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The thing about PE that confuses me, in fact it's about all finance. Why is it that a business can be bought by a PE firm, that uses the existing cash flow of

The thing about PE that confuses me, in fact it's about all finance. Why is it that a business can be bought by a PE firm, that uses the existing cash flow of the business to fund the loan repayments, but the business itself cannot get a loan to invest in new capital / buy the CEO a yacht etc? There feels like there is a missing market. There is the super safe regulated world of public corporations, where you loan MSFT your cash and they will spend it on marketing O365 or something. And there is the highly specialised one of a kind "selling it for parts" M&A. But where is the middle market where a PE firm makes an offer and the next day the business itself puts up a prospectus and is able to find enough semi-liquid capital to take the self same bet? Why is it so hard to raise funds? or ami missing something

multicast 3y ago
> that uses the existing cash flow of the business to fund the loan repayments, but the business itself cannot get a loan to invest in new capital / buy the CEO a yacht etc Loan repayment to banks and other financial institutions is the first and highest priority. During this process the company is constantly turned more efficient and profitable. If it adds value, jobs and capital in form of machines etc. is added, therefore PE firms do not only reduce employment. The goal is also to sell irrelevant jets / yachts and eliminate other expensive non-business related expenses from which often a few benefit. The goal is not to buy new yachts. In fact a PE firm is committed by contract and by incentives through own investments, to not use the company to fund lavish lifestyles. After on average 5 years the company is sold for a multiple. > But where is the middle market where a PE firm makes an offer and the next day the business itself puts up a prospectus and is able to find enough semi-liquid capital to take the self same bet? Why is it so hard to raise funds? I think I don't really get your point here. There is no infrastructure which provides businesses this option, because it does not make sense. Private businesses are often sold through investment banks, and if the desire to sell comes from the owner, then there is often a form of auction involved. Companies with a solid business are getting a very good price this way. But raising funds for an existing business and selling a business are two completely different things. You don't accept a PE firms invitation to a call, and then turn the other way to get funding and keep ownership.
bagacrap 3y ago
It's about swapping an old, ineffective management team for a new one. PE is just a loan and a new executive team in one bundle.
- lifeisstillgood 3y ago
  It's (also) this I don't get. if shareholders own enough of the company to be able to sell to PE then they own enough to be able to replace the damn management with better. That's basically the point of (active) shareholders. It seems this is an expensive way to get passive shareholders replaced with activist shareholders. it feels there is a better way.

multicast 3y ago

> that uses the existing cash flow of the business to fund the loan repayments, but the business itself cannot get a loan to invest in new capital / buy the CEO a yacht etc Loan repayment to banks and other financial institutions is the first and highest priority. During this process the company is constantly turned more efficient and profitable. If it adds value, jobs and capital in form of machines etc. is added, therefore PE firms do not only reduce employment. The goal is also to sell irrelevant jets / yachts and eliminate other expensive non-business related expenses from which often a few benefit. The goal is not to buy new yachts. In fact a PE firm is committed by contract and by incentives through own investments, to not use the company to fund lavish lifestyles. After on average 5 years the company is sold for a multiple. > But where is the middle market where a PE firm makes an offer and the next day the business itself puts up a prospectus and is able to find enough semi-liquid capital to take the self same bet? Why is it so hard to raise funds? I think I don't really get your point here. There is no infrastructure which provides businesses this option, because it does not make sense. Private businesses are often sold through investment banks, and if the desire to sell comes from the owner, then there is often a form of auction involved. Companies with a solid business are getting a very good price this way. But raising funds for an existing business and selling a business are two completely different things. You don't accept a PE firms invitation to a call, and then turn the other way to get funding and keep ownership.

bagacrap 3y ago

It's about swapping an old, ineffective management team for a new one. PE is just a loan and a new executive team in one bundle.

lifeisstillgood 3y ago
It's (also) this I don't get. if shareholders own enough of the company to be able to sell to PE then they own enough to be able to replace the damn management with better. That's basically the point of (active) shareholders. It seems this is an expensive way to get passive shareholders replaced with activist shareholders. it feels there is a better way.