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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 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.
    - scarface_74 3y ago
      Are you going to tell these mom and pop shops they can’t sell?
      - TeMPOraL 3y ago
        Of course not. The problem aren't the mom and pop shops. The problem are the PE companies making those offers. These are the ones to go after.
        scarface_74 3y ago
        How is that any different? You’re still trying to stop mom and pop shops from selling out to PE’s. Are you also going to stop startups from getting acquired to? Seeing that only 6 of the hundreds of companies that YC has invested in have ever gone public, acquisitions is the most likely exit
        TeMPOraL 3y ago
        The difference is that PE is just one of many kinds of buyers, but the one that has a particular tendency of doing trades with nasty externalities. It's this pattern of buying that is a problem, and I don't see fighting it any different than fighting factories dumping toxic waste into rivers. Factories, in general, are not a problem. Actions that have destructive impact on people at scale are a problem. Startups are a bad example because I absolutely would stop startups from being acquired as a general phenomenon. The pattern of startups seeking an exit is one of the worst economic innovations that happened to the world. They at best just waste time of their users/ customers before inevitable rugpull, and at worst, they actively disrupt whole market segments - not creatively disrupt, just in the "blow the whole thing up with VC money, disappear when it's clear the business was never sustainable" kind of way. And again, it's not the acquisitions as a concept that are the problem - it's the pattern of startups being created with acquisition as the goal that is a problem.
        scarface_74 3y ago
  - ryandrake 3y ago
    Why would a PE firm be buying (for example) a doctor's office if the doctor-owner was retiring? The doctor is why the business exists in the first place. Without him, it's no longer a doctor's office, it's a charming little suite with front desk people and a few nurses running around. We had a local machine shop (that I used to go to for welding) sadly go out of business because the owner was retiring. I asked him if he considered selling it instead so it could stay open and he said "Who would buy it? I am this shop and I'm retiring. In 5 days it's just going to be a pile of tools."
    - scarface_74 3y ago
      For the patients and as a slow “exit”
    - delfinom 3y ago
      Yea I don't see PEs buying a doctor's office. I have seen "mergers". A doctor will join up with another doctor and then disappear in a year or two. That let's them legally sell the practice while weening patients over. I have had a CPA start that process recently too. Suddenly announced he's joined up with this new CPA firm . Not to worry, he'll still be here to take care of our corporate needs and has transferred everything over (he's late 60s and snowbirding already) A PE may buy up a already larger medical practice chain or something, but never individual practices. The machine shop example is rough, he could do a merger retirement as well, but he needs to have consistent clients that he can bring over to another shop before slowly phasing himself out. Which may not have been scenario unfortunately.
- peteradio 3y ago
  If only each individual bond could try a little bit harder to resist the acid.
  - starcraft2wol 3y ago
    the point is the owners have a positive exit that they choose. And yes people are agents
    - peteradio 3y ago
      Right America is governed by individual incentives.
      - starcraft2wol 3y ago
        There are more kinds of incentives than money.
        peteradio 3y ago
        Doing what's morally responsible in spite of everyone else is a losers game these days.
- justrealist 3y ago
  It's partly that, but in medicine (dentistry, fertility, etc) a lot of clinics are being rolled into PE conglomerates because the bureaucratic overhead in medicine has skyrocketed in the past 20 years, and clinic chains have better support for doing all the paperwork and legal side of things.
- plagiarist 3y ago
  What a convenient way to completely ignore the macro effects, well done.
- gmd63 3y ago
  You joke but it's not benign. The reason economic regulations exist is to ensure we maintain the economy as a crucible for rewarding the smartest and hardest workers in society. When private money can grow cancerously via pump and dump crypto schemes, overhyping IPO's that peaked during the series A round, and strong arming small branches of independently owned practices (all to later enable milk mode and reap monopolistic profits), the general public and society is left with overlords who do not build, they eat.
  - fnimick 3y ago
    When have the smartest and hardest workers ever been the richest?
    - Applejinx 3y ago
      It's easy for me to believe it's not always been (and doesn't have to be) THIS bad. There's functional value in a capitalist system. It just requires ongoing maintenance, to avoid situations like we're currently in. It's not self-repairing. Operated properly, it makes market conditions self-repairing, but this is at the expense of the potential market capturers.
      - ToucanLoucan 3y ago
        It was better when corporate tax rates and income taxes for the incredibly wealthy were much, much higher. My favorite hobby is putting Thatcher and Reagan's faces on economic graphs to show what year they were elected is almost universally either the same year or just about when the global economic system went bugfuck by basically every metric we measure. But, thanks to those two and the larger political milieu they so well represent, those entities are now rich beyond all reason and in a capitalist system that permits things like Citizen's United, money more or less equals political power so the odds of getting any of this addressed are basically nil, along side other issues that would demand corporations make less money: like climate change, crumbling infrastructure, socialized healthcare for the US, better socialized healthcare elsewhere, the vanishing middle class, etc. Private Equity is going to get us all killed in a very real sense.
- techdmn 3y ago
  They could, but my opinion is that this is putting personal responsibility front and center on what is a systemic problem. If our economic systems encourage the consolidation of wealth, we should change the systems, rather than blaming individuals.
- chollida1 3y ago
