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> Banks are lending to private equity firms to fund purchases of businesses. Yes some businesses are SaaS but here's the real problem: Many businesses' sole pu

by o-o- 7mo ago

> Banks are lending to private equity firms to fund purchases of businesses. Yes some businesses are SaaS but here's the real problem: Many businesses' sole purpose is _leveraged buy-outs_ which really is the devil in disguise. It goes like this: A VC specialising in veterinary clinics finds a nice, privately owned town clinic with regular customers and "fair" prices, approach the owners saying "we love the clinic you've built! We'll buy your clinic for $2,500,000! You've really earned your exit!". So now the VC lends the money from the bank, buys the clinic, and here's the important part: _they push the debt onto the clinic's books_. So all of a sudden the nice town clinic has $2,500,000 in debt, raise prices accordingly, ~~burn out personnel~~ slim operations accordingly, and any surplus that doesn't go to interest and amortization goes straight to the VC. Debt and collateral on the veterinary clinics. Risk free revenue to the VC.

pembrook 7mo ago
So yes, PE funds are probably overvalued right now and there are a lot of PE funds getting rich off management fees while not providing promised returns...but this comment is so wrong I don't know where to begin. First, VC stands for venture capital, which is a subset of private equity that does zero LBOs and doesn't even acquire any businesses. VC funds buy equity in startups, and take on zero debt to do so. You have your boogiemen totally confused. Second, the entire point of a PE fund that uses a leveraged buyout strategy is that they need to sell the acquired firm at a profit to make any returns to the fund. LBO funds don't 'cashflow' businesses, and saddling a business with a bunch of debt is antithetical to that purpose anyways. Third, this is not "risk free revenue." It's a high risk strategy to use the debt to increase the value of the business by improving operations enough that you can sell it for a profit to the fund. If you saddle a company with debt and DON'T increase the value of the business beyond the debt you took on, the PE fund will not be in business for fund 2. The risk-free revenue while the fund is alive comes from the management fees that investors in the fund pay (usually 2%, which is way too high IMO, but has nothing to do with the debt or the acquired businesses). Please do not write confident sounding comments about things you don't understand, it spread misinformation and makes the internet a worse place.
- superxpro12 7mo ago
  As someone who's life is currently being affected directly by PE middle-manning something I spend a LOT of time on, I am sensitive to this issue. IF you have problems with the vocab and terms, fine. But I have seen personally this issue in my life, that is affecting my bank account. And we have seen example after example of these LBO's ruining otherwise functioning businesses. It's happening. All over the place.
  - pembrook 7mo ago
    It is absolutely possible (and even likely!) that a bad PE fund was the cause of the issue you're talking about. But there is also a media hysteria around PE, and a lack of understanding among the general public of what it is. It's just as likely the business that was acquired was already failing or unsustainable to begin with (hence why the owner wanted out at low multiples). LBO funds don't acquire promising businesses at 5-10X revenue like tech companies do, they usually buy businesses at low multiples that are past their prime or failing in an attempt to revitalize them (with debt, since you can't raise capital by selling equity in a failing business). Obviously this will not always work out great, given the trajectory of target companies was already not great to begin with. Momentum is the strongest factor in all markets. The problem is, Private Equity has become a conspiratorial catchall boogieman and scapegoat for every problem under the sun, so it's hard for me to assess without further details of the situation.
    - maest 7mo ago
      > Momentum is the strongest factor in all markets Nit: beta is the strongest factor in all markets. Which is actually relevant for the success for PE funds in general, as a rising tide lifts all boats and people taking on debt to finance equity generally post outsized returns in bull markets. Anyway, the rest of the stuff you're saying I agree with.
      - pembrook 7mo ago
