6 ms·

Private equity piling on debt like never before

64 points by hhs 3y ago

superhumanuser 3y ago
Lots of fear porn on HN recently.
- wolverine876 3y ago
  What do you mean by that? What other posts?
  - Game_Ender 3y ago
    The whole slew of layoff posts from Amazon, Google, and others.
    - azinman2 3y ago
      Seems very relevant for an SV focused community.
- sureThyngie 3y ago
  [dead]
droopyEyelids 3y ago
It sounds like this is the real “late stage capitalism” where the contradictions in the system are causing it to eat itself.
- probablypower 3y ago
  This post means literally nothing. Please put in more effort, or refrain from contributing to discussions where you have no value to provide.
jacknews 3y ago
"waffle waffle ... typically used by PE firms to help them return money to investors. waffle waffle" This scam, err, scheme, is simply a way for 'investors' to squeeze out all the company's speculative value in a quick cash lump sum, leaving behind a zombie corpse crippled by debt.
- wolverine876 3y ago
  That stereotype of PE investors is about how PE treats the businesses it invests in; it's not something they do to themselves.
  - SV_BubbleTime 3y ago
    What if someone found out they were delicious too?
    - selimthegrim 3y ago
      Gobble gobble.
  - colechristensen 3y ago
    True, regardless debt is used all over the place to “liquidate” assets without actually selling them as a tax scam. If you sell something and realize gains then you have to pay taxes and such. If you take out a loan against the increased value of an asset without selling, you get the profits without anybody charging you taxes on them. There are more complex benefits too. It’s a hole in regulation that’s too complicated to legislate against and one of the hidden ways wealth is shielded from tax.
    - dataflow 3y ago
      I don't really understand the hole you mentioned here. If you take out a loan against the increased value of an asset without selling, then how do you "get the profits"? Don't you still owe that loan back?
frfl 3y ago
> this debt uses cash flows such as fee streams and equity returns as collateral. Sounds a bit like what some European football (soccer) clubs do (to their determent at times) selling future earnings to secure financing. I think Barcelona did something like this selling part of their future TV revenue income to secure financing.
buffington 3y ago
Can someone explain in simple terms what this article was saying? I tried, and thought I knew, and began to realize how little I knew about anything the further I read.
- fakedang 3y ago
  PE firms are using non traditional collateral for getting financing for their acquisitions, since on hand cash is at its lowest in many years. Traditionally, PE firms would obtain cheap financing from a bank or another finance provider to carry out a leveraged buyout - the PE firm pays a small percent of the acquisition cost using cash, the banks cover the rest, while interest payments to the bank are covered by cash flows of the acquisition target. But with the higher cost of financing that is available for traditional collateral like the acquisition firm, the PE firms have had to resort to providing collateral using other sources, such as the cash flows of the PE management company itself, or the equity returns of the acquisition target. This could be the fees that are paid to the PE firms themselves to manage the money - it would have been very taboo to expose the management company to risk like that, but now PE firms don't care. Interest rates are skyhigh, around 20%, which is actually high for corporate, and usually the rate for consumer loans. So yeah, PE is changing quite significantly, and the old model of doing business won't work.
- skybrian 3y ago
  Private equity firms need money and lenders are charging them very high interest rates with more strings attached. (There's more than that, but I'm not an expert either.)
- nocoiner 3y ago
  The article is describing debt incurred in connection with private equity investments at two separate and distinct levels of the overall private equity fund structure. I’m trying to keep this simple and straightforward, but assume some knowledge of corporate finance - apologies if I’ve missed the mark and have either undersimplified or oversimplified. A private equity fund is an entity - usually a limited partnership - that is created by a “sponsor” (called a “manco” in that article for “management company”) and raises money from outside investors. The sponsor manages the fund and the investments it makes using that raised capital (and in exchange for various management fees paid by the fund to the sponsor). Note that, for a variety of reasons, those investments usually take the form of an investor (limited partner) agreeing to contribute cash up to a designated amount - but not upfront. Instead, the investor funds that agreement to invest cash in the fund when the sponsor asks for a portion of it to be sent to the fund so the fund can make an investment. It’s been standard practice for a while for a private equity fund to borrow money secured by its assets, which are generally a combination of the ownership interests in the companies it has invested in and its right to cause its limited partners to contribute additional capital to the partnership. By using proceeds funded from debt, the fund can improve the way that its returns to its equity investors are measured, which results in the sponsor receiving enhanced incentive economics. The main new development reported by this article is that private equity sponsors are now pursuing debt at the sponsor level that is secured by the sponsor’s incentive economics mentioned above as well as any management fees paid to the sponsors by the funds that it manages. This doesn’t mean that the companies that private equity invests in are more indebted or more likely to collapse due to leverage - instead, the article is reporting that the overall structure of a private equity investment (an operating company owned by a fund that is managed by a sponsor) is seeing additional levels of debt at the top level of that corporate structure.
