21 ms·

Private equity is devouring the U.S. economy

455 points by fortran77 3y ago

robertlagrant 3y ago
This article is...not good. > One answer is that the private-equity industry is devouring them. Another is that public companies buy them and they consolidate. Another is management buyouts. Another is it's harder to run a business than it used to be, for better or worse, so they close. > One-fifth of the market has been made effectively invisible to investors, the media, and regulators. No. You still have financial regulations to follow. If you're a medical device company, you'll still have to follow those regulations. You have employment regulations. All sorts of regulations. You just don't have to follow regulations for public companies (such as "don't talk about this thing with anyone outside a list until you've announced it publically, because that would be unfair to other investors), which are expensive and onerous, nor follow the whims of the market, which can be expensive and onerous. E.g. Dell went private and the quality got a lot better.
- Joker_vD 3y ago
  Yep. "Oh no, the investors don't get reliable information about private-equity companies and so investment is way too risky" — well, then investors probably would just stop invest in them? What's the problem?
  - Panezirigilloso 3y ago
    I think you missed a good part of the article. It says that: "A private economy is one in which companies can more easily get away with wrongdoing and an economic crisis can take everyone by surprise." Its not about the investors, is about the economy, the global economy.
- edoceo 3y ago
  I see how that works for a case like Dell. I've also read about PE buying up smaller medical/dental practices and squeezing the price. Happened to my old dentist in Ballard, WA -- and dang, they pushed me for x-rays on every visit (turns out there is good margin on x-rays). Dell is still run by the OG -- these PE folks are just trying to squeeze margin. And sure, they still have to follow some regulations -- but with much less oversight when you're not public. "expensive and onerous" is not a sufficient reason to not require a business to do something. Paying employees is expensive and onerous, should that stop?
  - scarface_74 3y ago
    Why do you care if a private company has to follow financial reporting regulations? The reason that public companies have to is because the public buys shares in the company.
    - edoceo 3y ago
      For a small company, a sole-prop dentist for example -- I don't. There is not enough motivation or sophistication or dollars on the table. For PE backed conglomerates I care because they can and do hide shady things in there. There is more motivation to juke the stats; more sophistication and dollars on the table. Sadly, because these companies are not public, when their anti-consumer operations are discovered there is little news about it. That results in a situation, for example, where folk don't think there is any reason to care about the issue.
      - scarface_74 3y ago
        Again why do you care as a consumer? If they aren’t getting money from the public market and no taxpayer money, how does that affect you? Whether the company is public or private they still have to follow the relevant laws for their industry.
        edoceo 3y ago
        I care because these PE backed firms can (and do) screw the consumer (me, my family, my friends, you) and there is no visibility. Do you understand it's possible to follow the law and still use greed to screw the consumer? Are you being intentionally naive?
        scarface_74 3y ago
        I’m asking you for a specific case where a PE firm could specifically screw you and you have no choice but to be a consumer in a way a public firm couldn’t?
- onlyrealcuzzo 3y ago
  Most of this goes away when you have positive real interest rates. It makes sense to take on massive amounts of debt to buy things when you get paid to be in debt. Companies that do leveraged buyouts are going to have a good time. When money isn't free - companies that do leveraged buyouts aren't going to have as good of a time.
  - lukas099 3y ago
    Do you mean higher real interest rates? They have been positive almost all of the last 10 years. https://fred.stlouisfed.org/series/REAINTRATREARAT10Y https://fred.stlouisfed.org/series/REAINTRATREARAT10Y
    - michaelt 3y ago
      That's the interest rate for people willing to lock their money up for 10 years. Look at https://fred.stlouisfed.org/series/REAINTRATREARAT1YE https://fred.stlouisfed.org/series/REAINTRATREARAT1YE instead, the 1 year real interest rate, and it's barely been positive between 2009 and 2022.
      - lukas099 3y ago
        Oh gotcha, you’re right.
    - onlyrealcuzzo 3y ago
      My understanding is the 10-y is not relevant to venture debt or leveraged buyouts: https://www.svb.com/startup-insights/venture-debt/how-does-venture-debt-work https://www.svb.com/startup-insights/venture-debt/how-does-v... And anyway - yes - a 1% real return really only existed in a long capacity since the 2000s, since QE became main stream.
- DragonStrength 3y ago
  Did you read the full article? The majority of it is defending why public financial oversight is good. Saying the article is "not good" while ignoring its central argument to make a tangential point is not convincing.
  - robertlagrant 3y ago
    The majority of it seemed to be very cherry-picked and caveated claims, with the claims being far more prominent than the caveats. If you want to avoid boom and bust cycles and the pursuit of growth at all costs, you probably want to avoid the public markets if you can, or at least for as long as possible.
- em500 3y ago
  > This article is...not good. I agree. The opening paragraph reeks of picking numbers to fit a narrative. It states that the number of US listed public firms declined from 8000 in 1996 to 4000 today (suggesting but not explicitly claiming that a significant part has been devoured by PE), but leaves out that the valuation of the public companies in that period increased from 5T to 40T.
  - dathos 3y ago
    I’m not arguing for their suggestion. But if their logic is that this happened because of PE and those PE owning also a big chunk of those public firms, doesn’t your argument proof they are devouring a large part of the economy?
    - robertlagrant 3y ago
      Private equity by definition isn't invested in public firms.
      - paulryanrogers 3y ago
        Public firms can be partially owned by PE, hence the phrase "big chunk"
        robertlagrant 3y ago
        They can be owned by firms called "PE firms", but that's not private equity. Their shares will be treated as public shares, obeying the same rules as anything else. The article is concerned about investments that can't be measured in the public markets or regulated as public investments.
- dangus 3y ago
  You could also say “all private equity is not created equal.” I think that the common belief that private equity swoops in and sucks the company dry like a vampire is only a half-truth. The “company flipper” style private equity companies are usually buying companies that are not doing all that well in the first place. Not unlike a venture capital firm investment in a startup, private equity firms probably don’t expect 100% of their investments to pan out. The idea is to buy a struggling company for pennies on the dollar, turn it around, make a big return on that investment. However, turning around a struggling business isn’t always going to happen, and when it fails the private equity firms are perceived as vultures. A good example of a company that has done well under private equity ownership has been Popeyes. They launched their extremely popular chicken sandwich under private equity ownership. The parent company has for the most part left the strong parts of the business alone (keeping the product up to a good enough standard) while appeasing franchises’ need for more profitable operations, leading to growth in its footprint.
chollida1 3y ago
This is, IMHO, a serious problem for the markets and regular investors. Microsoft went public for a valuation of around $300M and is trading over a $1T now. This means that regular investors had a chance at all this growth. Newer companies like AirBNB and Uber went public at what could be their max market cap valuation of billions so investors wont' get much of a chance to make money from these companies. In addition to this problem of private investors(VC's) taking most of the profits, we now have such concentration of wealth that the big PE firms can buy alot of what used to be small businesses and roll them up. Vet clinics, medial practices, engineering firms, etc all use to to thrive on being 20 person shops are now routinely being bought up by PE firms and rolled into larger companies which means far fewer entrepreneurs or chances for up and coming employees to buy into the firm from the founders, which helps stall careers. Heck you see it now with these firms buying up single family housing in US cities now and then renting them back to people, transforming regular middle class people from home owners to renters, and transferring the home appreciate from the middle and lower class to the PE limited partners ensuring the rich get richer and the middle class disappears even faster.
- Joker_vD 3y ago
  > we now have such concentration of wealth thatthe big PE firms can buy alot of what used to be small businesses and roll them up. If only those small businesses could just refuse and continue operating on their own... alas.
  - scarface_74 3y ago
    Exactly. No one forces these businesses to sell. It’s the owners easiest retirement plan instead of passing them down to their kids who may not want to or have the skill set to run the family business.
    - TeMPOraL 3y ago
