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Is it correct to understand private equity as transferring service quality to the initial set of customers (who were subsidised) from the new customers who have

Is it correct to understand private equity as transferring service quality to the initial set of customers (who were subsidised) from the new customers who have to give up quality to make the whole venture feasible?

JumpCrisscross 1y ago
No. Private equity means investors who buy equity in non-public companies. That's it. (It used to imply leverage, but that distinction has blurred away.) In popular discourse it's close to a meaningless term.
- simianwords 1y ago
  You are technically right but I wanted to understand the bigger reason of why this happens: A company runs well. But then they sell to a private equity. The quality goes down. This is the common critique against private equity.
  - Matticus_Rex 1y ago
    There are a bunch of different patterns (not all of which reduce quality), but usually when a company is sold to PE and quality goes down it's because the company was in trouble, either because they weren't profitable (or were, but only on paper), or were in a liquidity crunch, or were facing down imminent changes that would make them unprofitable. People are often comparing to a situation where the company continued doing things that weren't sustainable long-term.
    - simianwords 1y ago
      Yes this is what I was referring to. So it’s like the past customers were borrowing quality from future customers. The blame is usually put on the private equity for reducing quality but I wanted to understand the bigger reason behind it.
  - JumpCrisscross 1y ago
    > A company runs well. But then they sell to a private equity. The quality goes down I'm sceptical this pattern is true. But because of the aforementioned ambiguity in terms of what constites private equity, it's an essentially unanswerable question. If you want to support the hypothesis, you focus on investors who use a lot of leverage (LBOs) and those who focus on distressed assets. There is reason to criticise the former, which often amounts to limited-liability arbitrage. The latter is just sampling bias. Similarly, if you wanted to reject the hypothesis, you'd include venture capital in private equity, as well family offices that quietly collect businesses in an area they've long operated in, but want to say they're in private equity versus the family restaurant-parts supply business or whatnot. Going back to something like disability services, I don't see it being run phenomenally better by a VC or family or public company. The problem is fundamental to the profit incentives of the industry. Not the fact that the owners brand themselves as private equity.
  - Ekaros 1y ago
    Many private businesses "leave money on table". Private equity then acquires these and aim to extract maximum amount of value. Leaving money on table is probably general good. Like employees are reasonably paid, customers aren't charged maximum they can bear. Quality is not lowered as low as possible... But ofc, if you pay for a company based on not leaving money on table calculation or bet on doing that later all those will change. Then there are also the actually struggling and dying off companies. But I do not believe that is every one that is being acquired.
    - simianwords 1y ago
      Leaving money on the table is not an efficient way to run a sustainable business. No wonder they are usually sold to PE.
_DeadFred_ 1y ago
Search Kagi for 1980s leveraged buyout and/or corporate raiders to get a start understanding how PE operate. Then realize that they have since optimized (profits must go up) upon that model of extraction at all costs for almost 40 years, and rebranded as PE for optics. In 1980s Reagan/Yuppie/money obsessed America these guys were considered scum. In 2025 'the line must go up' America they are everywhere and considered 'you just have to accept them as part of capitalism' (even though 1980s Reagan America rejected them.)

JumpCrisscross 1y ago

No. Private equity means investors who buy equity in non-public companies. That's it. (It used to imply leverage, but that distinction has blurred away.) In popular discourse it's close to a meaningless term.

simianwords 1y ago
You are technically right but I wanted to understand the bigger reason of why this happens: A company runs well. But then they sell to a private equity. The quality goes down. This is the common critique against private equity.
- Matticus_Rex 1y ago
  There are a bunch of different patterns (not all of which reduce quality), but usually when a company is sold to PE and quality goes down it's because the company was in trouble, either because they weren't profitable (or were, but only on paper), or were in a liquidity crunch, or were facing down imminent changes that would make them unprofitable. People are often comparing to a situation where the company continued doing things that weren't sustainable long-term.
  - simianwords 1y ago
    Yes this is what I was referring to. So it’s like the past customers were borrowing quality from future customers. The blame is usually put on the private equity for reducing quality but I wanted to understand the bigger reason behind it.
- JumpCrisscross 1y ago
  > A company runs well. But then they sell to a private equity. The quality goes down I'm sceptical this pattern is true. But because of the aforementioned ambiguity in terms of what constites private equity, it's an essentially unanswerable question. If you want to support the hypothesis, you focus on investors who use a lot of leverage (LBOs) and those who focus on distressed assets. There is reason to criticise the former, which often amounts to limited-liability arbitrage. The latter is just sampling bias. Similarly, if you wanted to reject the hypothesis, you'd include venture capital in private equity, as well family offices that quietly collect businesses in an area they've long operated in, but want to say they're in private equity versus the family restaurant-parts supply business or whatnot. Going back to something like disability services, I don't see it being run phenomenally better by a VC or family or public company. The problem is fundamental to the profit incentives of the industry. Not the fact that the owners brand themselves as private equity.
- Ekaros 1y ago
  Many private businesses "leave money on table". Private equity then acquires these and aim to extract maximum amount of value. Leaving money on table is probably general good. Like employees are reasonably paid, customers aren't charged maximum they can bear. Quality is not lowered as low as possible... But ofc, if you pay for a company based on not leaving money on table calculation or bet on doing that later all those will change. Then there are also the actually struggling and dying off companies. But I do not believe that is every one that is being acquired.
  - simianwords 1y ago
    Leaving money on the table is not an efficient way to run a sustainable business. No wonder they are usually sold to PE.

_DeadFred_ 1y ago

Search Kagi for 1980s leveraged buyout and/or corporate raiders to get a start understanding how PE operate. Then realize that they have since optimized (profits must go up) upon that model of extraction at all costs for almost 40 years, and rebranded as PE for optics. In 1980s Reagan/Yuppie/money obsessed America these guys were considered scum. In 2025 'the line must go up' America they are everywhere and considered 'you just have to accept them as part of capitalism' (even though 1980s Reagan America rejected them.)