  Well think this through. There are 10 vet practices in your city. 7-8 get rolled up into one uber practice by a PE firm. They now have far less overhead per patient. Billing, equipment and even vets can be amortized over far more patients. You, the hold out clinic, are now more expensive, or have a far smaller profit ratio, thus you are operating at a big disadvantage to the other clinics in your city. You can hold out but what is your edge in this case where your competitor is now bigger and can handle things like a vet quitting as they have a bunch that roam from practice to practice. Or they can handle buying a new machine for millions while the bank won't lend to you due to your shrinking margins. Economies of scale are a thing and can be a very real competitive differentiator. You the hold out are now getting crushed by your competitors while you look around and see your fellow vets taking weekends off to take their new boat to the lake because they sold their practice and you're working your 11th weekend in a row because your other vet quit to work for your competitor that can now pay more than you. I've had friends live this and its not fun.
  - 1980phipsi 3y ago
    If the government increases regulations, then it tends to place a bigger burden on small businesses than big businesses for the same reasons you highlighted about overhead.
  - Joker_vD 3y ago
    Ah, so the overall economic efficiency improves and then everyone's better off. Wait, what's wrong with that?
    - deleted 3y ago
      [deleted]
    - gmd63 3y ago
      Think of Comcast but for puppies' health
    - jprete 3y ago
      The actual problem is that the unmonetizable value gets tossed out by PE. E.g. customer service will take a massive dive because everyone working for the clinic or whatever else will be time-pressured out of good service. Generally the problem with treating everything via pure financial models is that some things are valuable but hard to measure financially and those are inevitably destroyed by PE and other entropy-maximizers.
- TeMPOraL 3y ago
  If what's good for an individual short-term was also always good for them long-term, the world would've been an utopia.
- twobitshifter 3y ago
  Usually what happens is that 60 something year-old founders have retained control and not shared profits with their employees. Looking to sell, the employees can’t buy out the founder, and the founder finds PE with deep pockets. The fork in the road for keeping the company out of PE was passed long before the founder got to retirement age.
scarface_74 3y ago
Then the market should value those companies properly.
- Supermancho 3y ago
  Not sure what you are saying here. Which companies? Why?
  - michaelt 3y ago
    For private equity to take a publicly traded company private, they've got to pay more for it than the public market values it at. For example, in 2016 Softbank was able to buy ARM for US$32 billion, but that was only possible because the stock market priced it below US$32 billion.
Pet_Ant 3y ago
> 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. An argument I heard is that companies prefer to stay private longer to avoid the burden/oversight of SOX etc. The charitable interpretation is that they are too busy growing to be bothered, the less charitable is that they aren't capable of growing if they have to be accountable and forthright.
- QuarterReptile 3y ago
  The availability of VC will necessarily siphon off enterprises from other funding sources.
  - 1980phipsi 3y ago
    VC isn't a panacea and doesn't operate in a vacuum. If you raise the cost of going public and staying public, then that makes VC funding or going private more attractive. The VC funding may come with terms that are not expected by public company investors. But VC-backed companies is only one part of the private equity trend. The other part that is discussed is small owner-operated or partnership firms getting bought up by bigger ones. Here again, if the government increases regulations, then that tends to fall more strongly on small businesses than bigger businesses.
    - QuarterReptile 3y ago
      I agree with everything you have said. I'll just add that, with the path of finding VC well-known and well-worn, we should expect greater difficulty. Even if we somehow reversed the trend of all institutions and bureaucracies to become over time larger and more cumbersome, that is, we streamlined government processes, we should expect an additional hesitation of growing enterprises to return to IPO, because VC is now a comfortable path for a significant portion of the roadmap.
- deleted 3y ago
  [deleted]
spiralpolitik 3y ago
It's worse than that. The 401k generation will begin think about retiring in the next few years. Most will discover that their 401K, despite maximum contributions, will be insufficient to retire on. This will either keep older workers in the workforce longer, preventing younger workers for getting into positions, or it will result in discrimination against older workers who will find themselves unable to get jobs, let go, or laid off to make room for younger, cheaper workers. The expectation for your 401k is that it's going to grow by 6-8% each year. If there isn't any room for growth in the market then it's going to be hard to deliver that going forward, compounding the problem for later generations who probably won't be inheriting anything from their parents.
- flashback2199 3y ago
  > Most will discover that their 401K, despite maximum contributions, will be insufficient to retire on. How will that happen when there has been so much growth in the S&P?
  - toomuchtodo 3y ago
    https://www.nerdwallet.com/article/investing/the-average-401k-balance-by-age https://www.nerdwallet.com/article/investing/the-average-401... https://www.gao.gov/blog/growing-disparities-retirement-account-savings https://www.gao.gov/blog/growing-disparities-retirement-acco... https://www.gao.gov/financial-security-older-americans https://www.gao.gov/financial-security-older-americans (401k plans were a way for capital to con Americans that ditching pensions was the way to go; pension contributions became shareholder profits, and most did not or could not contribute to 401ks in any meaningful fashion)
    - flashback2199 3y ago
      Thanks for this pile of links... I don't believe what you're saying that 401k's are somehow not going to be enough to retire. Unless you meant retire where housing prices are rising the fastest.
Eumenes 3y ago
> 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. In the past 2 weeks, my local small biz autobody shop and furnace/HVAC company have been bought by large regional firms. The furnace company refuses to service your boiler w/o buying from their preferred oil supplier, and the autobody shop has adjusted their rates to essentially insure they only work with insurance claims.
- gymbeaux 3y ago
  It’s very common for auto body shops to only work with insurance claims. I think your best bet is to take the car to a dealership-owned body shop, especially if it’s the dealership you bought the car from, or the same make.