      Sure, no one is blaming any individual business for selling. Nor would you blame any particular drop of water for flowing downhill. Still, too much water will make a dam burst and most of the water will flood the land; too much business owners realizing their retirement plan by selling out to PEs, and everyone suffers - including those retirees.
throw0101c 3y ago
See also "The United States of Bed Bath & Beyond" from last month (raiding a company for cash and creating debt, then declaring bankruptcy): * https://news.ycombinator.com/item?id=37652479 https://news.ycombinator.com/item?id=37652479 "Bed Bath and Beyond files for bankruptcy", April 2023: * https://news.ycombinator.com/item?id=35700918 https://news.ycombinator.com/item?id=35700918
- xrd 3y ago
  Or, Toys R Us.
  - throw0101c 3y ago
    'The Toys “R” Us Bankruptcy and Private Equity': * https://www.theatlantic.com/magazine/archive/2018/07/toys-r-us-bankruptcy-private-equity/561758/ https://www.theatlantic.com/magazine/archive/2018/07/toys-r-... * https://archive.ph/OH9QF https://archive.ph/OH9QF
epups 3y ago
I have been reading a lot of criticism of PE here at HN, with similar arguments as TFA. In the case of small companies - vet offices, medical practices, etc - it is usually claimed that a PE acquisition enforces a bunch of changes that are ultimely detrimental to the end product, like quality of care. However, if that's the case, shouldn't we see non-PE companies flourish in competition? Or PE firms emerging that respect the end product at the expense of short term profits? I understand why enshittification and all these others process's occur when you have a monopoly or a large market share. I fail to see why it should not be punished by the market when applied to easily disruptable sectors.
- lordalch 3y ago
  When I moved and was looking for a new vet and dentist, I specifically asked each one about their ownership structure and didn't choose any that were owned by a PE firm.
  - badcppdev 3y ago
    This is the only solution in my opinion. Don't buy something cheap if it's from a crap company.
- Jill_the_Pill 3y ago
  >> shouldn't we see non-PE companies flourish in competition? It's seldom clear to patrons WHY things have changed. People get stuck in their habits and are hesitant to start somewhere new, particularly with things like medical services. My mom wouldn't recognize PE as the source of a problem at her doctor, dentist, vet or mechanic.
- l72 3y ago
  The problem is the PE company comes in and buys basically every vet clinic or nursing home in a city, undercutting the independents. Once the independents retire, shut down, or eventually sell, then the enshittification happens. This has been a major problem in smaller communities where there is essentially no choice in services anymore.
morninglight 3y ago
Private equity has made one-fifth of the market effectively invisible to tax collectors.
- chii 3y ago
  i dont get why being private makes you invisible to tax collectors. Taxation and ownership model are orthogonal concerns.
flint 3y ago
Sarbanes-Oxley https://www.investopedia.com/terms/s/sarbanesoxleyact.asp https://www.investopedia.com/terms/s/sarbanesoxleyact.asp
TehShrike 3y ago
This article seems to be stretching really hard to find any way to connect private equity with "bad things". I found the "private companies are kind of like public companies pre-1929-stock-market-crash" take to be particularly incoherent. There might be a good steel-man argument for "privately owned companies are bad", but this article doesn't look like it.
- deepsquirrelnet 3y ago
  I think the mistake is to assume that all private equity is bad. I’m sure there are good examples of what PE can do well. But for all of the consternation here about declining journalism quality, the things PE has done to local new sources is an abomination. If you’re not aware of the part they are playing, you owe yourself a bit of education.
  - TehShrike 3y ago
    I'm open to that education, what do you recommend I read?
    - deepsquirrelnet 3y ago
      I’ve been watching the saga for years since Alden took over the Denver Post, and their conglomerates bought the local newspapers in all directions from my town, eliminated the local offices and journalists and consolidated them into one office with a skeleton crew staff that no longer publishes much local content. But my emotionalism about that aside, I think this study does a really good job of explaining what’s going on: https://www.nber.org/system/files/working_papers/w29743/w29743.pdf https://www.nber.org/system/files/working_papers/w29743/w297...
  - x3n0ph3n3 3y ago
    SpaceX is a great example of what PE can do.
aurizon 3y ago
Dentists, vets etc are being bought up and added to a corporate front. As long as there is a token vet/dentist as a corporate officer, they can roll up 1000 practices. Vet/dental fees have been going up 15-20% annually for 6-7 years. A large amount of 'granular' billing is occurring. The days when you took a pet for a vaccination for $30 are gone. Now you have a billed office visit, a billed examination fee and the vaccination fee = over $120 in all. Large numbers of people take their chances and allow their pets to live unvaccinated or even die painful deaths. All due to the monopolies these managed corporate practices enforce. I expect a lot of human medical concentration also occurs. To be true, the thicket of insurance paper work engendered by the intersection of the AMA, Big Insuro, big Pharma, and big Hospo are part of why Americans have the same (on average) age at death as Cuba, 30-35 places down the list of longevity as listed by wiki https://en.wikipedia.org/wiki/List_of_countries_by_life_expectancy https://en.wikipedia.org/wiki/List_of_countries_by_life_expe...
- baby_souffle 3y ago
  Is there a formal way to confirm if a practice has been bought out?
  - aurizon 3y ago
    Examine the receipt, there should be some details about LLC, Ltd, Corp or Inc that can be accessed online for provenance details?
JumpinJack_Cash 3y ago
This is the sort of stuff that happens when you entrust your savings to someone else. Some 2000 firms and CIOs are doing the capital allocation which should be done by 350M people, many of them have been brainwashed or forced to part with their hard earned money using the lie that they are too inept to save and invest on their own. Private Equity is an industry that is only standing thanks to investments from pension funds which act as their LPs.
no_wizard 3y ago
One critical thing to think about here: Often (though not exclusively always) PE firms are backed by leveraging debt to rollup up companies. This creates a big cycle of: - Acquiring massive debt against the new rollup entity - Using that debt for short term expansion, maybe even subsidizing the business model in some cases - Payouts to executives at the PE firms. There are instances where larger PE firms actually borrow from themselves via another entity so the debt payback goes solely to the PE firm under favorable terms to the PE firm. - Then, squeezing as much of the market as possible to service this debt via localized monopolies and/or cost cutting measures. Typically higher prices and worse service follows in short order - Finally, if they can't continue to service the debt, the debt, since being held by the new entity and not the PE firm directly, the entity declares bankruptcy to restructure the debt (or in some cases, absolve it entirely) PE firms can then rinse and repeat on this, over and over again, with little oversight or repercussions. Sometimes I feel like I'm in the wrong business
- alexpetralia 3y ago
  And who is on the losing end in the bankruptcy? Who keeps underwriting these deals? It used to be syndicated bank loans (often repackaged into CLOs), but now it is jumbo private credit funds. The banks ended up losing (which is why they are retrenching from this space), but I don't believe private credit is (yet). https://www.ft.com/content/8962a5cc-2c4c-4e18-801c-9ad4e342f1fd https://www.ft.com/content/8962a5cc-2c4c-4e18-801c-9ad4e342f... https://www.wsj.com/finance/fed-rate-hikes-lending-banks-hedge-funds-896cb20b?mod=mhp https://www.wsj.com/finance/fed-rate-hikes-lending-banks-hed...
- renewiltord 3y ago
  So there's a bunch of sucker lenders here who are giving money away. That's fine, I suppose, so long as the sucker lenders aren't governments and their banks.
robust-cactus 3y ago
The praise for the public market in this article is a little disingenuous. Yes it has some nice properties but it's also a mess: 1. Algorithmic trading and the rules by which the big organizations play in the market make it rough for both companies and individuals 2. Margin trading seems to be making company stoke prices way more volatile 3. Overall corporations constant need to appease the shareholders (aka maximize profits) by law causes them to act like sociopaths at times.
smeeth 3y ago
I've seen a lot of lamentation about PE eating the world, but very few people discuss *why* PE got so huge. PE is popular for one reason and one reason only: taxes. PE generally makes money on a trade called a leveraged buyout (LBO), where they take out a massive loan to buy a company. Because interest on debt is tax-deductible, going debt-heavy increases the take-home profits of the company (this is called a "tax shield"). Because the profits are higher, the value of the company is higher, and the PE firm makes money on their trade. What this means in practice is that if you run your company sustainably (low debt, lots of assets). You become a target for a PE firm to attempt a hostile takeover of the company, all while claiming (defensibly, actually) to be doing whats in the best interest of the shareholders. So good companies will try to ward off these attacks by taking on lots of debt and going asset light to minimize the value gain a PE firm might have. In short, both PE ownership and the brittle, debt-heavy nature of the American economy today can be traced to the tax advantaged nature of debt. For reasons I can't quite understand, nobody seems to be advocating for revoking this tax deduction. I can only surmise this is because everyone hates taxes. Thank you for coming to my TED talk, your take home exam is a short essay on what you think the mortgage interest tax deduction (started in 1913) did to household debt.