        Yes, beta is the overwhelming source of returns. I was referring to factors in the sense of the University of Chicago research on market inefficiencies (where momentum is the strongest factor for inefficiency). If you buy a “factor-weighted” etf the idea is it’s tilting you into those “factors” away from pure beta like buying whole market. PE you could argue is largely just leverage plus an illiquidity factor play, since if PE just returned beta (which these days it might!) you’d be smarter to buy the S&P500 with equivalent leverage and not pay crazy fees.
newsclues 7mo ago
The Mars family is doing that with the vets.
- at_compile_time 7mo ago
  They also own a large part of the pet food industry. Given how much health is affected by diet, that's a huge conflict of interest.
  - joquarky 7mo ago
    Why can't they find something more interesting to do with their lives? They are wealthy enough to do anything and they choose to keep hoarding more and more.
koolba 7mo ago
> Risk free revenue to the VC. How is that risk free? If the clinic goes bankrupt the VC will be on the hook for the rest of the loan. It’s not free money.
- jaggederest 7mo ago
  They're not so silly as to have any personal or professional liability, they probably spin up a special purpose vehicle or llc to hold the bag if it all goes south
  - edgyquant 7mo ago
    No bank would agree to such nonsense
    - estimator7292 7mo ago
      It's called "financial engineering" and banks and courts agree to it on the daily.
    - JumpCrisscross 7mo ago
      It’s analogous to a mortgage in a non-recourse state. If the borrower defaults the bank (or non-bank lender) gets the leveraged company, but can’t usually go upstream.
    - xenadu02 7mo ago
      > No bank would agree to such nonsense Ohhhh a live one! Sir do I have a wonderful bridge in Brooklyn to sell you! :) Fun fact: banks fund this sort of nonsense constantly. I've asked about this before: why they do it. They must be making money I just don't know how. The LBO guys pay themselves massive management fees and dump the debt on the company so they walk away scott free. My wild guess was the banks offload the eventual IPO onto investors and so make their money on the IPO fees and funneling their own clients the dead-man-walking shares. But I honestly don't know.
      - 7mo ago
chrisweekly 7mo ago
"So now the VC lends the money from the bank" "lends" -> "borrows", right?
- axus 7mo ago
  If hours of preparation for college testing taught me anything, it's the difference between lend and borrow.
- mbrumlow 7mo ago
  No dude. Read it again. The VC lends (the money from the bank) which the vc borrowed, to the clinic. They are a sort of middle man. It the clinic is on the hook to the bank and the Vc takes fist cut before playing the bank. Eg. The vc only risked the company they were buying, and gets paid first.
  - NoboruWataya 7mo ago
    If the VC borrows money from the bank and lends it to the clinic, the clinic is not on the hook to the bank. The clinic is on the hook to the VC and the VC is on the hook to the bank. Which means that if the clinic goes under, the VC takes the loss because it still has to repay the bank. (Edit: To be clear, I agree with the other commenters that none of this is what VCs do. I'm just pointing out that the way this is being described doesn't even work on its own terms. Needless to say, LBOs are not "risk free".)
    - mbrumlow 7mo ago
      Nope. The clinic is the collateral to the bank. VC stand to loose nothing. It does not happen overnight. But what happens is after they take control of the clinic or company they change the sales model to boost reoccurring revenue, this then allows the clinic or target company to take loans out. Because they look good on paper. The company then pays VC back when then pays bank back. This can be done in about 6mo to 1 year process with some companies. The initial out of pocket expense is small and paid back very quickly. I also forgot. Sometimes they will take the newly owned company and merge it. During that process they extract more money and load more debt onto the remaining entities, again making the VC money. In some cases they can even get huge tax benefits by loading the company with debt which offsets the tax bill of the final entity. When these transactions are done, within the span of a day multiple companies are created and merged and absolved. There is little to no risk for the VC
JumpCrisscross 7mo ago