  - MisterTea 3y ago
    > It’s very common for auto body shops to only work with insurance claims. Right, because like health care they treat the insurance company like a giant piñata to beat free money out of. Ive seen auto shops lie about damages, things like claiming previous damage is part of a claim - anything to bilk them. Of course the clients don't see any moral issues because their car receives "free" work.
    - gymbeaux 3y ago
      [flagged]
Gustomaximus 3y ago
I've thought about this a bit. This concentration shift seems good for the economy in the short term but a massive loss for society as business increasingly becomes a chains or centralised. Especially in areas that are traditionally owner run like restaurants, pubs, vets, dentists, GP clinic, pharmacy, hardware etc. Capitalism is the best system but we too often forget a core tenant for govt to create a level playing field. We seem to have forgotten this and make it increasingly hard for small business which should be a significant driver of innovation and improvement. I think some possible solutions would be to; 1) Significantly lower taxes for smaller businesses vs larger. Even better bring personal rate inline to company rates... but this would be a very difficult shift for governments. 2) Tax benefits for companies listed and actively traded, so companies are encouraged to list and share wealth/growth. 3) A 'not in the national interest' law for companies that continually pay little to no tax where you would expect them to. Have tax department give something like a 3 year warning they are on the 'consideration list' and if things dont change the tax office can make them sell, or if they prefer close. And then they remain on said list for a couple decades or so to verify. This, while being risky for overuse, would be an effective tool on the worst tax dodgers and wielded in a limited capacity quite useful for those that have high end tax strategists that keep getting around the rules. 4) Limit investment ownership in residential so people dont spend their life trying to buy a house. This will allow people to take some business risk and invest in their entrepreurship far more easily. 5) Put a low market cap limit on core local business like those mentioned above like vets, dentists, GP clinic, pharmacy. Or maybe a progressively sliding scale annual asset tax past a value/outlet of X. Something that limits how big these organisations can get. 6) Stop large consumer distributors selling their own brand product. Not sure how to word this exactly but places like Amazon or large supermarkets, they should be a retailer of other business goods only. Stop them sticking their own rip-off product next to the other. Obviously a load more...
- jeffreyrogers 3y ago
  I think it will be a cyclical thing. The PE firms actually do run those businesses much more efficiently, but they also become homogenized and that's offputting, which opens the door for new entrants to differentiate themselves.
leishman 3y ago
It’s because of cheap money flowing into Wall Street. The negative impact of ZIRP has only started to be felt.
ikekkdcjkfke 3y ago
Where is all this money coming from?
JumpCrisscross 3y ago
> Newer companies like AirBNB and Uber went public at what could be their max market cap Uber is worth 50%+ its IPO valuations.(EDIT: No it isn’t. Sorry, jet lagged.)
- chollida1 3y ago
  > Uber is worth 50%+ its IPO valuations. Is it? I just looked at the chart and saw it went public at $45 and it currently trading at $45. Did it split at some point or issue a 50% div?
  - ta1243 3y ago
    https://finance.yahoo.com/quote/UBER https://finance.yahoo.com/quote/UBER says opened at $41.91 in May 2019 and is now $42.42 Had it kept track with inflation it would be about $50 - up 15% Had it kept track with S&P it would be about $63 - up 50%
- slotrans 3y ago
  No it isn't, as 30 seconds of research would show.
globular-toast 3y ago
As John Kay put it, the stock market used to be a way for new businesses to raise capital, now it's a way for already profitable companies to cash out. The example he gives of one of the first ones is Google. So it's been going on for quite a long time now. The funny thing is now many of these companies aren't even profitable. It's all driven by speculation.
- jeffreyrogers 3y ago
  It's still how many new businesses raise capital. That's how the biotech industry works for example. (In biotech VC just gets you to the IPO stage and you don't cash out at IPO since typically those companies don't even have an approved product yet).
  - Andrex 3y ago
    > It's still how many new businesses raise capital. Should it be? Theranos stained biotech badly.
    - jeffreyrogers 3y ago
      Business and markets run on trust. The less trust you have the more overhead you have to verify that every claim your counterparty makes is true. That's expensive and means some worthwhile things become impossible to do profitably. It's a tradeoff and I think in general the US finds a good spot between regulation and ease of doing business, and the rest of the world benefits from it too. There are failures of course, but most of the big ones recently have been in private markets not the public ones.
    - ak217 3y ago
      No knowledgeable biotech VC invested in Theranos, because they were unable to pass due diligence. Theranos investors were unsophisticated family offices who didn't operate in the space, didn't know enough science or technology themselves, and didn't know how to run due diligence. Had Theranos attempted to open up enough to go public in those circumstances, they would have been exposed much more quickly.
cs702 3y ago
I agree! But I also think the rise in interest rates could help reverse this trend, at least somewhat. Consider: Until recently, interest rates in the US and other developed economies had only declined, in fits and starts, since the early 1980's.[a] Not coincidentally, the modern private equity sector was born in the 1980's.[b] Until recently, private equity firms had benefited from interest rates that only decline and valuation multiples that only expand -- for four decades! A lot of deals that "work" when rates only decline will stop working if rates don't. For example, there are a lot of private-equity-backed middle-market businesses, including plenty of roll-ups, that were financed before rates went up, with such high leverage that the companies are now at risk of insolvency if rates don't decline soon. If rates stay at current levels or (gasp!) continue to increase, I'd expect to see a significant contraction in the number of private equity firms. Those private equity firms survive may have to become mainly lenders, i.e., banks in all but name, and sooner or later will end up being regulated as such. --- [a] https://fred.stlouisfed.org/graph/?g=1aNbC https://fred.stlouisfed.org/graph/?g=1aNbC [b] https://en.wikipedia.org/wiki/Private_equity#Private_equity_in_the_1980s https://en.wikipedia.org/wiki/Private_equity#Private_equity_...