- onlyrealcuzzo 3y ago
  > For reasons I can't quite understand, nobody seems to be advocating for revoking this tax deduction. Why can you not understand why the US would prefer people to be invested in the future of the US? That's essentially what putting your money into US debt means. You are in the interest of the US not exploding in the middle of the night. I do think that the typical 90% debt to 10% equity LBO ratio is toxic and should be regulated down. I can see this incentivizing the types that would put in 10M now to get 100M now - spending that on coke & hookers now, and then hoping the US collapses and they don't have to pay anything back.
  - pjmorris 3y ago
    > Why can you not understand why the US would prefer people to be invested in the future of the US? I can understand investing in the future of the US. I add an interest in investing in the present of the US, e.g. wages that support the consumption needs of the populace, including but not limited to food, shelter, health care, and education.
j7ake 3y ago
Also many retail investors are passive, relying on ETFs. This means private companies take all the profits, and when there is sign of trouble, can dump their stock to the stock market, get it bundled into an ETF, and a passive retail investor will buy some through their monthly contributes to a popular ETF.
RobotToaster 3y ago
Isn't capitalism great?
- x3n0ph3n3 3y ago
  Unironically, yes.
hartator 3y ago
I wonder how it affects a BogleHead strategy to retirement. If the Sp500 (VOO, or VTI, VT) is less and less representative of the U.S. market, there is a case to be made that it's becoming disconnected more and more of the "real" economy. This is kind of undermining BogleHead strategy to just buy the full market as the full market is less and less accessible.
nintendo1889 3y ago
Buy bitcoin and forget the debt, if possible. Preach to the next generation do not go to school (public school is marxist-originated gov't propaganda at it's core; if not then why does the law require you to go to school in some areas), do not acquire debt. Learn real skills and trades. Tune in, turn on, and drop out. I was home schooled until 4th grade. I finished my schoolwork in 2 hours and then played outside and read the encyclopedia the rest of the day.
slotrans 3y ago
Hard to believe there are ZERO mentions of Sarbanes-Oxley in this whole article.
jmyeet 3y ago
This is the private equity model: 1. Borrow a lot of money; 2. Buy some company that is somehow deemed "cheap"; 3. Cut costs and raise prices; 4. Load up the company with arcane debt that will blow up some time after the PE investors have cashed out; and 5. Based on the surface-level financials from (3), re-list the company to exit before it blows up. I'm not worried about PE because this isn't sustainable, for two reasons: if debt isn't cheap, it doesn't work and the debt burden only works so long as the SEC doesn't take a hard look at it. Remember the investors have to be able to cash out and pay back those loans. If no one buys the junk they create then this business model falls apart. I'm more concerned with the short to medium term effects of this such as the extortion of housing of our poorest and most vulnerable [1] (which people should absolutely go to prison for), buying up all your local vet clinics [2] and buying up medical practices [3], to name a few. All of this is just rent-seeking. This is what capitalism is. This is what capitalism does. It's the only thing capitalism does: intermedidation and rent-seeking. [1]: https://www.newyorker.com/magazine/2021/03/15/what-happens-when-investment-firms-acquire-trailer-parks https://www.newyorker.com/magazine/2021/03/15/what-happens-w... [2]: https://www.thenation.com/article/economy/private-equity-pets-veterinarian/ https://www.thenation.com/article/economy/private-equity-pet... [3]: https://www.nytimes.com/2023/07/10/upshot/private-equity-doctors-offices.html https://www.nytimes.com/2023/07/10/upshot/private-equity-doc...
braza 3y ago
One forgotten aspect of this PE taking over established businesses is that are the employees. I saw some cases where the company gave stock options for employees and kept everyone hanging due to a promise of an IPO and when the whole thing scrubs, the founders sells to the PE and the first measure is to expire all the options from the employee pool [1]. Honestly I think the whole thing about options with the rise of PE and this brutal aspect to get best financial resources is over for any person joining wanting to have a more outsized exit. [1] - https://news.ycombinator.com/item?id=28561054 https://news.ycombinator.com/item?id=28561054
sam345 3y ago
Compliance costs and exposure to political risk is the primary driver of going or staying private in the US. A company immediately becomes a target for governmental and NGO political pressures once it becomes public. Now it no longer can focus on designing, producing, and selling the best products and services at a good profit for its shareholders, it must devote a substantial percentage of its efforts on hiring lawyers, PR specialists, and lobbyists. More recently the SEC has morphed from an agency whose primary goal was transparency of investment risk, to a cudgel for enforcing preferred political goals. Nobody wants a target on their back if they can avoid it. A company only goes public when it has no choice when it runs out of investors or shareholders need liquidity. Pretty ironic IMO that same voices that identified public corporations as the enemy are now lamenting their demise.
cushpush 3y ago
Nursing homes and care centers suffer tremendously in the shift to private equity holdings. Corners cut, costs cut, staff released, everything is a skeleton crew, and then they want you to bring Grandma in..
Damogran6 3y ago
Retirement is 8-10 away. I was considering 'do I own my home outright' or do I 'buy a new home with a mortgage I never expect to fully pay off' This kind of BS makes me think owning the property would be safe, so I don't wake up one morning with a mortgage I can't pay.
typedef_struct 3y ago
Working as intended
happyjack 3y ago
After reading Thomas Piketty's theories on "Capital in the 21st Century," a lot of these issues have really come to light. Capital grows about 2-4% each year in real terms, while the economy (labor) in general grows 1-2%. i.e. if you own stuff (shares of companies, property (real or intangible), land, etc. etc.) your worth grow twice that of a working person. Compounded over 60 years (time after WW2), capital has grown ~100% more than labor. There is real generational wealth in America & the rest of the OECD world, and this wealth is growing at absurd rates. I'm not to lobby or claim that I have a solution or that wealth should be distributed. All I'm saying is there is a giant monkey in the room. And this isn't just and Elon or Bezos or Ivy League elite problem. There are even small $1-$10M blue collar businesses that no one could possibly start today even if you had the skills & knowledge with how money it would take to buy equipment, have a shop space / real estate, cash burn in the first few years, etc. I do think it is worrisome that businesses and its capital are largely going private. Public companies have much more scrutiny with the SEC, big labor, and has more checks & balances. It's also a vehicle for normal folks to invest money into a retirement plan; you can throw tens of thousands of dollars and actually own parts of major companies. I also think the economy of scale for PE is very worrisome. Many folks here have talked about Vet clinics, medical clinics, etc. When PE gets together, they can buy buy buy and bleed bleed bleed money until the competition is out, and then they can jack up prices to make the difference up. Thoughts / 2 cents.
- kwere 3y ago
  A solution to this situation could be to force structured businesses with a certain base of revenues and employees to freely allow their employees to invest in the company and sell those shares in a public secondary market. Most countries have already complex accountacy regulations and public registries even for smaller businesses.
  - happyjack 3y ago
    What size, though? Are we talking 10 employees, 1000? Just curious.
    - 3y ago
gamblor956 3y ago
I used to have a number of private equity clients when I was still working at a firm. Private equity's business model is to profit from the destruction of people's livelihoods. PE partners are the most immoral people I have ever met (and for comparison, I used to work as a public defender representing murderers and sex offenders). If they could make a dollar by murdering a baby, most of them would do it with a smile. Yes, there are the occasional accidental success stories like Staples. But they overwhelming majority of PE stories are viable companies being ripped apart for their "valuable assets" or saddled with crushing debt to fund the acquisition of the company and/or dividend payouts to their new PE owners.
onewheeltom 3y ago
Because stock market “show a short term profit” every quarter is insane. The rationality of a 2 year old on cocaine (as I was told).
zeruch 3y ago
PE could be "fixed" with one simple change, make them fiduciaries all the way down. (I mean, it would likely also nuke the PE domain, but I consider that a feature not a bug). PE is a pox that focuses on short-term, debt-riddled 3 card monty games, and should be annihilated. It's like the fecal byproduct of something Milken and Gekko would sire.