s1artibartfast 3y ago
There is nothing wrong with buying and liquidating a company. Piling up debt is just one of many ways to do it. I don't have much sympathy for banks speculating on companies and ending up loaning more than the collateral is worth. Hopefully this won't be the next bailout
- mtsr 3y ago
  Operating under the assumption that companies provide no value to society, maybe. Otherwise this is extracting value from companies and then leaving society worse off. These PEs are the locusts of the financial world.
  - anovikov 3y ago
    That's what we need to assume: companies usually are a detriment to society. I am more and more starting to see life as "you harm the world when you make the money; you benefit the world when you spend it". Hard to see opposite examples. They seem to be more like exceptions than happen when things didn't go according to plan for the companies.
    - yterdy 3y ago
      It's almost as if the coming-together-to-complete-a-mission that is a business has a raison d'etre other than profit (and, particularly, returning profit to investors), or something.
      - konschubert 3y ago
        Profit is a great incentive. All sides can profit. Life is positive-sum.
        yterdy 3y ago
        Clearly not. This is wishful-thinking.
    - 3y ago
Animats 3y ago
Who is loaning them money? Of course, at 19%, even crappy investments look good. Unless they go to 0.
- dehrmann 3y ago
  It might be a bet that interest rates drop this year, and you can sell the bonds for more in 12 months. You're not too concerned with what happens after that.
  - ta988 3y ago
    Sounds like a dangerous bet to make in a really tense year politically.
    - dehrmann 3y ago
      Conventional wisdom is the tension leads to lower interest rates. War in the Middle East? Lower rates. Stumbling economy in an election year? Lower rates. The Fed watches neither of those metrics; they watch inflation and unemployment, so I wouldn't actually make this bet, but it's a story people like to tell.
      - ta988 3y ago
        They take more than that into account see https://en.m.wikipedia.org/wiki/Federal_Open_Market_Committee https://en.m.wikipedia.org/wiki/Federal_Open_Market_Committe...
nostromo 3y ago
I know it's hard to buy a house right now and some people have been laid off which is always the worst and prices are still too high. But I must say that the economy seems more "normal" than it has in a long, long time. Private Equity is paying a ton of money to borrow. Startups don't raise at billion-dollar valuations on a dream and a white-paper. Monkey NFTs are worthless. Several crypto currencies that seemed like thinly veiled scams are basically dead. China has stopped building empty cities. This all seems pretty good. If the US Government wasn't staring at a mushroom cloud of unsustainable debt without future interest rate decreases, I'd say things are down right peachy.
- atemerev 3y ago
  Well, I refer you to this fine chart: https://fred.stlouisfed.org/series/T10Y2Y https://fred.stlouisfed.org/series/T10Y2Y (look at max date range)
  - jgilias 3y ago
    Thank you for the chart! A bit unfair that you’re getting downvoted, it’s not your fault that the yield curve inversion is unfolding, and that this historically has been a strong leading indicator of a recession.
- JakeAl 3y ago
  US debt to GDP ratio is >120%. By IMF definition that's an economic death spiral. The death spiral becomes irreversible by 2028 because by then the interest on the loans for all that money we've been printing for decades to prop up the fake economy will only cover the interest, no longer the principal, which will continue to accrue interest, meaning it can never be paid down and the US will be insolvent (cease to exist) by 2042. That road we've been kicking the can down for decades -- this is the end of it. Social Security will be insolvent in a decade. Medicare -- don't ask. Historically about this time 1 or all of 3 things happen: 1) Global Depression/Massive Austerity 2) World War 3) A new monetary system and all the things that go with that, most notably a new world order and loss of civil liberties and rights in exchange for security, housing, food (indentured servitude). The economy is quantifiably worse than it has ever been. Money in the economy is contracting (disappearing) at the highest rate in history (look up the M2 Real.) It just takes a while for the trickle of trickle down economics to make it all the way back to the spout. All those jobs they keep revising down after the fact turned out to be government jobs, so the only thing growing is actually the government, and the only economic growth is coming from fiscal (government) spending that has been slowly making it's way into the economy after years. It's pretty nuts. We're literally borrowing money from China to send to Ukraine and Gaza. Those illegal immigrants--I mean "refugees" are costing each taxpayer over $9,000 a year. Kids are born today owing the government over $100,000. Their kids, right now it'll be $250,000. Dark Age onset type stuff we're witnessing if you've ever read a book about how the Dark Ages (Bronze age, Fall of the Roman Empire) happened. You know that "This is Fine" meme. Yeah, that. Even Apple's growth rate is the slowest it's been in 5 years. Wall Street and Big Tech have been hoarding money and are pouring it all into the AI revolution so the robots can take over and restore order when the Technological Singularity happens by 2028 thanks to the billionaires Accelerationism plans. Good times if you like dystopian sci-fi movies. Next 20 years are going be a real hoot. I've always wanted a battle van. And thank Elon we'll finally have one that can be solar powered. Eat your heart out Mad Max. See you in the wasteland, cowboys.
Nishamarshall 3y ago
[dead]

