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> the M&A people will talk someone in the lending department into doing the deal. According to the standard narrative, lenders have been repeatedly duped into

> the M&A people will talk someone in the lending department into doing the deal. According to the standard narrative, lenders have been repeatedly duped into throwing billions into bad PE investments for decades. If you had a friend who asked for a thousand dollars every month, always promised to pay you back and never did, how long would you continue to give him a thousand dollars each month? If "talking" alone can accomplish this, I think we need to start considering the intervention of supernatural forces in these deals.

lordnacho 3y ago
It's the agency that causes the issue. And a little bit of financial engineering. Say you have a friend who often can't pay back his debts. But he can pay 80% of them. You have another friend who wants to lend to safe debtors. Why not get that safe tranche, the bottom 80%? He needs to show he's safe so he can take more risk. He loves going out to dinner with you. Another guy wants to take some risk. You give him the 20%, but you also let him into some other deals that you have, so that he doesn't always lose. In fact, it turns out this guy isn't paid on the returns, he's paid on assets managed. And he's not even going to be around that long, he'll be onto the next role long before the bond is up. And they're in a bag of other stuff anyway. Turns out you're not even the guy lending the money. You work on a transaction basis. Your next job might be as one of the friends. Or on the PE side. So you and your buddies keep skimming a bit of the money off each year, well mixed with other stuff that you are managing. Well smeared poop.
- fairity 3y ago
  Nice sounding story, but do you have a source that debt lent to PE backed companies has negative real returns, on average?
  - lordnacho 3y ago
    One of the articles linked mentioned it. I wouldn't say negative real returns, probably just worse on a risk adjusted basis.
anigbrowl 3y ago
Everyone knows fraud exists, yet fraudsters continue to flourish; they are good at leveraging new technology and tropes to rebrand themselves. Consider the frequent complaints about scammers marketing substandard products on Amazon; the issue is well understood, the markers of scammers are well identified, but Amazon does nothing about it because the lesses from disgruntled customers are less than the revenue from shapeshifting scammers.

lordnacho 3y ago

It's the agency that causes the issue. And a little bit of financial engineering. Say you have a friend who often can't pay back his debts. But he can pay 80% of them. You have another friend who wants to lend to safe debtors. Why not get that safe tranche, the bottom 80%? He needs to show he's safe so he can take more risk. He loves going out to dinner with you. Another guy wants to take some risk. You give him the 20%, but you also let him into some other deals that you have, so that he doesn't always lose. In fact, it turns out this guy isn't paid on the returns, he's paid on assets managed. And he's not even going to be around that long, he'll be onto the next role long before the bond is up. And they're in a bag of other stuff anyway. Turns out you're not even the guy lending the money. You work on a transaction basis. Your next job might be as one of the friends. Or on the PE side. So you and your buddies keep skimming a bit of the money off each year, well mixed with other stuff that you are managing. Well smeared poop.

fairity 3y ago
Nice sounding story, but do you have a source that debt lent to PE backed companies has negative real returns, on average?
- lordnacho 3y ago
  One of the articles linked mentioned it. I wouldn't say negative real returns, probably just worse on a risk adjusted basis.

anigbrowl 3y ago

Everyone knows fraud exists, yet fraudsters continue to flourish; they are good at leveraging new technology and tropes to rebrand themselves. Consider the frequent complaints about scammers marketing substandard products on Amazon; the issue is well understood, the markers of scammers are well identified, but Amazon does nothing about it because the lesses from disgruntled customers are less than the revenue from shapeshifting scammers.