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Just want to highlight this portion: > or extract value from them "Only costing 7 dental practices' worth of capital to effectively run 10 practices" is the i

Just want to highlight this portion: > or extract value from them "Only costing 7 dental practices' worth of capital to effectively run 10 practices" is the idealized vision for what PE can and wants to do. In practice, what ends up happening is extracting value by financial maneuvers like directing the companies they own to sell off assets, but charging a transaction fee so the PE group gets a cut of the sales. Or by owning a company and being its largest creditor -- getting to discharge liabilities as the owner by declaring bankruptcy but subsequently still maintaining control over the company as its largest creditor. [0] (Ctrl+f for "Sun Capital" in the page). Disclaimer: I am an employee of a firm that was somewhat recently acquired by private equity. [0]: https://www.ineteconomics.org/perspectives/blog/private-equity-is-out-of-control-and-looting-america-this-prosecutor-says-we-can-fix-it https://www.ineteconomics.org/perspectives/blog/private-equi...

hack_fraud13 2y ago
I'm curious how this actually works. If it were that easy to buy a company, bankrupt it, and somehow make money selling it off again why wouldn't everyone do that instead of going through the trouble of operating the business? It doesn't make sense why selling capital equipment would pay for the acquisition, when almost every business trades over book value. Loading it with debt and paying the PE firm a fee doesn't sound like it would cover the cost of acquisition, either. A lot is said on the internet of the practice of loading companies with debt, but done within reason this is the financially responsible thing to do. There's even a financial theory that debt provides a disciplining effect on management[0], meaning that the management of companies with reasonable debt levels are less likely to take on unfavorable risks and more likely to find returns above the WACC. The point of leverage is that it increases returns. Here's a really good example of that in the context of real estate, where leverage almost doubles the IRR. [1] [0]https://www.jstor.org/stable/1818789 https://www.jstor.org/stable/1818789 [1]https://www.youtube.com/watch?v=ocnMZDp52zA&list=PLyyvHNlYa0zTiE39lTKPQrSqb5IW_twZH&index=3 https://www.youtube.com/watch?v=ocnMZDp52zA&list=PLyyvHNlYa0...
- Spooky23 2y ago
  They “sell” stuff to closely held entities and then lease them back. The principals take a vig from everything. It’s not always an objective for the target company to go bankrupt, but if they do, the management has already pulled their money out. A company I worked for was a cash cow used to borrow and buy 3 other companies. The combined entity grew due to some growth hack stuff and one-shots, then got acquired. The PE boys made a lot of money, and the company itself was pretty much toast after the second acquisition.
  - hack_fraud13 2y ago
    Thanks I appreciate the clarification. You're referring to a leaseback, right? From the research I've done, I've mostly seen it happen in the context of real estate, e.g. with Darden when Starboard Value took over [0]. I think the rebuttals to management on slide 38. What I wonder about this is in cases where the real estate is spun off into a REIT, does the original company keep shares in the REIT, or are transactions like this purely for one-time raising capital? [0]https://www.sec.gov/Archives/edgar/data/940944/000092189514000700/ex991dfan14a206297125_033114.pdf https://www.sec.gov/Archives/edgar/data/940944/0000921895140...

hack_fraud13 2y ago

I'm curious how this actually works. If it were that easy to buy a company, bankrupt it, and somehow make money selling it off again why wouldn't everyone do that instead of going through the trouble of operating the business? It doesn't make sense why selling capital equipment would pay for the acquisition, when almost every business trades over book value. Loading it with debt and paying the PE firm a fee doesn't sound like it would cover the cost of acquisition, either. A lot is said on the internet of the practice of loading companies with debt, but done within reason this is the financially responsible thing to do. There's even a financial theory that debt provides a disciplining effect on management[0], meaning that the management of companies with reasonable debt levels are less likely to take on unfavorable risks and more likely to find returns above the WACC. The point of leverage is that it increases returns. Here's a really good example of that in the context of real estate, where leverage almost doubles the IRR. [1] [0]https://www.jstor.org/stable/1818789 https://www.jstor.org/stable/1818789 [1]https://www.youtube.com/watch?v=ocnMZDp52zA&list=PLyyvHNlYa0zTiE39lTKPQrSqb5IW_twZH&index=3 https://www.youtube.com/watch?v=ocnMZDp52zA&list=PLyyvHNlYa0...

Spooky23 2y ago
They “sell” stuff to closely held entities and then lease them back. The principals take a vig from everything. It’s not always an objective for the target company to go bankrupt, but if they do, the management has already pulled their money out. A company I worked for was a cash cow used to borrow and buy 3 other companies. The combined entity grew due to some growth hack stuff and one-shots, then got acquired. The PE boys made a lot of money, and the company itself was pretty much toast after the second acquisition.
- hack_fraud13 2y ago
  Thanks I appreciate the clarification. You're referring to a leaseback, right? From the research I've done, I've mostly seen it happen in the context of real estate, e.g. with Darden when Starboard Value took over [0]. I think the rebuttals to management on slide 38. What I wonder about this is in cases where the real estate is spun off into a REIT, does the original company keep shares in the REIT, or are transactions like this purely for one-time raising capital? [0]https://www.sec.gov/Archives/edgar/data/940944/000092189514000700/ex991dfan14a206297125_033114.pdf https://www.sec.gov/Archives/edgar/data/940944/0000921895140...