> now the VC lends the money from the bank, buys the clinic, and here's the important part: _they push the debt onto the clinic's books This mostly correctly describes a leveraged buyout (LBO). LBOs are done by LBO shops, a type of private equity (PE) firm. Not VCs. (VCS do venture capital, a different type of PE.) And LBO debt isn’t “pushed” onto the company’s books, it’s never on the sponsor’s (LBO shop’s) books in the first place to any material extent. Private credit, on the other hand, involves e.g. Blue Owl borrowing from a bank to lend to software businesses, usually without any taking control or equity. It’s fundamentally different from both LBOs and VC or any private equity inasmuch as it doesn’t have anything to do with the equity, just the debt. (Though some private credit firms will turn around and lend into a merger or LBO. And I’m sure some of them get equity kickers. But in that capacity they’re competing with banks. Not PE. Certainly not VC, though growth capital muddles the line between what is VC and other kinds of PE or even project financing.)
- mbesto 7mo ago
  Guy who works in the PE market here (not a PE shop myself) - this comment is correct.
  - meetingthrower 7mo ago
    Correct. One niggle in that PE can access private credit as part of the capital stack. One flavor of debt in the ice cream store.
  - refurb 7mo ago
    If you work in a PE shop you’d know it’s not riskfree and that the PE firm also puts their own money up plus money raised through LPs (hence “leveraged”)
    - mbesto 7mo ago
      Not sure your point, but... > PE firm also puts their own money up plus money raised through LPs (hence “leveraged”) This is not true. PE firm individuals put their own money in a fund, which also has LPs money. That fund is used to acquire businesses and in order to fund a transaction they use both equity (capital from that fund) and debt (loans from banks) to fund the transaction. The debt is the "leverage" part of the equation...hence leveraged.
WorkerBee28474 7mo ago
> So all of a sudden the nice town clinic has $2,500,000 in debt, raise prices accordingly... From a financial engineering perspective this is wrong. Both equity and debt have costs of capital. Debtholders expect interest, capital holders expect RoE. The money going to debt interest is money that would previously have gone to equity, but now does not because the equity is replaced with debt. Crucially, the costs of debt is lower than the cost of equity because of the interest tax shield. Therefore, the vet clinic now requires less revenue to maintain or even increase its return to equity.
- JumpCrisscross 7mo ago
  > the vet clinic now requires less revenue to maintain or even increase its return to equity The small-town vet would have probably accepted a lower RoE. More critically, they’d have been more willing to absorb shocks to said RoE than a lender will to their debt payments.
- t0mas88 7mo ago
  Technically true, but RoE expectations from a PE firm are typically a lot higher than from the original owners of a small business. And the LBO model is much less resilient to economic headwind. Let's assume a 25% EBITDA margin business, with most costs fixed (like the clinic example). Unfortunately revenue drops 20% because of external factors. It would maybe have a tiny profit left, tax would also be tiny and there is no interest to pay. The shareholders receive near zero, absorbing most of the problem for a year waiting for times to get better. Now the same business, same reported EBITDA, but paying a large interest sum every year to the bank. If revenue drops 20% they can't pay their interest, and banks don't just wait for next year. Now the business has the restructure, agree with the banks what that looks like, or face a bankruptcy risk. While the new PE shareholder has a better RoE due to leverage in the upside scenario, the business (and the PE) could be completely cooked in a downside scenario. For the PE this is a calculated risk, they optimise the overall portfolio. But for the employees and customers this isn't a great scenario.
- bombcar 7mo ago
  Small businesses are notoriously bad about calculating RoE; bookstores that own a building that would rent for way more than they ever make in a month, etc.
8note 7mo ago
why wouldnt the previous owners just open a new vet clinic, and hore all the same people back? or some manager at it? it must be easy enough to raise that starting money, if the PE firm could get the loan
- t0mas88 7mo ago
  An acquisition like that would have non-compete restrictions. And often the previous owners don't get 100% cash, they would receive part as shares in the new holding company.
  - tartoran 7mo ago
    Yeah, they thought about it well on how to shackle, extract and leave a husk behind. What about the clinic's long term success? Not in their plans, they just want to extract cash from the customers as fast as they can. I'm sure that if people organized well enough and change their mindset they'd find workarounds to these financial engineering scums.
