real estate, brand names, IP, capital equipment. Their worst case scenario is that stuff all gets sold off and they get paid back from the firesale proceeds.

s1artibartfast 3y ago
If that's the case then there are no losers left holding a loss, what seems to be the problem? That's just a group of people buying a company and selling it off the assets for a profit.
- AlexandrB 3y ago
  The losers are the customers and employees of the company. When we talk about company efficiency, we generally mean ROI. But an inefficient company may be inefficient because it's providing surplus value to either its employees or its customers. When such a company is bought by PE and sold for parts, customers/employers are forced to deal with more "efficient" companies that are better at "capturing value". If you zoom out a bit stuff like this is, I think, why modern products tend towards increasing monetization, selling of data, rental instead of ownership, etc. You either treat your customer like garbage, or you get bought by PE and replaced by someone who does.

IG_Semmelweiss 3y ago

1 - why didnt this happen before? Thwre was never this much of money created in the system, and Capital was never this cheap. 2 - its usually employees, and sometimes even customers, who are non equity shareholders but long term beneficiaries of the health of the company. Workers usually are not organized well enough to repel a a saavy PE firm. But careful, in some cases, PE may be liberating a firm being sucked dry from low-productivity workers or richly paid pensioners. Its hard to know which is which unless you are diving into the details. PE is not wrong, just like unions are not wrong, but what matters is what is their management style. Parasite, or builder?

ComputerGuru 3y ago

> When PE loads up a firm with supposedly unsustainable billions of debt, someone is on the other side of that transaction, lending the billions. Who does that and why? Are they perpetual suckers, unaware of the decades of experience we have doing this? In at least some of the cases, the answer is absolute corruption with PE paying the other party “on the side” to sign off on a deal only a sucker would agree to. See for example this piece of investigative journalism into Medical Properties Trust and just how many red flags and obvious bribes were involved (not to mention potential murder to cover up their misdeeds!!): https://prospect.org/health/2023-05-23-quackonomics-medical-properties-trust/ https://prospect.org/health/2023-05-23-quackonomics-medical-...

multicast 3y ago
Wrong. Banks who provided billions in loans to PE firms for decades, are now getting more cautious. But not because they fear of a failed investment, but certain investors of the bank do and that means problem for the bank. The Banks actually don't care what happens to the company being bought. An investment bank which provides a loan never sits on its debt. They are bundled into financial products like CDO, CLO etc and sold to institutional and wealthy private investors. This bought the rise to a new ''era'' recently, where PE firms set up special investment funds to fund big acquisitions of other PE firms. The reason being the current situation of the financial markets and the general negative mood in the markets. Example with a retailer from the UK, which turned costly for the investment bank: https://www.youtube.com/watch?v=DKYKT4pvYYA&pp=ygUTZnQuY29tIGdvbGRtYSBzYWNocw%3D%3D https://www.youtube.com/watch?v=DKYKT4pvYYA&pp=ygUTZnQuY29tI...
- ComputerGuru 3y ago
  I wasn’t referring to the banks but the owners (or rather, the controllers) of the businesses that can obtain cash against the value of their property/assets or from the value of their business. These aren’t always individual loans in the hundreds of millions of dollars; the debt can be accrued piecemeal. (I’m also not talking in general but rather about certain specific cases/forms.)

boppo1 3y ago

>1. Why is private equity ending up with all these resources? Who is selling to them and why? Why didn't this happen before? It's not like PE is new. Centrally planned benchmark interest rates below market equilibrium took capital away from activities that produced value today and handed it to people who promised unrealistically optimistic future growth. Central planning doesn't work. People have gone from criticising the FOMC to openly mocking it. Google 'transitory meme'.

silencethendang 3y ago

For #2 - I'm not a PE insider, but I'm pretty aware of a lot of corporate dynamics in big tech, which increasingly seems like it's indistinguishable from any other corporate sector. I think we have a habit of thinking of companies/firms as individual actors deciding what's in their best interest, when in reality it's basically an oligarchy of either C-suite execs or boards of directors determining what's going to happen to the rest of the company. If these people want to get rich quick, and I'm guessing they do, since this is probably the end game for 99% of them, then private equity is their answer. They likely don't really care about the employees or the future of the company as an end in itself, just a means to enrich themselves, and so if PE presents this opportunity without those strings attached (i.e. by splitting the dividend recapitalization or the real estate leasebacks with the execs in the form of 'bonuses') the execs/boards will likely take it. TL;DR - PE can't exist in its current form without extreme power/ownership imbalances within the firms they take over and run into the ground. This has probably been increasing over time, hence why PE has been getting worse over time.