3 ms·
> Private equity aims for 3-5 year returns I honestly don't understand how private equity makes money at all. The playbook is: 1. Borrow a ton of money and bu
by jmyeet 2y ago
> Private equity aims for 3-5 year returns
I honestly don't understand how private equity makes money at all. The playbook is:
1. Borrow a ton of money and buy a company on an LBO
2. Load up the company with debt, often complicated, exploding debt, to repay the original loan. Possibly sell off assets like real estate to pay off the original loan; and
3. Here's the kicker: sell off the company for a profit.
But we've seen time and time again that PE is a death sentence. Toys R Us, Red Lobster, numerous others. The company seemingly always explodes under the debt after the original snake oil salesman have cashed out. But my point is: who keeps falling for this and buying a PE hollowed out husk?
- dehrmann 2y agoYou've seen publicized examples (Toys R Us) where it played out like that, but that narrative doesn't generally pass the smell test–no counterparty would keep making bad loans. There are cases where companies are mismanaged, their value is as a real estate holding company, etc. and PE improves operations and creates a more investable business. The other thing is that like VC, PE has become saturated, so the good opportunities just aren't there anymore.
- bogtog 2y agoI've also wondered how banks get convinced to offer companies the debt in these LBOs. The only explanation I see is that failures (Toys R Us, etc.) become well-known while successful LBOs and sales of companies with long-term profitability are quiet
- kasey_junk 2y agoYou are describing only 1 kind of private equity and only 1 subclass of that. But there are lots of well publicized lbo success stories as well. Hilton, Safeway, Dell, Nabisco. The list goes on.
- cloudbonsai 2y ago> Hilton, Safeway, Dell, Nabisco. The list goes on. For what it's worth, KKR's takeover of RJR Nabisco was actually a flop. KKR bought the company in 1988, and then spent 15+ years trying painfully to exit the position. It is widely believed that it was the major reason why their 1987 vintage turned out to be disappointing.
- kasey_junk 2y agoI more meant when it was successful for the acquired company, but that’s a good call out that there are outcomes that are break the meme in that direction as well.