4 ms·

Thanks, yes, that's a good summary. I think if the original claim was that the PE business model is pathological and parasitic because it is (economic) value-d

by tome 3y ago

Thanks, yes, that's a good summary. I think if the original claim was that the PE business model is pathological and parasitic because it is (economic) value-destroying then the claim must be false. Other financial stakeholders wouldn't participate, because they would make an economic loss. If the claim is that it is pathological and parasitic because it leaves employees and customers worse off that's another argument, and I could see myself agreeing, but it's a value judgement, not a financial or economic one. In principle there's nothing that PE can't do that owner-operators can't also do. The objection is to the outcome, not the means they use to get the outcome.

dllthomas 3y ago
There's potentially room for value to be destroyed while still enough is extracted to pay off the debts. > In principle there's nothing that PE can't do that owner-operators can't also do. As others have got at, in bankruptcy owners (of any sort) get paid last; debt gets paid first. Borrowing to pay the owners makes "wind down the company" more attractive by letting the relevant decision-makers cut in line. Outside of PE you see a similar dynamic with funding stock buybacks with debt.
- tome 3y ago
  Right, but in both cases you have to pay out of retained earnings. You can't "pay out using borrowed money"! You can borrow to get more cash on hand, and then pay out, but that's not the same thing: dividends are never allowed to take the equity in the company below zero. Dividends are always paid out of profits that have already been realised, and either kept as cash/investments or put into capital. (Having said that I'm not a corporate accountant so I'm open to correction, but no one has posted any technical details about this matter that make me think I'm mistaken, yet.) > Borrowing to pay the owners makes "wind down the company" more attractive by letting the relevant decision-makers cut in line. This bit I don't understand. It reads like a criticism, but what's wrong with winding down a company that's not deploying its capital as efficiently as it could be? (Wrong economically/financially, that is; I've already explained that I'm in sympathy with the effect on customers and workers.)

by tome 3y ago

dllthomas 3y ago

There's potentially room for value to be destroyed while still enough is extracted to pay off the debts. > In principle there's nothing that PE can't do that owner-operators can't also do. As others have got at, in bankruptcy owners (of any sort) get paid last; debt gets paid first. Borrowing to pay the owners makes "wind down the company" more attractive by letting the relevant decision-makers cut in line. Outside of PE you see a similar dynamic with funding stock buybacks with debt.

tome 3y ago
Right, but in both cases you have to pay out of retained earnings. You can't "pay out using borrowed money"! You can borrow to get more cash on hand, and then pay out, but that's not the same thing: dividends are never allowed to take the equity in the company below zero. Dividends are always paid out of profits that have already been realised, and either kept as cash/investments or put into capital. (Having said that I'm not a corporate accountant so I'm open to correction, but no one has posted any technical details about this matter that make me think I'm mistaken, yet.) > Borrowing to pay the owners makes "wind down the company" more attractive by letting the relevant decision-makers cut in line. This bit I don't understand. It reads like a criticism, but what's wrong with winding down a company that's not deploying its capital as efficiently as it could be? (Wrong economically/financially, that is; I've already explained that I'm in sympathy with the effect on customers and workers.)