Buttons840 7mo ago
The free market solution to this seems to be making it easy / easier for competitors to arise. Then, when private equity does this, the customers, and workers, just hop ship to a competitor that's better managed and the original clinic goes under. I don't expect this happens in reality though. In general the things that happen in a healthy free market are NOT happening in our society.
- yoyohello13 7mo ago
  This completely discounts the work involved to find service providers you trust. I spent a long time finding a Doctor I trust, finding a Vet I trust, etc. I don't want a "free market" solution where I need to switch providers every 6 months because some rich dude is being a dick. This is the problem with so many market focused solutions. They discount the burden put on the consumer.
  - rootusrootus 7mo ago
    If the market is healthy, there will already be two or three providers in town instead of one that has any sort of monopoly, and the LBO won't be lucrative to begin with.
    - sarchertech 7mo ago
      Unless the PE firm comes in and buys up all of the vet practices in town (or enough of them), which is a tactic they like to employ.
    - whatevaa 7mo ago
      They buy all of them.
      - rootusrootus 7mo ago
        In a perfect world we'd have antitrust enforcement all the way from the top of government down to the municipality, so that this kind of behavior could be curbed. But I bet few cities bother to try at all.
infecto 7mo ago
This is just wrong. VC is not PE. The Vet example is really a bad trope. For every bad deal there are many others you never hear about. PE firms are not making money by simply buying everything up. The business still has to maintain and grow.
- skeeter2020 7mo ago
  VC is most definitely a form of Private Equity, though it's not the limited-partnership deal model that we often see in SaaS, or Vet Clinics, or Housing, etc. Yes, they need to grow but PE firms don't invest directly. They have funds with relatively short time horizons that want 2 things: 1. cashflow during the fund lifetime and 2. equity growth so they can sell the assets in the fund prior to the end. PE firms will sometime flip portfolio companies to their next fund but this is frowned upon because the investors are sophisticated and recognize the valuation conflict of interest. The PE business depends on repeat business for selling their funds; the best are always over subscribed and never go shopping for investors, while the rest are marginal forever.
  - infecto 7mo ago
    Did not read all of it. Yes, it is a form of private equity. Of course. You missed the context. The post kept saying VC is buying a vet shop. In that context they meant private equity. VC is not the same as what they meant to say, PE.
    - mbrumlow 7mo ago
      True.
- 4d4m 7mo ago
  Sure there are differences between tigers and vultures, but they both eat things till they're dead.
pseudosavant 7mo ago
This is exactly what happened at a SaaS company I previously worked at. It was an awesome company with ~1500 employees, turning a small profit. Private Equity comes along, buys it with ~$2B in debt. Sticks the SaaS company with a $100M+ annual interest payment. Round after round after round of layoffs ensued. Then interest rates went up... and it got even worse. I think they are under 500 employees now. They basically laid off almost all of engineering and hired 100 new contractors in India to completely rebuild the entire platform in Node.js, as if the language it was written in was the problem. So glad to be far from that dumpster fire. Really disappointing to see a great company gutted by some private equity people who almost certainly got their bonuses before the shit hit the fan.
- skeeter2020 7mo ago
  This was driven home to me at SaaS company with > $80M ARR when the new CEO was parachuted in by the PE owner said in an all-hands "and we're close to cashflow positive when we account for our interest payments..." How can a software company generating this much subscription revenue NOT be making money? When it's servicing the > $500M the PE firm used to buy it. The rest of the playbook was boringly predictable: cut costs, sign multi-year enterprise deals, sell before the current fund's horizon and hope the music doesn't end. As a result I prefer the naked greed of VCs where everybody - VC, owners, employees - knows the plan is IPO because at least it's transparent compared to the dirty lies a lot of PE pushes.
  - matheusmoreira 7mo ago