philip1209 3y ago
In the US, it's easier to get a loan to buy a business than it is to get a loan to start a business. That tells you all you need to know.
- Loocid 3y ago
  That makes sense though. An existing business is a known quantity where is a new business isn't. It's easier to assess the risk of something that already exists.
  - philip1209 3y ago
    Sure. Then, the system becomes unbalanced - with lots of capital chasing fewer deals. Companies become overpriced generally. And, I think that can lead to an issue.
bandyaboot 3y ago
> When a private-equity fund buys a publicly traded company, it takes the company private—hence the name. (If the company has not yet gone public, the acquisition keeps that from happening.) This gives the fund total control, which in theory allows it to find ways to boost profits so that it can sell the company for a big payday a few years later. Concentration of wealth at the very top driving further concentration of wealth to the very top.
rednerrus 3y ago
Change the tax structure to encourage businesses to pay a dividend and this will correct itself.
chrisgd 3y ago
I wouldn’t worry too much about it. With more and more investors having the opportunity to get 5% almost risk free from US treasuries, PE will slowly fade back. The roll up strategy of medical clinics is especially risky now that many of these are trading at 11% interest rates. When ebitda margins are usually 30% when perfect, it doesn’t give you a lot of breathing room.
dehrmann 3y ago
This article is pretty late to the party. PE was fueled by low interest rates, so at this point, I wouldn't be surprised if it's in decline.
29athrowaway 3y ago
Just a friendly reminder: you can barter and trade. You don't have to use currency for everything.
- keiferski 3y ago
  I have been waiting for an online marketplace site that uses bartering. Sort of an eBay with advanced tech that can figure out a complex trade between multiple people without resorting to currency. Do you know if that exists?
  - 29athrowaway 3y ago
    There are bartering apps but naturally since they cannot take a share of what is being traded (no currency involved), they do not have money for ads like marketplaces do.
andy_ppp 3y ago
If we take out growth from companies like future Apples and Googles and this growth goes into private markets, does the old adage that an index tracker is the simplest way to build wealth just go out of the window?
arb-spreads 3y ago
This is an unsurprisingly terrible article. If anything, venture capital is more responsible for a lack of IPOs. At one point, there were over a thousand unicorns that had no reason to go public. Multiple series of fundraising rounds between venture capital and growth equity firms have enabled companies like Bytedance, SpaceX, and Stripe to grow into companies worth hundreds of billions of dollars with minimal pressure to go public. Additionally, excessive regulation has seriously hampered IPOs. Expensive disclosures - for both investors and companies - makes being private far more compelling. Not to mention the fact that many private companies are sketchy and overvalued. Public markets incentivize market participates to root out fraud in order to more accurately value businesses. Deep capital markets are one of the many strengths of the United States. To enable individual investors to invest in the next Apple, Microsoft, or Nvidia, the onus is on petty government bureaucrats to make it 10x easier to go public. Over the last few decades, it has instead become 10x more difficult and expensive.
semilattice 3y ago
US equities market for retail investors are riddled with sharks taking the retail investors money left-and-right. From high frequency traders, to the fund managers, to money managers, to Jim Cramer-style filth marketing stock picks. Hoping that investing in US equity markets as a retail investors, will bring you same benefits as it did for folks in '60s, 80s and 90s -- is being delusional, and lacking critical thinking. The US institutions that supposedly provide a system of checks and balances, and a form of judicial and executive branch oversight, had long been gone. We are now in the era of corruption, selective outrage, a system of sabotage/entrapment-of-opposition/spying and executive-level incompetence across most of the institutions that are supposed to provide businesses with a level-playing-fields, and consumers with trust/confidence on those businesses.
infecto 3y ago
This will probably get lost but it took me a moment to think about it. Its not just PE eating the U.S. economy. It is also U.S. consumers eating the economy. Consumers are a complete PITA these days. Hard to manage, tons of complaints, looking for the cheapest X. I say this because while I agree there are a lot of movements in the past 2 decades on PE and other investments swallowing up shops, its not always as clear that its the big bad finance guys ruining America. We have small-medium business owners aging out, in a lot of cases no clear succession to the business line and they sell out. It can be a real pain these days to run a business, you not only have to offer the best service, the best product but have to do so at the best price while also managing your PR to identify any attacks that may hurt your business. I can see why people sell out given the opportunity.
chung8123 3y ago
I feel like if a wealth tax gains traction we are headed to a lot more companies being owned privately since you can control valuation easier and you will be able to make sure valuations don't get ahead of revenue.
impressthenet 3y ago
This explanation covers why this sort of activity seems inevitable: https://pudding.cool/2022/12/yard-sale/ https://pudding.cool/2022/12/yard-sale/
andrewjl 3y ago
How much of this will end being a ZIRP phenomenon? The article does cover the implications of rising interest rates towards the end. > Meanwhile, interest rates have reached a 20-year high, posing a direct threat to private equity’s debt-heavy business model. In response, many private-equity funds have migrated toward even riskier forms of backroom financing. Many of these involve taking on even more debt on the assumption that market conditions will soon improve enough to restore profitability. If that doesn’t happen—and many of these big deals fail—the implications could be massive. For anyone interested in the nuts and bolts of how private equity works I highly recommend the 50X podcast[1] which covers how a firm focusing on buying out aircraft component suppliers operates. [1] https://www.50xpodcast.com https://www.50xpodcast.com
- ramesh31 3y ago
  >How much of this will end being a ZIRP phenomenon? A lot, given that private equity operates on a debt driven M&A strategy. But don't expect the consolidation to slow down. They will just squeeze their businesses and customers that much harder.
  - nine_zeros 3y ago
    > A lot, given that private equity operates on a debt driven M&A strategy. But don't expect the consolidation to slow down. They will just squeeze their businesses and customers that much harder. This. The likely outcome is a deterioration of the companies. The deterioration will be felt by employees and customers both. This is the only way PE will be able to recoup any high interest debt they take on.
  - andrewjl 3y ago
    I don't doubt that will happen but how does that translate to sustainable, as opposed to short-term, earnings?
    - ramesh31 3y ago
      >I don't doubt that will happen but how does that translate to sustainable, as opposed to short-term, earnings? It doesn't. The PE playbook is to find distressed businesses with solid brand power, milk them dry until there's nothing left, and then sell off or liquidate the remnants. They function more or less as garbage collection for the economy.
rrrix1 3y ago
This would have been better if you posted it on Halloween, all doom and gloom, demons, monsters and hedge fund managers... shiver Anyways. As usual, finding that regulation sweet spot is clearly still as hard as ever. Less regulation is better than more regulation, until it's not. Although, in situations like this, I feel like having too much is better than not enough.
- smolder 3y ago
  It's not the amount of regulation that matters, it's the intent. Is it written to benefit a greater good, or written to benefit a political party's benefactor? The same applies to removing regulations. Where did the intent lie? New regulation and repeal are most often shades of grey --bad mixed with good in terms of overall consequences, disproportionately helping a few at some expense to the many. That's what happens when minority interests with a lot of money are overrepresented in government, lobbyists write bills, etc.
glimshe 3y ago
There is nothing wrong with private companies. A lot of family businesses are private. I understand that private equity investment companies controlling a lot of businesses might not be a great thing, but let's not demonize private ownership.
- darth_avocado 3y ago
  These are not your “mom and pop” private businesses, these are “billions of dollars at disposal” businesses. And the central point isn’t their existence, the point is their operation with little oversight in a way that hollows out industries and harms consumers.
  - glimshe 3y ago
    I wasn't talking about mom and pop businesses. There are many large private companies which are owned by families or individuals. One thing these companies can do which public companies can't is to think longer term and ignore the pressure of quarterly reporting and institutional investors. We can't stereotype all medium and large private businesses as doing the bidding of private equity investment companies.
truth777 3y ago
[dead]