- jeffreyrogers 3y ago
  Those companies are only at risk of insolvency if their debt is variable rate or has a balloon payment due soon. I imagine most PE firms are smart enough to avoid those risks. Banks are also incentivized to negotiate with debtors in those situations since the asset is worth more as a going concern than it would be in bankruptcy and banks don't want to operate a business (they have no expertise there). Most PE deals would work (with lower returns) without any debt. The debt allows them to diversify into more deals (since they put less equity into any given deal).
  - cs702 3y ago
    > Those companies are only at risk of insolvency if their debt is variable rate or has a balloon payment due soon. Actually, most LBO-type deals are financed with a combination of bank and bond debt. A shocking number of bond deals will be maturing within 1-3 years, and have to be refinanced. The bank debt, senior to the bond issues, is typically variable-rate and (depending on deal size) split into tranches that must be repaid at different schedules over time. Many PE-backed borrowers in recent years decided not to enter into swap contracts to fix their debt rates. My understanding is that things could get ugly quickly if rates don't come down soon. > Most PE deals would work (with lower returns) without any debt. Actually, if a deal returns less than the yield on corporate debt of similar risk, then the deal does not work. LP's in the PE fund will correctly view it as a failure. The raison d'être of PE funds is to earn returns above those yields. Moreover, if a portfolio company is already loaded with debt, finding buyers that will pay the old multiples given the new rates will prove difficult, if not impossible -- similar to the situation many US homeowners that locked-in ~2% mortgage rates a few years ago face today: They cannot sell their home at the old valuation because prospective buyers are looking at mortgages that cost ~8%/year. Higher interest rates make it hard to impossible to "exit" at valuations that generate decent returns.
Aunche 3y ago
> 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. Almost all of these companies were massively overvalued by the time they IPO'd. I for one am glad that regular people were not allowed to invest in Theranos or WeWork. Looser restrictions on investing would create even more dodgy company's whose primary goal is to scam retail investors, like what we've seen NFTs. > 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 IMO, this is a symptom and not a cause. Vet clinics and medical practices would be terrible investments if it were sufficiently easy to start new vet clinics and medical practices. Likewise, housing would be a terrible investment if it were sufficiently easy to build more housing.
- pas 3y ago
  It's not terribly hard to start a clinic, but it just makes sense to consolidate, and it doesn't make much sense for anyone who's not a vet to start one (because of the relative pricing power of vets). But it's not bad for vets to be able to exit to PE after they have established the clinic. And after consolidation PE can make better deals with vendors (from pharma to insurance networks to maintenance). (Of course exorbitant rise in vet costs shows there's room for more vet clinics, but it's mostly a side-effect of a lot of rich people spending a lot on their pets.)
Retric 3y ago
Don’t forget about inflation when comparing these numbers. 300M in 1984 is 0.85 Billion today. Some companies IPO at huge valuations, but ShockWave Medical, Inc., had a 2019 IPO at roughly the same valuation as Microsoft and has seen 11x returns since then. Looking at the other 2019 IPO’s you see a lot of volatility but many home runs. https://stockanalysis.com/ipos/2019/ https://stockanalysis.com/ipos/2019/
hnthrowaway0328 3y ago
IMO this also impacts "large" institutional investors such as pension funds. A lot of them are going to hold the bag. I don't see a way to get out of it without a fundamental change.
FireBeyond 3y ago
> 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. When they don't decide to do a leveraged buy out and have the business help fund its acquisition. One small step away from Tony Soprano and the sporting goods store bust out.
deleted 3y ago
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jowea 3y ago
> 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. Can't the regular investors buy PE stock?
- yieldcrv 3y ago
  No, unless they lie and can cough up the minimum investment amount ($25,000 to $1,000,000) Just a little counterintuitive but feasible
  - jowea 3y ago
    I was thinking of the ETFs for PE investment. And aren't there PE firms with public stock?
    - yieldcrv 3y ago
      If 5 out of 1000 PE firms have public stock, thats the same circumstance the article is talking about
deleted 3y ago
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DebtDeflation 3y ago
It's not just PE either. Collectively, Vanguard, State Street, and BlackRock own 28% of the SP500's market cap and one of the three are the majority shareholder in 88% of the SP500.
toss1 3y ago
Yes. I've found that with the big IPOs, while everyone is scrambling to somehow get into the stock pre-IPO, or at the first minute of the sale, the stock almost inevitably goes below the IPO price in the first weeks or months of trading. A bit of patience can yield more value. Then, of course, is the question of whether it will ever go up again... I haven't done the study of whether they are (on average) reliable bargains or fools' gold.
takinola 3y ago
I would be surprised if this argument is borne by the facts. Sure, Bill Gates would be a trillionaire now if Microsoft remained private for longer but for every company that sees tremendous growth after IPO, how many see their shares sink. This investment strategy only works if you are able to predict the top of the market for individual private companies which is likely incredibly hard to do. Given the power law of returns in VC, you only need to get this wrong once or twice before you wipe out the returns of your fund. As for the idea that PE firms are buying up SFH, I would be surprised if this is happening on a meaningfully large scale (anecdotes aside). Homes are real physical assets that need all sorts of actual maintenance on an ongoing basis. I don't know of any investment firm that is set up in a way that supports this type of operational burden. Even if they outsourced the work, it still wouldn't make sense to have any management overhead to keep on top of it. Investment firms want assets that can exist (for all practical purposes) inside of a spreadsheet. Homes are the opposite of that.