    It's the destructiveness that gets me. It's a perfectly good company, employees are happy, consumers are happy, profit is being made, it's sustaining itself... Then they come and just literally destroy all that. This can't be good for society. I wonder why it's just not criminalized somehow.
    - Terr_ 7mo ago
      > It's a perfectly good company [...] I wonder why it's just not criminalized somehow. Not-an-expert here, but I think part of the problem is that it's hard to draw a nice legally-enforceable line that would distinguish when it's a "perfectly good" company versus one crying out for intervention. For example, suppose a company is floundering because of executive mismanagement, outrageous compensation to the C-suite, etc. In that case, someone could LBO in, fix things up, and then sell the revitalized thing later and make a modest profit while improving the world. It's... less likely, but they could.
deleted 7mo ago
[deleted]
ehnto 7mo ago
I think the free market response is that another vet with fair prices will show up, but A) that's a waste of everyones time and very inefficient and B) a real grass roots business takes time and passion, somebody to start it, buy in from the community etc. That work had already been done. To throw it all away for VC or PE to squeeze the life out of it and by extension the community, that's just sad, and a net negative for society. I don't really care about who to blame, the PE or the business owner who sold, the process is destructive.
- ambicapter 7mo ago
  There's only one way to combat this, which is to make it unprofitable.
  - jellyroll42 7mo ago
    ...by regulating the practice to extinction
- gradus_ad 7mo ago
  Waste and inefficiency is real. As unpalatable as it is, cleaning up the mess of decay often requires brutal methods. That begs the question, is waste and inefficiency socially undesirable? Maybe not. Maybe not on certain scales or in isolation. But waste compounds.
  - pocksuppet 7mo ago
    A certain amount of inefficiency or slack is necessary buffer in any system to reduce brittleness. When a problem occurs, a system that is running with 50% slack can recover more easily than a system with 5% slack. See Germany's rail network, where almost every time-slot is occupied by a train, and then one train is delayed, and the system collapses with nobody getting to their destination on time for the rest of the day, until the overnight buffer. In queuing problems, queue length (which means latency) is inversely proportional to slack time. If a network link is running a 90% capacity, on average there are 10 packets queued up and a packet that arrives will have to wait for 10 packet transmission times. At 99%, 100. At 99.99%, 10000. And if you try to use exactly 100% of your network link, the expected queue length is infinity, and the expected latency is infinity, which will not occur in practice because sometimes it will exceed available memory and packets will be dropped, even though utilization never exceeded 99.9999...%.
refurb 7mo ago
I mean, just getting new management, improving efficiency and raising prices of any business is… normal business? Whether a PE firm decides to buy it and do the same isn’t some nefarious act or special in any way, it’s just new owners. Let’s say your neighbor has a lawn mowing business but wants to retire, says they’ll sell for $50,000. You think great! You could run the business better, plus the old man hasn’t raised prices since 1990! But you don’t have $50k, only $30k, so you borrow $20k from your brother. Congrats, you just did a leveraged buyout. And no, it’s not risk free revenue (I think you mean profit?) because it clearly might go under and PE firms need to pony up some of their own cash too plus money raised through LPs.
ludicrousdispla 7mo ago
About eight years ago I had a chat with a physician in Texas, who had a several year old private clinic that he was planning to sell within a year to an investment firm, and it wasn't the first time he had done this. I expect all those urgent health care clinics that show up follow a similar path.
gspr 7mo ago
I absolutely believe you on the facts, and it all sounds very disgusting, but here's what I don't understand: customers and staff alike no longer like the clinic. Won't that be a huge boon to competitors, essentially ruining the VC's investment? I get that it's not so clean cut with something as equipment- and licensing heavy as the veterinarian sector. But I've heard the same story exemplified with pizza parlors instead. Won't all the good staff take all the loyal customers and go elsewhere very easily in that case?