455 points by fortran77 3y ago

This article is...not good. > One answer is that the private-equity industry is devouring them. Another is that public companies buy them and they consolidate. Another is management buyouts. Another is it's harder to run a business than it used to be, for better or worse, so they close. > One-fifth of the market has been made effectively invisible to investors, the media, and regulators. No. You still have financial regulations to follow. If you're a medical device company, you'll still have to follow those regulations. You have employment regulations. All sorts of regulations. You just don't have to follow regulations for public companies (such as "don't talk about this thing with anyone outside a list until you've announced it publically, because that would be unfair to other investors), which are expensive and onerous, nor follow the whims of the market, which can be expensive and onerous. E.g. Dell went private and the quality got a lot better.

Joker_vD 3y ago
Yep. "Oh no, the investors don't get reliable information about private-equity companies and so investment is way too risky" — well, then investors probably would just stop invest in them? What's the problem?
- Panezirigilloso 3y ago
  I think you missed a good part of the article. It says that: "A private economy is one in which companies can more easily get away with wrongdoing and an economic crisis can take everyone by surprise." Its not about the investors, is about the economy, the global economy.
edoceo 3y ago
I see how that works for a case like Dell. I've also read about PE buying up smaller medical/dental practices and squeezing the price. Happened to my old dentist in Ballard, WA -- and dang, they pushed me for x-rays on every visit (turns out there is good margin on x-rays). Dell is still run by the OG -- these PE folks are just trying to squeeze margin. And sure, they still have to follow some regulations -- but with much less oversight when you're not public. "expensive and onerous" is not a sufficient reason to not require a business to do something. Paying employees is expensive and onerous, should that stop?
- scarface_74 3y ago
  Why do you care if a private company has to follow financial reporting regulations? The reason that public companies have to is because the public buys shares in the company.
  - edoceo 3y ago
    For a small company, a sole-prop dentist for example -- I don't. There is not enough motivation or sophistication or dollars on the table. For PE backed conglomerates I care because they can and do hide shady things in there. There is more motivation to juke the stats; more sophistication and dollars on the table. Sadly, because these companies are not public, when their anti-consumer operations are discovered there is little news about it. That results in a situation, for example, where folk don't think there is any reason to care about the issue.
    - scarface_74 3y ago
      Again why do you care as a consumer? If they aren’t getting money from the public market and no taxpayer money, how does that affect you? Whether the company is public or private they still have to follow the relevant laws for their industry.
      - edoceo 3y ago
        I care because these PE backed firms can (and do) screw the consumer (me, my family, my friends, you) and there is no visibility. Do you understand it's possible to follow the law and still use greed to screw the consumer? Are you being intentionally naive?
        scarface_74 3y ago
        I’m asking you for a specific case where a PE firm could specifically screw you and you have no choice but to be a consumer in a way a public firm couldn’t?
onlyrealcuzzo 3y ago
Most of this goes away when you have positive real interest rates. It makes sense to take on massive amounts of debt to buy things when you get paid to be in debt. Companies that do leveraged buyouts are going to have a good time. When money isn't free - companies that do leveraged buyouts aren't going to have as good of a time.
- lukas099 3y ago
  Do you mean higher real interest rates? They have been positive almost all of the last 10 years. https://fred.stlouisfed.org/series/REAINTRATREARAT10Y https://fred.stlouisfed.org/series/REAINTRATREARAT10Y
  - michaelt 3y ago
    That's the interest rate for people willing to lock their money up for 10 years. Look at https://fred.stlouisfed.org/series/REAINTRATREARAT1YE https://fred.stlouisfed.org/series/REAINTRATREARAT1YE instead, the 1 year real interest rate, and it's barely been positive between 2009 and 2022.
    - lukas099 3y ago
      Oh gotcha, you’re right.
  - onlyrealcuzzo 3y ago
    My understanding is the 10-y is not relevant to venture debt or leveraged buyouts: https://www.svb.com/startup-insights/venture-debt/how-does-venture-debt-work https://www.svb.com/startup-insights/venture-debt/how-does-v... And anyway - yes - a 1% real return really only existed in a long capacity since the 2000s, since QE became main stream.
DragonStrength 3y ago
Did you read the full article? The majority of it is defending why public financial oversight is good. Saying the article is "not good" while ignoring its central argument to make a tangential point is not convincing.
- robertlagrant 3y ago
  The majority of it seemed to be very cherry-picked and caveated claims, with the claims being far more prominent than the caveats. If you want to avoid boom and bust cycles and the pursuit of growth at all costs, you probably want to avoid the public markets if you can, or at least for as long as possible.
em500 3y ago
> This article is...not good. I agree. The opening paragraph reeks of picking numbers to fit a narrative. It states that the number of US listed public firms declined from 8000 in 1996 to 4000 today (suggesting but not explicitly claiming that a significant part has been devoured by PE), but leaves out that the valuation of the public companies in that period increased from 5T to 40T.
- dathos 3y ago
  I’m not arguing for their suggestion. But if their logic is that this happened because of PE and those PE owning also a big chunk of those public firms, doesn’t your argument proof they are devouring a large part of the economy?
  - robertlagrant 3y ago
    Private equity by definition isn't invested in public firms.
    - paulryanrogers 3y ago
      Public firms can be partially owned by PE, hence the phrase "big chunk"
      - robertlagrant 3y ago
        They can be owned by firms called "PE firms", but that's not private equity. Their shares will be treated as public shares, obeying the same rules as anything else. The article is concerned about investments that can't be measured in the public markets or regulated as public investments.
dangus 3y ago
You could also say “all private equity is not created equal.” I think that the common belief that private equity swoops in and sucks the company dry like a vampire is only a half-truth. The “company flipper” style private equity companies are usually buying companies that are not doing all that well in the first place. Not unlike a venture capital firm investment in a startup, private equity firms probably don’t expect 100% of their investments to pan out. The idea is to buy a struggling company for pennies on the dollar, turn it around, make a big return on that investment. However, turning around a struggling business isn’t always going to happen, and when it fails the private equity firms are perceived as vultures. A good example of a company that has done well under private equity ownership has been Popeyes. They launched their extremely popular chicken sandwich under private equity ownership. The parent company has for the most part left the strong parts of the business alone (keeping the product up to a good enough standard) while appeasing franchises’ need for more profitable operations, leading to growth in its footprint.

chollida1 3y ago

This is, IMHO, a serious problem for the markets and regular investors. Microsoft went public for a valuation of around $300M and is trading over a $1T now. This means that regular investors had a chance at all this growth. Newer companies like AirBNB and Uber went public at what could be their max market cap valuation of billions so investors wont' get much of a chance to make money from these companies. In addition to this problem of private investors(VC's) taking most of the profits, we now have such concentration of wealth that the big PE firms can buy alot of what used to be small businesses and roll them up. Vet clinics, medial practices, engineering firms, etc all use to to thrive on being 20 person shops are now routinely being bought up by PE firms and rolled into larger companies which means far fewer entrepreneurs or chances for up and coming employees to buy into the firm from the founders, which helps stall careers. Heck you see it now with these firms buying up single family housing in US cities now and then renting them back to people, transforming regular middle class people from home owners to renters, and transferring the home appreciate from the middle and lower class to the PE limited partners ensuring the rich get richer and the middle class disappears even faster.