64 points by hhs 3y ago

superhumanuser 3y ago

Lots of fear porn on HN recently.

wolverine876 3y ago
What do you mean by that? What other posts?
- Game_Ender 3y ago
  The whole slew of layoff posts from Amazon, Google, and others.
  - azinman2 3y ago
    Seems very relevant for an SV focused community.
sureThyngie 3y ago
[dead]

droopyEyelids 3y ago

It sounds like this is the real “late stage capitalism” where the contradictions in the system are causing it to eat itself.

probablypower 3y ago
This post means literally nothing. Please put in more effort, or refrain from contributing to discussions where you have no value to provide.

jacknews 3y ago

"waffle waffle ... typically used by PE firms to help them return money to investors. waffle waffle" This scam, err, scheme, is simply a way for 'investors' to squeeze out all the company's speculative value in a quick cash lump sum, leaving behind a zombie corpse crippled by debt.

wolverine876 3y ago
That stereotype of PE investors is about how PE treats the businesses it invests in; it's not something they do to themselves.
- SV_BubbleTime 3y ago
  What if someone found out they were delicious too?
  - selimthegrim 3y ago
    Gobble gobble.
- colechristensen 3y ago
  True, regardless debt is used all over the place to “liquidate” assets without actually selling them as a tax scam. If you sell something and realize gains then you have to pay taxes and such. If you take out a loan against the increased value of an asset without selling, you get the profits without anybody charging you taxes on them. There are more complex benefits too. It’s a hole in regulation that’s too complicated to legislate against and one of the hidden ways wealth is shielded from tax.
  - dataflow 3y ago
    I don't really understand the hole you mentioned here. If you take out a loan against the increased value of an asset without selling, then how do you "get the profits"? Don't you still owe that loan back?

frfl 3y ago

> this debt uses cash flows such as fee streams and equity returns as collateral. Sounds a bit like what some European football (soccer) clubs do (to their determent at times) selling future earnings to secure financing. I think Barcelona did something like this selling part of their future TV revenue income to secure financing.