by o-o- 7mo ago

pembrook 7mo ago

So yes, PE funds are probably overvalued right now and there are a lot of PE funds getting rich off management fees while not providing promised returns...but this comment is so wrong I don't know where to begin. First, VC stands for venture capital, which is a subset of private equity that does zero LBOs and doesn't even acquire any businesses. VC funds buy equity in startups, and take on zero debt to do so. You have your boogiemen totally confused. Second, the entire point of a PE fund that uses a leveraged buyout strategy is that they need to sell the acquired firm at a profit to make any returns to the fund. LBO funds don't 'cashflow' businesses, and saddling a business with a bunch of debt is antithetical to that purpose anyways. Third, this is not "risk free revenue." It's a high risk strategy to use the debt to increase the value of the business by improving operations enough that you can sell it for a profit to the fund. If you saddle a company with debt and DON'T increase the value of the business beyond the debt you took on, the PE fund will not be in business for fund 2. The risk-free revenue while the fund is alive comes from the management fees that investors in the fund pay (usually 2%, which is way too high IMO, but has nothing to do with the debt or the acquired businesses). Please do not write confident sounding comments about things you don't understand, it spread misinformation and makes the internet a worse place.

superxpro12 7mo ago
As someone who's life is currently being affected directly by PE middle-manning something I spend a LOT of time on, I am sensitive to this issue. IF you have problems with the vocab and terms, fine. But I have seen personally this issue in my life, that is affecting my bank account. And we have seen example after example of these LBO's ruining otherwise functioning businesses. It's happening. All over the place.
- pembrook 7mo ago
  It is absolutely possible (and even likely!) that a bad PE fund was the cause of the issue you're talking about. But there is also a media hysteria around PE, and a lack of understanding among the general public of what it is. It's just as likely the business that was acquired was already failing or unsustainable to begin with (hence why the owner wanted out at low multiples). LBO funds don't acquire promising businesses at 5-10X revenue like tech companies do, they usually buy businesses at low multiples that are past their prime or failing in an attempt to revitalize them (with debt, since you can't raise capital by selling equity in a failing business). Obviously this will not always work out great, given the trajectory of target companies was already not great to begin with. Momentum is the strongest factor in all markets. The problem is, Private Equity has become a conspiratorial catchall boogieman and scapegoat for every problem under the sun, so it's hard for me to assess without further details of the situation.
  - maest 7mo ago
    > Momentum is the strongest factor in all markets Nit: beta is the strongest factor in all markets. Which is actually relevant for the success for PE funds in general, as a rising tide lifts all boats and people taking on debt to finance equity generally post outsized returns in bull markets. Anyway, the rest of the stuff you're saying I agree with.
    - pembrook 7mo ago
      Yes, beta is the overwhelming source of returns. I was referring to factors in the sense of the University of Chicago research on market inefficiencies (where momentum is the strongest factor for inefficiency). If you buy a “factor-weighted” etf the idea is it’s tilting you into those “factors” away from pure beta like buying whole market. PE you could argue is largely just leverage plus an illiquidity factor play, since if PE just returned beta (which these days it might!) you’d be smarter to buy the S&P500 with equivalent leverage and not pay crazy fees.

newsclues 7mo ago

The Mars family is doing that with the vets.

at_compile_time 7mo ago
They also own a large part of the pet food industry. Given how much health is affected by diet, that's a huge conflict of interest.
- joquarky 7mo ago
  Why can't they find something more interesting to do with their lives? They are wealthy enough to do anything and they choose to keep hoarding more and more.

koolba 7mo ago

> Risk free revenue to the VC. How is that risk free? If the clinic goes bankrupt the VC will be on the hook for the rest of the loan. It’s not free money.

jaggederest 7mo ago
They're not so silly as to have any personal or professional liability, they probably spin up a special purpose vehicle or llc to hold the bag if it all goes south
- edgyquant 7mo ago
  No bank would agree to such nonsense
  - estimator7292 7mo ago
    It's called "financial engineering" and banks and courts agree to it on the daily.
  - JumpCrisscross 7mo ago
    It’s analogous to a mortgage in a non-recourse state. If the borrower defaults the bank (or non-bank lender) gets the leveraged company, but can’t usually go upstream.
  - xenadu02 7mo ago
    > No bank would agree to such nonsense Ohhhh a live one! Sir do I have a wonderful bridge in Brooklyn to sell you! :) Fun fact: banks fund this sort of nonsense constantly. I've asked about this before: why they do it. They must be making money I just don't know how. The LBO guys pay themselves massive management fees and dump the debt on the company so they walk away scott free. My wild guess was the banks offload the eventual IPO onto investors and so make their money on the IPO fees and funneling their own clients the dead-man-walking shares. But I honestly don't know.
    - 7mo ago

chrisweekly 7mo ago

"So now the VC lends the money from the bank" "lends" -> "borrows", right?