Joker_vD 3y ago
> we now have such concentration of wealth thatthe big PE firms can buy alot of what used to be small businesses and roll them up. If only those small businesses could just refuse and continue operating on their own... alas.
- scarface_74 3y ago
  Exactly. No one forces these businesses to sell. It’s the owners easiest retirement plan instead of passing them down to their kids who may not want to or have the skill set to run the family business.
  - TeMPOraL 3y ago
    Sure, no one is blaming any individual business for selling. Nor would you blame any particular drop of water for flowing downhill. Still, too much water will make a dam burst and most of the water will flood the land; too much business owners realizing their retirement plan by selling out to PEs, and everyone suffers - including those retirees.

throw0101c 3y ago

See also "The United States of Bed Bath & Beyond" from last month (raiding a company for cash and creating debt, then declaring bankruptcy): * https://news.ycombinator.com/item?id=37652479 https://news.ycombinator.com/item?id=37652479 "Bed Bath and Beyond files for bankruptcy", April 2023: * https://news.ycombinator.com/item?id=35700918 https://news.ycombinator.com/item?id=35700918

xrd 3y ago
Or, Toys R Us.
- throw0101c 3y ago
  'The Toys “R” Us Bankruptcy and Private Equity': * https://www.theatlantic.com/magazine/archive/2018/07/toys-r-us-bankruptcy-private-equity/561758/ https://www.theatlantic.com/magazine/archive/2018/07/toys-r-... * https://archive.ph/OH9QF https://archive.ph/OH9QF

epups 3y ago

I have been reading a lot of criticism of PE here at HN, with similar arguments as TFA. In the case of small companies - vet offices, medical practices, etc - it is usually claimed that a PE acquisition enforces a bunch of changes that are ultimely detrimental to the end product, like quality of care. However, if that's the case, shouldn't we see non-PE companies flourish in competition? Or PE firms emerging that respect the end product at the expense of short term profits? I understand why enshittification and all these others process's occur when you have a monopoly or a large market share. I fail to see why it should not be punished by the market when applied to easily disruptable sectors.

lordalch 3y ago
When I moved and was looking for a new vet and dentist, I specifically asked each one about their ownership structure and didn't choose any that were owned by a PE firm.
- badcppdev 3y ago
  This is the only solution in my opinion. Don't buy something cheap if it's from a crap company.
Jill_the_Pill 3y ago
>> shouldn't we see non-PE companies flourish in competition? It's seldom clear to patrons WHY things have changed. People get stuck in their habits and are hesitant to start somewhere new, particularly with things like medical services. My mom wouldn't recognize PE as the source of a problem at her doctor, dentist, vet or mechanic.
l72 3y ago
The problem is the PE company comes in and buys basically every vet clinic or nursing home in a city, undercutting the independents. Once the independents retire, shut down, or eventually sell, then the enshittification happens. This has been a major problem in smaller communities where there is essentially no choice in services anymore.

morninglight 3y ago

Private equity has made one-fifth of the market effectively invisible to tax collectors.

chii 3y ago
i dont get why being private makes you invisible to tax collectors. Taxation and ownership model are orthogonal concerns.

flint 3y ago

Sarbanes-Oxley https://www.investopedia.com/terms/s/sarbanesoxleyact.asp https://www.investopedia.com/terms/s/sarbanesoxleyact.asp

TehShrike 3y ago

This article seems to be stretching really hard to find any way to connect private equity with "bad things". I found the "private companies are kind of like public companies pre-1929-stock-market-crash" take to be particularly incoherent. There might be a good steel-man argument for "privately owned companies are bad", but this article doesn't look like it.

deepsquirrelnet 3y ago
I think the mistake is to assume that all private equity is bad. I’m sure there are good examples of what PE can do well. But for all of the consternation here about declining journalism quality, the things PE has done to local new sources is an abomination. If you’re not aware of the part they are playing, you owe yourself a bit of education.
- TehShrike 3y ago
  I'm open to that education, what do you recommend I read?
  - deepsquirrelnet 3y ago
    I’ve been watching the saga for years since Alden took over the Denver Post, and their conglomerates bought the local newspapers in all directions from my town, eliminated the local offices and journalists and consolidated them into one office with a skeleton crew staff that no longer publishes much local content. But my emotionalism about that aside, I think this study does a really good job of explaining what’s going on: https://www.nber.org/system/files/working_papers/w29743/w29743.pdf https://www.nber.org/system/files/working_papers/w29743/w297...
- x3n0ph3n3 3y ago
  SpaceX is a great example of what PE can do.

aurizon 3y ago

Dentists, vets etc are being bought up and added to a corporate front. As long as there is a token vet/dentist as a corporate officer, they can roll up 1000 practices. Vet/dental fees have been going up 15-20% annually for 6-7 years. A large amount of 'granular' billing is occurring. The days when you took a pet for a vaccination for $30 are gone. Now you have a billed office visit, a billed examination fee and the vaccination fee = over $120 in all. Large numbers of people take their chances and allow their pets to live unvaccinated or even die painful deaths. All due to the monopolies these managed corporate practices enforce. I expect a lot of human medical concentration also occurs. To be true, the thicket of insurance paper work engendered by the intersection of the AMA, Big Insuro, big Pharma, and big Hospo are part of why Americans have the same (on average) age at death as Cuba, 30-35 places down the list of longevity as listed by wiki https://en.wikipedia.org/wiki/List_of_countries_by_life_expectancy https://en.wikipedia.org/wiki/List_of_countries_by_life_expe...

baby_souffle 3y ago
Is there a formal way to confirm if a practice has been bought out?
- aurizon 3y ago
  Examine the receipt, there should be some details about LLC, Ltd, Corp or Inc that can be accessed online for provenance details?

JumpinJack_Cash 3y ago

This is the sort of stuff that happens when you entrust your savings to someone else. Some 2000 firms and CIOs are doing the capital allocation which should be done by 350M people, many of them have been brainwashed or forced to part with their hard earned money using the lie that they are too inept to save and invest on their own. Private Equity is an industry that is only standing thanks to investments from pension funds which act as their LPs.

no_wizard 3y ago

One critical thing to think about here: Often (though not exclusively always) PE firms are backed by leveraging debt to rollup up companies. This creates a big cycle of: - Acquiring massive debt against the new rollup entity - Using that debt for short term expansion, maybe even subsidizing the business model in some cases - Payouts to executives at the PE firms. There are instances where larger PE firms actually borrow from themselves via another entity so the debt payback goes solely to the PE firm under favorable terms to the PE firm. - Then, squeezing as much of the market as possible to service this debt via localized monopolies and/or cost cutting measures. Typically higher prices and worse service follows in short order - Finally, if they can't continue to service the debt, the debt, since being held by the new entity and not the PE firm directly, the entity declares bankruptcy to restructure the debt (or in some cases, absolve it entirely) PE firms can then rinse and repeat on this, over and over again, with little oversight or repercussions. Sometimes I feel like I'm in the wrong business

alexpetralia 3y ago
And who is on the losing end in the bankruptcy? Who keeps underwriting these deals? It used to be syndicated bank loans (often repackaged into CLOs), but now it is jumbo private credit funds. The banks ended up losing (which is why they are retrenching from this space), but I don't believe private credit is (yet). https://www.ft.com/content/8962a5cc-2c4c-4e18-801c-9ad4e342f1fd https://www.ft.com/content/8962a5cc-2c4c-4e18-801c-9ad4e342f... https://www.wsj.com/finance/fed-rate-hikes-lending-banks-hedge-funds-896cb20b?mod=mhp https://www.wsj.com/finance/fed-rate-hikes-lending-banks-hed...
renewiltord 3y ago
So there's a bunch of sucker lenders here who are giving money away. That's fine, I suppose, so long as the sucker lenders aren't governments and their banks.

robust-cactus 3y ago

The praise for the public market in this article is a little disingenuous. Yes it has some nice properties but it's also a mess: 1. Algorithmic trading and the rules by which the big organizations play in the market make it rough for both companies and individuals 2. Margin trading seems to be making company stoke prices way more volatile 3. Overall corporations constant need to appease the shareholders (aka maximize profits) by law causes them to act like sociopaths at times.

smeeth 3y ago

I've seen a lot of lamentation about PE eating the world, but very few people discuss *why* PE got so huge. PE is popular for one reason and one reason only: taxes. PE generally makes money on a trade called a leveraged buyout (LBO), where they take out a massive loan to buy a company. Because interest on debt is tax-deductible, going debt-heavy increases the take-home profits of the company (this is called a "tax shield"). Because the profits are higher, the value of the company is higher, and the PE firm makes money on their trade. What this means in practice is that if you run your company sustainably (low debt, lots of assets). You become a target for a PE firm to attempt a hostile takeover of the company, all while claiming (defensibly, actually) to be doing whats in the best interest of the shareholders. So good companies will try to ward off these attacks by taking on lots of debt and going asset light to minimize the value gain a PE firm might have. In short, both PE ownership and the brittle, debt-heavy nature of the American economy today can be traced to the tax advantaged nature of debt. For reasons I can't quite understand, nobody seems to be advocating for revoking this tax deduction. I can only surmise this is because everyone hates taxes. Thank you for coming to my TED talk, your take home exam is a short essay on what you think the mortgage interest tax deduction (started in 1913) did to household debt.