buffington 3y ago

Can someone explain in simple terms what this article was saying? I tried, and thought I knew, and began to realize how little I knew about anything the further I read.

fakedang 3y ago
PE firms are using non traditional collateral for getting financing for their acquisitions, since on hand cash is at its lowest in many years. Traditionally, PE firms would obtain cheap financing from a bank or another finance provider to carry out a leveraged buyout - the PE firm pays a small percent of the acquisition cost using cash, the banks cover the rest, while interest payments to the bank are covered by cash flows of the acquisition target. But with the higher cost of financing that is available for traditional collateral like the acquisition firm, the PE firms have had to resort to providing collateral using other sources, such as the cash flows of the PE management company itself, or the equity returns of the acquisition target. This could be the fees that are paid to the PE firms themselves to manage the money - it would have been very taboo to expose the management company to risk like that, but now PE firms don't care. Interest rates are skyhigh, around 20%, which is actually high for corporate, and usually the rate for consumer loans. So yeah, PE is changing quite significantly, and the old model of doing business won't work.
skybrian 3y ago
Private equity firms need money and lenders are charging them very high interest rates with more strings attached. (There's more than that, but I'm not an expert either.)
nocoiner 3y ago
The article is describing debt incurred in connection with private equity investments at two separate and distinct levels of the overall private equity fund structure. I’m trying to keep this simple and straightforward, but assume some knowledge of corporate finance - apologies if I’ve missed the mark and have either undersimplified or oversimplified. A private equity fund is an entity - usually a limited partnership - that is created by a “sponsor” (called a “manco” in that article for “management company”) and raises money from outside investors. The sponsor manages the fund and the investments it makes using that raised capital (and in exchange for various management fees paid by the fund to the sponsor). Note that, for a variety of reasons, those investments usually take the form of an investor (limited partner) agreeing to contribute cash up to a designated amount - but not upfront. Instead, the investor funds that agreement to invest cash in the fund when the sponsor asks for a portion of it to be sent to the fund so the fund can make an investment. It’s been standard practice for a while for a private equity fund to borrow money secured by its assets, which are generally a combination of the ownership interests in the companies it has invested in and its right to cause its limited partners to contribute additional capital to the partnership. By using proceeds funded from debt, the fund can improve the way that its returns to its equity investors are measured, which results in the sponsor receiving enhanced incentive economics. The main new development reported by this article is that private equity sponsors are now pursuing debt at the sponsor level that is secured by the sponsor’s incentive economics mentioned above as well as any management fees paid to the sponsors by the funds that it manages. This doesn’t mean that the companies that private equity invests in are more indebted or more likely to collapse due to leverage - instead, the article is reporting that the overall structure of a private equity investment (an operating company owned by a fund that is managed by a sponsor) is seeing additional levels of debt at the top level of that corporate structure.

s1artibartfast 3y ago

There is nothing wrong with buying and liquidating a company. Piling up debt is just one of many ways to do it. I don't have much sympathy for banks speculating on companies and ending up loaning more than the collateral is worth. Hopefully this won't be the next bailout

mtsr 3y ago
Operating under the assumption that companies provide no value to society, maybe. Otherwise this is extracting value from companies and then leaving society worse off. These PEs are the locusts of the financial world.
- anovikov 3y ago
  That's what we need to assume: companies usually are a detriment to society. I am more and more starting to see life as "you harm the world when you make the money; you benefit the world when you spend it". Hard to see opposite examples. They seem to be more like exceptions than happen when things didn't go according to plan for the companies.
  - yterdy 3y ago
    It's almost as if the coming-together-to-complete-a-mission that is a business has a raison d'etre other than profit (and, particularly, returning profit to investors), or something.
    - konschubert 3y ago
      Profit is a great incentive. All sides can profit. Life is positive-sum.
      - yterdy 3y ago
        Clearly not. This is wishful-thinking.
  - 3y ago