axus 7mo ago
If hours of preparation for college testing taught me anything, it's the difference between lend and borrow.
mbrumlow 7mo ago
No dude. Read it again. The VC lends (the money from the bank) which the vc borrowed, to the clinic. They are a sort of middle man. It the clinic is on the hook to the bank and the Vc takes fist cut before playing the bank. Eg. The vc only risked the company they were buying, and gets paid first.
- NoboruWataya 7mo ago
  If the VC borrows money from the bank and lends it to the clinic, the clinic is not on the hook to the bank. The clinic is on the hook to the VC and the VC is on the hook to the bank. Which means that if the clinic goes under, the VC takes the loss because it still has to repay the bank. (Edit: To be clear, I agree with the other commenters that none of this is what VCs do. I'm just pointing out that the way this is being described doesn't even work on its own terms. Needless to say, LBOs are not "risk free".)
  - mbrumlow 7mo ago
    Nope. The clinic is the collateral to the bank. VC stand to loose nothing. It does not happen overnight. But what happens is after they take control of the clinic or company they change the sales model to boost reoccurring revenue, this then allows the clinic or target company to take loans out. Because they look good on paper. The company then pays VC back when then pays bank back. This can be done in about 6mo to 1 year process with some companies. The initial out of pocket expense is small and paid back very quickly. I also forgot. Sometimes they will take the newly owned company and merge it. During that process they extract more money and load more debt onto the remaining entities, again making the VC money. In some cases they can even get huge tax benefits by loading the company with debt which offsets the tax bill of the final entity. When these transactions are done, within the span of a day multiple companies are created and merged and absolved. There is little to no risk for the VC

JumpCrisscross 7mo ago

> now the VC lends the money from the bank, buys the clinic, and here's the important part: _they push the debt onto the clinic's books This mostly correctly describes a leveraged buyout (LBO). LBOs are done by LBO shops, a type of private equity (PE) firm. Not VCs. (VCS do venture capital, a different type of PE.) And LBO debt isn’t “pushed” onto the company’s books, it’s never on the sponsor’s (LBO shop’s) books in the first place to any material extent. Private credit, on the other hand, involves e.g. Blue Owl borrowing from a bank to lend to software businesses, usually without any taking control or equity. It’s fundamentally different from both LBOs and VC or any private equity inasmuch as it doesn’t have anything to do with the equity, just the debt. (Though some private credit firms will turn around and lend into a merger or LBO. And I’m sure some of them get equity kickers. But in that capacity they’re competing with banks. Not PE. Certainly not VC, though growth capital muddles the line between what is VC and other kinds of PE or even project financing.)

mbesto 7mo ago
Guy who works in the PE market here (not a PE shop myself) - this comment is correct.
- meetingthrower 7mo ago
  Correct. One niggle in that PE can access private credit as part of the capital stack. One flavor of debt in the ice cream store.
- refurb 7mo ago
  If you work in a PE shop you’d know it’s not riskfree and that the PE firm also puts their own money up plus money raised through LPs (hence “leveraged”)
  - mbesto 7mo ago
    Not sure your point, but... > PE firm also puts their own money up plus money raised through LPs (hence “leveraged”) This is not true. PE firm individuals put their own money in a fund, which also has LPs money. That fund is used to acquire businesses and in order to fund a transaction they use both equity (capital from that fund) and debt (loans from banks) to fund the transaction. The debt is the "leverage" part of the equation...hence leveraged.

WorkerBee28474 7mo ago

> So all of a sudden the nice town clinic has $2,500,000 in debt, raise prices accordingly... From a financial engineering perspective this is wrong. Both equity and debt have costs of capital. Debtholders expect interest, capital holders expect RoE. The money going to debt interest is money that would previously have gone to equity, but now does not because the equity is replaced with debt. Crucially, the costs of debt is lower than the cost of equity because of the interest tax shield. Therefore, the vet clinic now requires less revenue to maintain or even increase its return to equity.