onlyrealcuzzo 3y ago
> For reasons I can't quite understand, nobody seems to be advocating for revoking this tax deduction. Why can you not understand why the US would prefer people to be invested in the future of the US? That's essentially what putting your money into US debt means. You are in the interest of the US not exploding in the middle of the night. I do think that the typical 90% debt to 10% equity LBO ratio is toxic and should be regulated down. I can see this incentivizing the types that would put in 10M now to get 100M now - spending that on coke & hookers now, and then hoping the US collapses and they don't have to pay anything back.
- pjmorris 3y ago
  > Why can you not understand why the US would prefer people to be invested in the future of the US? I can understand investing in the future of the US. I add an interest in investing in the present of the US, e.g. wages that support the consumption needs of the populace, including but not limited to food, shelter, health care, and education.

j7ake 3y ago

Also many retail investors are passive, relying on ETFs. This means private companies take all the profits, and when there is sign of trouble, can dump their stock to the stock market, get it bundled into an ETF, and a passive retail investor will buy some through their monthly contributes to a popular ETF.

RobotToaster 3y ago

Isn't capitalism great?

x3n0ph3n3 3y ago
Unironically, yes.

hartator 3y ago

I wonder how it affects a BogleHead strategy to retirement. If the Sp500 (VOO, or VTI, VT) is less and less representative of the U.S. market, there is a case to be made that it's becoming disconnected more and more of the "real" economy. This is kind of undermining BogleHead strategy to just buy the full market as the full market is less and less accessible.

nintendo1889 3y ago

Buy bitcoin and forget the debt, if possible. Preach to the next generation do not go to school (public school is marxist-originated gov't propaganda at it's core; if not then why does the law require you to go to school in some areas), do not acquire debt. Learn real skills and trades. Tune in, turn on, and drop out. I was home schooled until 4th grade. I finished my schoolwork in 2 hours and then played outside and read the encyclopedia the rest of the day.

slotrans 3y ago

Hard to believe there are ZERO mentions of Sarbanes-Oxley in this whole article.

jmyeet 3y ago

This is the private equity model: 1. Borrow a lot of money; 2. Buy some company that is somehow deemed "cheap"; 3. Cut costs and raise prices; 4. Load up the company with arcane debt that will blow up some time after the PE investors have cashed out; and 5. Based on the surface-level financials from (3), re-list the company to exit before it blows up. I'm not worried about PE because this isn't sustainable, for two reasons: if debt isn't cheap, it doesn't work and the debt burden only works so long as the SEC doesn't take a hard look at it. Remember the investors have to be able to cash out and pay back those loans. If no one buys the junk they create then this business model falls apart. I'm more concerned with the short to medium term effects of this such as the extortion of housing of our poorest and most vulnerable [1] (which people should absolutely go to prison for), buying up all your local vet clinics [2] and buying up medical practices [3], to name a few. All of this is just rent-seeking. This is what capitalism is. This is what capitalism does. It's the only thing capitalism does: intermedidation and rent-seeking. [1]: https://www.newyorker.com/magazine/2021/03/15/what-happens-when-investment-firms-acquire-trailer-parks https://www.newyorker.com/magazine/2021/03/15/what-happens-w... [2]: https://www.thenation.com/article/economy/private-equity-pets-veterinarian/ https://www.thenation.com/article/economy/private-equity-pet... [3]: https://www.nytimes.com/2023/07/10/upshot/private-equity-doctors-offices.html https://www.nytimes.com/2023/07/10/upshot/private-equity-doc...

braza 3y ago

One forgotten aspect of this PE taking over established businesses is that are the employees. I saw some cases where the company gave stock options for employees and kept everyone hanging due to a promise of an IPO and when the whole thing scrubs, the founders sells to the PE and the first measure is to expire all the options from the employee pool [1]. Honestly I think the whole thing about options with the rise of PE and this brutal aspect to get best financial resources is over for any person joining wanting to have a more outsized exit. [1] - https://news.ycombinator.com/item?id=28561054 https://news.ycombinator.com/item?id=28561054

sam345 3y ago

Compliance costs and exposure to political risk is the primary driver of going or staying private in the US. A company immediately becomes a target for governmental and NGO political pressures once it becomes public. Now it no longer can focus on designing, producing, and selling the best products and services at a good profit for its shareholders, it must devote a substantial percentage of its efforts on hiring lawyers, PR specialists, and lobbyists. More recently the SEC has morphed from an agency whose primary goal was transparency of investment risk, to a cudgel for enforcing preferred political goals. Nobody wants a target on their back if they can avoid it. A company only goes public when it has no choice when it runs out of investors or shareholders need liquidity. Pretty ironic IMO that same voices that identified public corporations as the enemy are now lamenting their demise.

cushpush 3y ago

Nursing homes and care centers suffer tremendously in the shift to private equity holdings. Corners cut, costs cut, staff released, everything is a skeleton crew, and then they want you to bring Grandma in..

Damogran6 3y ago

Retirement is 8-10 away. I was considering 'do I own my home outright' or do I 'buy a new home with a mortgage I never expect to fully pay off' This kind of BS makes me think owning the property would be safe, so I don't wake up one morning with a mortgage I can't pay.

typedef_struct 3y ago

Working as intended

happyjack 3y ago

After reading Thomas Piketty's theories on "Capital in the 21st Century," a lot of these issues have really come to light. Capital grows about 2-4% each year in real terms, while the economy (labor) in general grows 1-2%. i.e. if you own stuff (shares of companies, property (real or intangible), land, etc. etc.) your worth grow twice that of a working person. Compounded over 60 years (time after WW2), capital has grown ~100% more than labor. There is real generational wealth in America & the rest of the OECD world, and this wealth is growing at absurd rates. I'm not to lobby or claim that I have a solution or that wealth should be distributed. All I'm saying is there is a giant monkey in the room. And this isn't just and Elon or Bezos or Ivy League elite problem. There are even small $1-$10M blue collar businesses that no one could possibly start today even if you had the skills & knowledge with how money it would take to buy equipment, have a shop space / real estate, cash burn in the first few years, etc. I do think it is worrisome that businesses and its capital are largely going private. Public companies have much more scrutiny with the SEC, big labor, and has more checks & balances. It's also a vehicle for normal folks to invest money into a retirement plan; you can throw tens of thousands of dollars and actually own parts of major companies. I also think the economy of scale for PE is very worrisome. Many folks here have talked about Vet clinics, medical clinics, etc. When PE gets together, they can buy buy buy and bleed bleed bleed money until the competition is out, and then they can jack up prices to make the difference up. Thoughts / 2 cents.

kwere 3y ago
A solution to this situation could be to force structured businesses with a certain base of revenues and employees to freely allow their employees to invest in the company and sell those shares in a public secondary market. Most countries have already complex accountacy regulations and public registries even for smaller businesses.
- happyjack 3y ago
  What size, though? Are we talking 10 employees, 1000? Just curious.
  - 3y ago

gamblor956 3y ago

I used to have a number of private equity clients when I was still working at a firm. Private equity's business model is to profit from the destruction of people's livelihoods. PE partners are the most immoral people I have ever met (and for comparison, I used to work as a public defender representing murderers and sex offenders). If they could make a dollar by murdering a baby, most of them would do it with a smile. Yes, there are the occasional accidental success stories like Staples. But they overwhelming majority of PE stories are viable companies being ripped apart for their "valuable assets" or saddled with crushing debt to fund the acquisition of the company and/or dividend payouts to their new PE owners.

onewheeltom 3y ago

Because stock market “show a short term profit” every quarter is insane. The rationality of a 2 year old on cocaine (as I was told).

zeruch 3y ago

PE could be "fixed" with one simple change, make them fiduciaries all the way down. (I mean, it would likely also nuke the PE domain, but I consider that a feature not a bug). PE is a pox that focuses on short-term, debt-riddled 3 card monty games, and should be annihilated. It's like the fecal byproduct of something Milken and Gekko would sire.

philip1209 3y ago

In the US, it's easier to get a loan to buy a business than it is to get a loan to start a business. That tells you all you need to know.