Animats 3y ago

Who is loaning them money? Of course, at 19%, even crappy investments look good. Unless they go to 0.

dehrmann 3y ago
It might be a bet that interest rates drop this year, and you can sell the bonds for more in 12 months. You're not too concerned with what happens after that.
- ta988 3y ago
  Sounds like a dangerous bet to make in a really tense year politically.
  - dehrmann 3y ago
    Conventional wisdom is the tension leads to lower interest rates. War in the Middle East? Lower rates. Stumbling economy in an election year? Lower rates. The Fed watches neither of those metrics; they watch inflation and unemployment, so I wouldn't actually make this bet, but it's a story people like to tell.
    - ta988 3y ago
      They take more than that into account see https://en.m.wikipedia.org/wiki/Federal_Open_Market_Committee https://en.m.wikipedia.org/wiki/Federal_Open_Market_Committe...

nostromo 3y ago

I know it's hard to buy a house right now and some people have been laid off which is always the worst and prices are still too high. But I must say that the economy seems more "normal" than it has in a long, long time. Private Equity is paying a ton of money to borrow. Startups don't raise at billion-dollar valuations on a dream and a white-paper. Monkey NFTs are worthless. Several crypto currencies that seemed like thinly veiled scams are basically dead. China has stopped building empty cities. This all seems pretty good. If the US Government wasn't staring at a mushroom cloud of unsustainable debt without future interest rate decreases, I'd say things are down right peachy.

atemerev 3y ago
Well, I refer you to this fine chart: https://fred.stlouisfed.org/series/T10Y2Y https://fred.stlouisfed.org/series/T10Y2Y (look at max date range)
- jgilias 3y ago
  Thank you for the chart! A bit unfair that you’re getting downvoted, it’s not your fault that the yield curve inversion is unfolding, and that this historically has been a strong leading indicator of a recession.
JakeAl 3y ago
US debt to GDP ratio is >120%. By IMF definition that's an economic death spiral. The death spiral becomes irreversible by 2028 because by then the interest on the loans for all that money we've been printing for decades to prop up the fake economy will only cover the interest, no longer the principal, which will continue to accrue interest, meaning it can never be paid down and the US will be insolvent (cease to exist) by 2042. That road we've been kicking the can down for decades -- this is the end of it. Social Security will be insolvent in a decade. Medicare -- don't ask. Historically about this time 1 or all of 3 things happen: 1) Global Depression/Massive Austerity 2) World War 3) A new monetary system and all the things that go with that, most notably a new world order and loss of civil liberties and rights in exchange for security, housing, food (indentured servitude). The economy is quantifiably worse than it has ever been. Money in the economy is contracting (disappearing) at the highest rate in history (look up the M2 Real.) It just takes a while for the trickle of trickle down economics to make it all the way back to the spout. All those jobs they keep revising down after the fact turned out to be government jobs, so the only thing growing is actually the government, and the only economic growth is coming from fiscal (government) spending that has been slowly making it's way into the economy after years. It's pretty nuts. We're literally borrowing money from China to send to Ukraine and Gaza. Those illegal immigrants--I mean "refugees" are costing each taxpayer over $9,000 a year. Kids are born today owing the government over $100,000. Their kids, right now it'll be $250,000. Dark Age onset type stuff we're witnessing if you've ever read a book about how the Dark Ages (Bronze age, Fall of the Roman Empire) happened. You know that "This is Fine" meme. Yeah, that. Even Apple's growth rate is the slowest it's been in 5 years. Wall Street and Big Tech have been hoarding money and are pouring it all into the AI revolution so the robots can take over and restore order when the Technological Singularity happens by 2028 thanks to the billionaires Accelerationism plans. Good times if you like dystopian sci-fi movies. Next 20 years are going be a real hoot. I've always wanted a battle van. And thank Elon we'll finally have one that can be solar powered. Eat your heart out Mad Max. See you in the wasteland, cowboys.

Nishamarshall 3y ago

[dead]