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.
  - scarface_74 3y ago
    Are you going to tell these mom and pop shops they can’t sell?
    - TeMPOraL 3y ago
      Of course not. The problem aren't the mom and pop shops. The problem are the PE companies making those offers. These are the ones to go after.
      - scarface_74 3y ago
        How is that any different? You’re still trying to stop mom and pop shops from selling out to PE’s. Are you also going to stop startups from getting acquired to? Seeing that only 6 of the hundreds of companies that YC has invested in have ever gone public, acquisitions is the most likely exit
        TeMPOraL 3y ago
        The difference is that PE is just one of many kinds of buyers, but the one that has a particular tendency of doing trades with nasty externalities. It's this pattern of buying that is a problem, and I don't see fighting it any different than fighting factories dumping toxic waste into rivers. Factories, in general, are not a problem. Actions that have destructive impact on people at scale are a problem. Startups are a bad example because I absolutely would stop startups from being acquired as a general phenomenon. The pattern of startups seeking an exit is one of the worst economic innovations that happened to the world. They at best just waste time of their users/ customers before inevitable rugpull, and at worst, they actively disrupt whole market segments - not creatively disrupt, just in the "blow the whole thing up with VC money, disappear when it's clear the business was never sustainable" kind of way. And again, it's not the acquisitions as a concept that are the problem - it's the pattern of startups being created with acquisition as the goal that is a problem.
        scarface_74 3y ago
- ryandrake 3y ago
  Why would a PE firm be buying (for example) a doctor's office if the doctor-owner was retiring? The doctor is why the business exists in the first place. Without him, it's no longer a doctor's office, it's a charming little suite with front desk people and a few nurses running around. We had a local machine shop (that I used to go to for welding) sadly go out of business because the owner was retiring. I asked him if he considered selling it instead so it could stay open and he said "Who would buy it? I am this shop and I'm retiring. In 5 days it's just going to be a pile of tools."
  - scarface_74 3y ago
    For the patients and as a slow “exit”
  - delfinom 3y ago
    Yea I don't see PEs buying a doctor's office. I have seen "mergers". A doctor will join up with another doctor and then disappear in a year or two. That let's them legally sell the practice while weening patients over. I have had a CPA start that process recently too. Suddenly announced he's joined up with this new CPA firm . Not to worry, he'll still be here to take care of our corporate needs and has transferred everything over (he's late 60s and snowbirding already) A PE may buy up a already larger medical practice chain or something, but never individual practices. The machine shop example is rough, he could do a merger retirement as well, but he needs to have consistent clients that he can bring over to another shop before slowly phasing himself out. Which may not have been scenario unfortunately.
peteradio 3y ago
If only each individual bond could try a little bit harder to resist the acid.
- starcraft2wol 3y ago
  the point is the owners have a positive exit that they choose. And yes people are agents
  - peteradio 3y ago
    Right America is governed by individual incentives.
    - starcraft2wol 3y ago
      There are more kinds of incentives than money.
      - peteradio 3y ago
        Doing what's morally responsible in spite of everyone else is a losers game these days.
justrealist 3y ago
It's partly that, but in medicine (dentistry, fertility, etc) a lot of clinics are being rolled into PE conglomerates because the bureaucratic overhead in medicine has skyrocketed in the past 20 years, and clinic chains have better support for doing all the paperwork and legal side of things.
plagiarist 3y ago
What a convenient way to completely ignore the macro effects, well done.
gmd63 3y ago
You joke but it's not benign. The reason economic regulations exist is to ensure we maintain the economy as a crucible for rewarding the smartest and hardest workers in society. When private money can grow cancerously via pump and dump crypto schemes, overhyping IPO's that peaked during the series A round, and strong arming small branches of independently owned practices (all to later enable milk mode and reap monopolistic profits), the general public and society is left with overlords who do not build, they eat.
- fnimick 3y ago
  When have the smartest and hardest workers ever been the richest?
  - Applejinx 3y ago
    It's easy for me to believe it's not always been (and doesn't have to be) THIS bad. There's functional value in a capitalist system. It just requires ongoing maintenance, to avoid situations like we're currently in. It's not self-repairing. Operated properly, it makes market conditions self-repairing, but this is at the expense of the potential market capturers.
    - ToucanLoucan 3y ago
      It was better when corporate tax rates and income taxes for the incredibly wealthy were much, much higher. My favorite hobby is putting Thatcher and Reagan's faces on economic graphs to show what year they were elected is almost universally either the same year or just about when the global economic system went bugfuck by basically every metric we measure. But, thanks to those two and the larger political milieu they so well represent, those entities are now rich beyond all reason and in a capitalist system that permits things like Citizen's United, money more or less equals political power so the odds of getting any of this addressed are basically nil, along side other issues that would demand corporations make less money: like climate change, crumbling infrastructure, socialized healthcare for the US, better socialized healthcare elsewhere, the vanishing middle class, etc. Private Equity is going to get us all killed in a very real sense.
techdmn 3y ago
They could, but my opinion is that this is putting personal responsibility front and center on what is a systemic problem. If our economic systems encourage the consolidation of wealth, we should change the systems, rather than blaming individuals.
chollida1 3y ago
Well think this through. There are 10 vet practices in your city. 7-8 get rolled up into one uber practice by a PE firm. They now have far less overhead per patient. Billing, equipment and even vets can be amortized over far more patients. You, the hold out clinic, are now more expensive, or have a far smaller profit ratio, thus you are operating at a big disadvantage to the other clinics in your city. You can hold out but what is your edge in this case where your competitor is now bigger and can handle things like a vet quitting as they have a bunch that roam from practice to practice. Or they can handle buying a new machine for millions while the bank won't lend to you due to your shrinking margins. Economies of scale are a thing and can be a very real competitive differentiator. You the hold out are now getting crushed by your competitors while you look around and see your fellow vets taking weekends off to take their new boat to the lake because they sold their practice and you're working your 11th weekend in a row because your other vet quit to work for your competitor that can now pay more than you. I've had friends live this and its not fun.
- 1980phipsi 3y ago
  If the government increases regulations, then it tends to place a bigger burden on small businesses than big businesses for the same reasons you highlighted about overhead.
- Joker_vD 3y ago
  Ah, so the overall economic efficiency improves and then everyone's better off. Wait, what's wrong with that?
  - deleted 3y ago
    [deleted]
  - gmd63 3y ago
    Think of Comcast but for puppies' health
  - jprete 3y ago
    The actual problem is that the unmonetizable value gets tossed out by PE. E.g. customer service will take a massive dive because everyone working for the clinic or whatever else will be time-pressured out of good service. Generally the problem with treating everything via pure financial models is that some things are valuable but hard to measure financially and those are inevitably destroyed by PE and other entropy-maximizers.
TeMPOraL 3y ago
If what's good for an individual short-term was also always good for them long-term, the world would've been an utopia.
twobitshifter 3y ago
Usually what happens is that 60 something year-old founders have retained control and not shared profits with their employees. Looking to sell, the employees can’t buy out the founder, and the founder finds PE with deep pockets. The fork in the road for keeping the company out of PE was passed long before the founder got to retirement age.