Loocid 3y ago
That makes sense though. An existing business is a known quantity where is a new business isn't. It's easier to assess the risk of something that already exists.
- philip1209 3y ago
  Sure. Then, the system becomes unbalanced - with lots of capital chasing fewer deals. Companies become overpriced generally. And, I think that can lead to an issue.

bandyaboot 3y ago

> When a private-equity fund buys a publicly traded company, it takes the company private—hence the name. (If the company has not yet gone public, the acquisition keeps that from happening.) This gives the fund total control, which in theory allows it to find ways to boost profits so that it can sell the company for a big payday a few years later. Concentration of wealth at the very top driving further concentration of wealth to the very top.

rednerrus 3y ago

Change the tax structure to encourage businesses to pay a dividend and this will correct itself.

chrisgd 3y ago

I wouldn’t worry too much about it. With more and more investors having the opportunity to get 5% almost risk free from US treasuries, PE will slowly fade back. The roll up strategy of medical clinics is especially risky now that many of these are trading at 11% interest rates. When ebitda margins are usually 30% when perfect, it doesn’t give you a lot of breathing room.

dehrmann 3y ago

This article is pretty late to the party. PE was fueled by low interest rates, so at this point, I wouldn't be surprised if it's in decline.

29athrowaway 3y ago

Just a friendly reminder: you can barter and trade. You don't have to use currency for everything.

keiferski 3y ago
I have been waiting for an online marketplace site that uses bartering. Sort of an eBay with advanced tech that can figure out a complex trade between multiple people without resorting to currency. Do you know if that exists?
- 29athrowaway 3y ago
  There are bartering apps but naturally since they cannot take a share of what is being traded (no currency involved), they do not have money for ads like marketplaces do.

andy_ppp 3y ago

If we take out growth from companies like future Apples and Googles and this growth goes into private markets, does the old adage that an index tracker is the simplest way to build wealth just go out of the window?

arb-spreads 3y ago

This is an unsurprisingly terrible article. If anything, venture capital is more responsible for a lack of IPOs. At one point, there were over a thousand unicorns that had no reason to go public. Multiple series of fundraising rounds between venture capital and growth equity firms have enabled companies like Bytedance, SpaceX, and Stripe to grow into companies worth hundreds of billions of dollars with minimal pressure to go public. Additionally, excessive regulation has seriously hampered IPOs. Expensive disclosures - for both investors and companies - makes being private far more compelling. Not to mention the fact that many private companies are sketchy and overvalued. Public markets incentivize market participates to root out fraud in order to more accurately value businesses. Deep capital markets are one of the many strengths of the United States. To enable individual investors to invest in the next Apple, Microsoft, or Nvidia, the onus is on petty government bureaucrats to make it 10x easier to go public. Over the last few decades, it has instead become 10x more difficult and expensive.

semilattice 3y ago

US equities market for retail investors are riddled with sharks taking the retail investors money left-and-right. From high frequency traders, to the fund managers, to money managers, to Jim Cramer-style filth marketing stock picks. Hoping that investing in US equity markets as a retail investors, will bring you same benefits as it did for folks in '60s, 80s and 90s -- is being delusional, and lacking critical thinking. The US institutions that supposedly provide a system of checks and balances, and a form of judicial and executive branch oversight, had long been gone. We are now in the era of corruption, selective outrage, a system of sabotage/entrapment-of-opposition/spying and executive-level incompetence across most of the institutions that are supposed to provide businesses with a level-playing-fields, and consumers with trust/confidence on those businesses.

infecto 3y ago

This will probably get lost but it took me a moment to think about it. Its not just PE eating the U.S. economy. It is also U.S. consumers eating the economy. Consumers are a complete PITA these days. Hard to manage, tons of complaints, looking for the cheapest X. I say this because while I agree there are a lot of movements in the past 2 decades on PE and other investments swallowing up shops, its not always as clear that its the big bad finance guys ruining America. We have small-medium business owners aging out, in a lot of cases no clear succession to the business line and they sell out. It can be a real pain these days to run a business, you not only have to offer the best service, the best product but have to do so at the best price while also managing your PR to identify any attacks that may hurt your business. I can see why people sell out given the opportunity.

chung8123 3y ago

I feel like if a wealth tax gains traction we are headed to a lot more companies being owned privately since you can control valuation easier and you will be able to make sure valuations don't get ahead of revenue.

impressthenet 3y ago

This explanation covers why this sort of activity seems inevitable: https://pudding.cool/2022/12/yard-sale/ https://pudding.cool/2022/12/yard-sale/

andrewjl 3y ago

How much of this will end being a ZIRP phenomenon? The article does cover the implications of rising interest rates towards the end. > Meanwhile, interest rates have reached a 20-year high, posing a direct threat to private equity’s debt-heavy business model. In response, many private-equity funds have migrated toward even riskier forms of backroom financing. Many of these involve taking on even more debt on the assumption that market conditions will soon improve enough to restore profitability. If that doesn’t happen—and many of these big deals fail—the implications could be massive. For anyone interested in the nuts and bolts of how private equity works I highly recommend the 50X podcast[1] which covers how a firm focusing on buying out aircraft component suppliers operates. [1] https://www.50xpodcast.com https://www.50xpodcast.com

ramesh31 3y ago
>How much of this will end being a ZIRP phenomenon? A lot, given that private equity operates on a debt driven M&A strategy. But don't expect the consolidation to slow down. They will just squeeze their businesses and customers that much harder.
- nine_zeros 3y ago
  > A lot, given that private equity operates on a debt driven M&A strategy. But don't expect the consolidation to slow down. They will just squeeze their businesses and customers that much harder. This. The likely outcome is a deterioration of the companies. The deterioration will be felt by employees and customers both. This is the only way PE will be able to recoup any high interest debt they take on.
- andrewjl 3y ago
  I don't doubt that will happen but how does that translate to sustainable, as opposed to short-term, earnings?
  - ramesh31 3y ago
    >I don't doubt that will happen but how does that translate to sustainable, as opposed to short-term, earnings? It doesn't. The PE playbook is to find distressed businesses with solid brand power, milk them dry until there's nothing left, and then sell off or liquidate the remnants. They function more or less as garbage collection for the economy.

rrrix1 3y ago

This would have been better if you posted it on Halloween, all doom and gloom, demons, monsters and hedge fund managers... shiver Anyways. As usual, finding that regulation sweet spot is clearly still as hard as ever. Less regulation is better than more regulation, until it's not. Although, in situations like this, I feel like having too much is better than not enough.

smolder 3y ago
It's not the amount of regulation that matters, it's the intent. Is it written to benefit a greater good, or written to benefit a political party's benefactor? The same applies to removing regulations. Where did the intent lie? New regulation and repeal are most often shades of grey --bad mixed with good in terms of overall consequences, disproportionately helping a few at some expense to the many. That's what happens when minority interests with a lot of money are overrepresented in government, lobbyists write bills, etc.

glimshe 3y ago

There is nothing wrong with private companies. A lot of family businesses are private. I understand that private equity investment companies controlling a lot of businesses might not be a great thing, but let's not demonize private ownership.

darth_avocado 3y ago
These are not your “mom and pop” private businesses, these are “billions of dollars at disposal” businesses. And the central point isn’t their existence, the point is their operation with little oversight in a way that hollows out industries and harms consumers.
- glimshe 3y ago
  I wasn't talking about mom and pop businesses. There are many large private companies which are owned by families or individuals. One thing these companies can do which public companies can't is to think longer term and ignore the pressure of quarterly reporting and institutional investors. We can't stereotype all medium and large private businesses as doing the bidding of private equity investment companies.

truth777 3y ago

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