scarface_74 3y ago

Then the market should value those companies properly.

Supermancho 3y ago
Not sure what you are saying here. Which companies? Why?
- michaelt 3y ago
  For private equity to take a publicly traded company private, they've got to pay more for it than the public market values it at. For example, in 2016 Softbank was able to buy ARM for US$32 billion, but that was only possible because the stock market priced it below US$32 billion.

Pet_Ant 3y ago

> 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. An argument I heard is that companies prefer to stay private longer to avoid the burden/oversight of SOX etc. The charitable interpretation is that they are too busy growing to be bothered, the less charitable is that they aren't capable of growing if they have to be accountable and forthright.

QuarterReptile 3y ago
The availability of VC will necessarily siphon off enterprises from other funding sources.
- 1980phipsi 3y ago
  VC isn't a panacea and doesn't operate in a vacuum. If you raise the cost of going public and staying public, then that makes VC funding or going private more attractive. The VC funding may come with terms that are not expected by public company investors. But VC-backed companies is only one part of the private equity trend. The other part that is discussed is small owner-operated or partnership firms getting bought up by bigger ones. Here again, if the government increases regulations, then that tends to fall more strongly on small businesses than bigger businesses.
  - QuarterReptile 3y ago
    I agree with everything you have said. I'll just add that, with the path of finding VC well-known and well-worn, we should expect greater difficulty. Even if we somehow reversed the trend of all institutions and bureaucracies to become over time larger and more cumbersome, that is, we streamlined government processes, we should expect an additional hesitation of growing enterprises to return to IPO, because VC is now a comfortable path for a significant portion of the roadmap.
deleted 3y ago
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spiralpolitik 3y ago

It's worse than that. The 401k generation will begin think about retiring in the next few years. Most will discover that their 401K, despite maximum contributions, will be insufficient to retire on. This will either keep older workers in the workforce longer, preventing younger workers for getting into positions, or it will result in discrimination against older workers who will find themselves unable to get jobs, let go, or laid off to make room for younger, cheaper workers. The expectation for your 401k is that it's going to grow by 6-8% each year. If there isn't any room for growth in the market then it's going to be hard to deliver that going forward, compounding the problem for later generations who probably won't be inheriting anything from their parents.

flashback2199 3y ago
> Most will discover that their 401K, despite maximum contributions, will be insufficient to retire on. How will that happen when there has been so much growth in the S&P?
- toomuchtodo 3y ago
  https://www.nerdwallet.com/article/investing/the-average-401k-balance-by-age https://www.nerdwallet.com/article/investing/the-average-401... https://www.gao.gov/blog/growing-disparities-retirement-account-savings https://www.gao.gov/blog/growing-disparities-retirement-acco... https://www.gao.gov/financial-security-older-americans https://www.gao.gov/financial-security-older-americans (401k plans were a way for capital to con Americans that ditching pensions was the way to go; pension contributions became shareholder profits, and most did not or could not contribute to 401ks in any meaningful fashion)
  - flashback2199 3y ago
    Thanks for this pile of links... I don't believe what you're saying that 401k's are somehow not going to be enough to retire. Unless you meant retire where housing prices are rising the fastest.

Eumenes 3y ago

> 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. In the past 2 weeks, my local small biz autobody shop and furnace/HVAC company have been bought by large regional firms. The furnace company refuses to service your boiler w/o buying from their preferred oil supplier, and the autobody shop has adjusted their rates to essentially insure they only work with insurance claims.

gymbeaux 3y ago
It’s very common for auto body shops to only work with insurance claims. I think your best bet is to take the car to a dealership-owned body shop, especially if it’s the dealership you bought the car from, or the same make.
- MisterTea 3y ago
  > It’s very common for auto body shops to only work with insurance claims. Right, because like health care they treat the insurance company like a giant piñata to beat free money out of. Ive seen auto shops lie about damages, things like claiming previous damage is part of a claim - anything to bilk them. Of course the clients don't see any moral issues because their car receives "free" work.
  - gymbeaux 3y ago
    [flagged]

Gustomaximus 3y ago

I've thought about this a bit. This concentration shift seems good for the economy in the short term but a massive loss for society as business increasingly becomes a chains or centralised. Especially in areas that are traditionally owner run like restaurants, pubs, vets, dentists, GP clinic, pharmacy, hardware etc. Capitalism is the best system but we too often forget a core tenant for govt to create a level playing field. We seem to have forgotten this and make it increasingly hard for small business which should be a significant driver of innovation and improvement. I think some possible solutions would be to; 1) Significantly lower taxes for smaller businesses vs larger. Even better bring personal rate inline to company rates... but this would be a very difficult shift for governments. 2) Tax benefits for companies listed and actively traded, so companies are encouraged to list and share wealth/growth. 3) A 'not in the national interest' law for companies that continually pay little to no tax where you would expect them to. Have tax department give something like a 3 year warning they are on the 'consideration list' and if things dont change the tax office can make them sell, or if they prefer close. And then they remain on said list for a couple decades or so to verify. This, while being risky for overuse, would be an effective tool on the worst tax dodgers and wielded in a limited capacity quite useful for those that have high end tax strategists that keep getting around the rules. 4) Limit investment ownership in residential so people dont spend their life trying to buy a house. This will allow people to take some business risk and invest in their entrepreurship far more easily. 5) Put a low market cap limit on core local business like those mentioned above like vets, dentists, GP clinic, pharmacy. Or maybe a progressively sliding scale annual asset tax past a value/outlet of X. Something that limits how big these organisations can get. 6) Stop large consumer distributors selling their own brand product. Not sure how to word this exactly but places like Amazon or large supermarkets, they should be a retailer of other business goods only. Stop them sticking their own rip-off product next to the other. Obviously a load more...

jeffreyrogers 3y ago
I think it will be a cyclical thing. The PE firms actually do run those businesses much more efficiently, but they also become homogenized and that's offputting, which opens the door for new entrants to differentiate themselves.

leishman 3y ago

It’s because of cheap money flowing into Wall Street. The negative impact of ZIRP has only started to be felt.

ikekkdcjkfke 3y ago

Where is all this money coming from?

JumpCrisscross 3y ago

> Newer companies like AirBNB and Uber went public at what could be their max market cap Uber is worth 50%+ its IPO valuations.(EDIT: No it isn’t. Sorry, jet lagged.)

chollida1 3y ago
> Uber is worth 50%+ its IPO valuations. Is it? I just looked at the chart and saw it went public at $45 and it currently trading at $45. Did it split at some point or issue a 50% div?
- ta1243 3y ago
  https://finance.yahoo.com/quote/UBER https://finance.yahoo.com/quote/UBER says opened at $41.91 in May 2019 and is now $42.42 Had it kept track with inflation it would be about $50 - up 15% Had it kept track with S&P it would be about $63 - up 50%
slotrans 3y ago
No it isn't, as 30 seconds of research would show.

globular-toast 3y ago

As John Kay put it, the stock market used to be a way for new businesses to raise capital, now it's a way for already profitable companies to cash out. The example he gives of one of the first ones is Google. So it's been going on for quite a long time now. The funny thing is now many of these companies aren't even profitable. It's all driven by speculation.

jeffreyrogers 3y ago
It's still how many new businesses raise capital. That's how the biotech industry works for example. (In biotech VC just gets you to the IPO stage and you don't cash out at IPO since typically those companies don't even have an approved product yet).
- Andrex 3y ago
  > It's still how many new businesses raise capital. Should it be? Theranos stained biotech badly.
  - jeffreyrogers 3y ago
    Business and markets run on trust. The less trust you have the more overhead you have to verify that every claim your counterparty makes is true. That's expensive and means some worthwhile things become impossible to do profitably. It's a tradeoff and I think in general the US finds a good spot between regulation and ease of doing business, and the rest of the world benefits from it too. There are failures of course, but most of the big ones recently have been in private markets not the public ones.
  - ak217 3y ago
    No knowledgeable biotech VC invested in Theranos, because they were unable to pass due diligence. Theranos investors were unsophisticated family offices who didn't operate in the space, didn't know enough science or technology themselves, and didn't know how to run due diligence. Had Theranos attempted to open up enough to go public in those circumstances, they would have been exposed much more quickly.

cs702 3y ago

I agree! But I also think the rise in interest rates could help reverse this trend, at least somewhat. Consider: Until recently, interest rates in the US and other developed economies had only declined, in fits and starts, since the early 1980's.[a] Not coincidentally, the modern private equity sector was born in the 1980's.[b] Until recently, private equity firms had benefited from interest rates that only decline and valuation multiples that only expand -- for four decades! A lot of deals that "work" when rates only decline will stop working if rates don't. For example, there are a lot of private-equity-backed middle-market businesses, including plenty of roll-ups, that were financed before rates went up, with such high leverage that the companies are now at risk of insolvency if rates don't decline soon. If rates stay at current levels or (gasp!) continue to increase, I'd expect to see a significant contraction in the number of private equity firms. Those private equity firms survive may have to become mainly lenders, i.e., banks in all but name, and sooner or later will end up being regulated as such. --- [a] https://fred.stlouisfed.org/graph/?g=1aNbC https://fred.stlouisfed.org/graph/?g=1aNbC [b] https://en.wikipedia.org/wiki/Private_equity#Private_equity_in_the_1980s https://en.wikipedia.org/wiki/Private_equity#Private_equity_...

jeffreyrogers 3y ago
Those companies are only at risk of insolvency if their debt is variable rate or has a balloon payment due soon. I imagine most PE firms are smart enough to avoid those risks. Banks are also incentivized to negotiate with debtors in those situations since the asset is worth more as a going concern than it would be in bankruptcy and banks don't want to operate a business (they have no expertise there). Most PE deals would work (with lower returns) without any debt. The debt allows them to diversify into more deals (since they put less equity into any given deal).
- cs702 3y ago
  > Those companies are only at risk of insolvency if their debt is variable rate or has a balloon payment due soon. Actually, most LBO-type deals are financed with a combination of bank and bond debt. A shocking number of bond deals will be maturing within 1-3 years, and have to be refinanced. The bank debt, senior to the bond issues, is typically variable-rate and (depending on deal size) split into tranches that must be repaid at different schedules over time. Many PE-backed borrowers in recent years decided not to enter into swap contracts to fix their debt rates. My understanding is that things could get ugly quickly if rates don't come down soon. > Most PE deals would work (with lower returns) without any debt. Actually, if a deal returns less than the yield on corporate debt of similar risk, then the deal does not work. LP's in the PE fund will correctly view it as a failure. The raison d'être of PE funds is to earn returns above those yields. Moreover, if a portfolio company is already loaded with debt, finding buyers that will pay the old multiples given the new rates will prove difficult, if not impossible -- similar to the situation many US homeowners that locked-in ~2% mortgage rates a few years ago face today: They cannot sell their home at the old valuation because prospective buyers are looking at mortgages that cost ~8%/year. Higher interest rates make it hard to impossible to "exit" at valuations that generate decent returns.

Aunche 3y ago

> 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. Almost all of these companies were massively overvalued by the time they IPO'd. I for one am glad that regular people were not allowed to invest in Theranos or WeWork. Looser restrictions on investing would create even more dodgy company's whose primary goal is to scam retail investors, like what we've seen NFTs. > 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 IMO, this is a symptom and not a cause. Vet clinics and medical practices would be terrible investments if it were sufficiently easy to start new vet clinics and medical practices. Likewise, housing would be a terrible investment if it were sufficiently easy to build more housing.

pas 3y ago
It's not terribly hard to start a clinic, but it just makes sense to consolidate, and it doesn't make much sense for anyone who's not a vet to start one (because of the relative pricing power of vets). But it's not bad for vets to be able to exit to PE after they have established the clinic. And after consolidation PE can make better deals with vendors (from pharma to insurance networks to maintenance). (Of course exorbitant rise in vet costs shows there's room for more vet clinics, but it's mostly a side-effect of a lot of rich people spending a lot on their pets.)

Retric 3y ago

Don’t forget about inflation when comparing these numbers. 300M in 1984 is 0.85 Billion today. Some companies IPO at huge valuations, but ShockWave Medical, Inc., had a 2019 IPO at roughly the same valuation as Microsoft and has seen 11x returns since then. Looking at the other 2019 IPO’s you see a lot of volatility but many home runs. https://stockanalysis.com/ipos/2019/ https://stockanalysis.com/ipos/2019/

hnthrowaway0328 3y ago

IMO this also impacts "large" institutional investors such as pension funds. A lot of them are going to hold the bag. I don't see a way to get out of it without a fundamental change.

FireBeyond 3y ago

> 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. When they don't decide to do a leveraged buy out and have the business help fund its acquisition. One small step away from Tony Soprano and the sporting goods store bust out.

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jowea 3y ago

> 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. Can't the regular investors buy PE stock?

yieldcrv 3y ago
No, unless they lie and can cough up the minimum investment amount ($25,000 to $1,000,000) Just a little counterintuitive but feasible
- jowea 3y ago
  I was thinking of the ETFs for PE investment. And aren't there PE firms with public stock?
  - yieldcrv 3y ago
    If 5 out of 1000 PE firms have public stock, thats the same circumstance the article is talking about

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DebtDeflation 3y ago

It's not just PE either. Collectively, Vanguard, State Street, and BlackRock own 28% of the SP500's market cap and one of the three are the majority shareholder in 88% of the SP500.

toss1 3y ago

Yes. I've found that with the big IPOs, while everyone is scrambling to somehow get into the stock pre-IPO, or at the first minute of the sale, the stock almost inevitably goes below the IPO price in the first weeks or months of trading. A bit of patience can yield more value. Then, of course, is the question of whether it will ever go up again... I haven't done the study of whether they are (on average) reliable bargains or fools' gold.

takinola 3y ago

I would be surprised if this argument is borne by the facts. Sure, Bill Gates would be a trillionaire now if Microsoft remained private for longer but for every company that sees tremendous growth after IPO, how many see their shares sink. This investment strategy only works if you are able to predict the top of the market for individual private companies which is likely incredibly hard to do. Given the power law of returns in VC, you only need to get this wrong once or twice before you wipe out the returns of your fund. As for the idea that PE firms are buying up SFH, I would be surprised if this is happening on a meaningfully large scale (anecdotes aside). Homes are real physical assets that need all sorts of actual maintenance on an ongoing basis. I don't know of any investment firm that is set up in a way that supports this type of operational burden. Even if they outsourced the work, it still wouldn't make sense to have any management overhead to keep on top of it. Investment firms want assets that can exist (for all practical purposes) inside of a spreadsheet. Homes are the opposite of that.