JumpCrisscross 7mo ago
> the vet clinic now requires less revenue to maintain or even increase its return to equity The small-town vet would have probably accepted a lower RoE. More critically, they’d have been more willing to absorb shocks to said RoE than a lender will to their debt payments.
t0mas88 7mo ago
Technically true, but RoE expectations from a PE firm are typically a lot higher than from the original owners of a small business. And the LBO model is much less resilient to economic headwind. Let's assume a 25% EBITDA margin business, with most costs fixed (like the clinic example). Unfortunately revenue drops 20% because of external factors. It would maybe have a tiny profit left, tax would also be tiny and there is no interest to pay. The shareholders receive near zero, absorbing most of the problem for a year waiting for times to get better. Now the same business, same reported EBITDA, but paying a large interest sum every year to the bank. If revenue drops 20% they can't pay their interest, and banks don't just wait for next year. Now the business has the restructure, agree with the banks what that looks like, or face a bankruptcy risk. While the new PE shareholder has a better RoE due to leverage in the upside scenario, the business (and the PE) could be completely cooked in a downside scenario. For the PE this is a calculated risk, they optimise the overall portfolio. But for the employees and customers this isn't a great scenario.
bombcar 7mo ago
Small businesses are notoriously bad about calculating RoE; bookstores that own a building that would rent for way more than they ever make in a month, etc.

8note 7mo ago

why wouldnt the previous owners just open a new vet clinic, and hore all the same people back? or some manager at it? it must be easy enough to raise that starting money, if the PE firm could get the loan

t0mas88 7mo ago
An acquisition like that would have non-compete restrictions. And often the previous owners don't get 100% cash, they would receive part as shares in the new holding company.
- tartoran 7mo ago
  Yeah, they thought about it well on how to shackle, extract and leave a husk behind. What about the clinic's long term success? Not in their plans, they just want to extract cash from the customers as fast as they can. I'm sure that if people organized well enough and change their mindset they'd find workarounds to these financial engineering scums.

Buttons840 7mo ago

The free market solution to this seems to be making it easy / easier for competitors to arise. Then, when private equity does this, the customers, and workers, just hop ship to a competitor that's better managed and the original clinic goes under. I don't expect this happens in reality though. In general the things that happen in a healthy free market are NOT happening in our society.

yoyohello13 7mo ago
This completely discounts the work involved to find service providers you trust. I spent a long time finding a Doctor I trust, finding a Vet I trust, etc. I don't want a "free market" solution where I need to switch providers every 6 months because some rich dude is being a dick. This is the problem with so many market focused solutions. They discount the burden put on the consumer.
- rootusrootus 7mo ago
  If the market is healthy, there will already be two or three providers in town instead of one that has any sort of monopoly, and the LBO won't be lucrative to begin with.
  - sarchertech 7mo ago
    Unless the PE firm comes in and buys up all of the vet practices in town (or enough of them), which is a tactic they like to employ.
  - whatevaa 7mo ago
    They buy all of them.
    - rootusrootus 7mo ago
      In a perfect world we'd have antitrust enforcement all the way from the top of government down to the municipality, so that this kind of behavior could be curbed. But I bet few cities bother to try at all.

infecto 7mo ago

This is just wrong. VC is not PE. The Vet example is really a bad trope. For every bad deal there are many others you never hear about. PE firms are not making money by simply buying everything up. The business still has to maintain and grow.

skeeter2020 7mo ago
VC is most definitely a form of Private Equity, though it's not the limited-partnership deal model that we often see in SaaS, or Vet Clinics, or Housing, etc. Yes, they need to grow but PE firms don't invest directly. They have funds with relatively short time horizons that want 2 things: 1. cashflow during the fund lifetime and 2. equity growth so they can sell the assets in the fund prior to the end. PE firms will sometime flip portfolio companies to their next fund but this is frowned upon because the investors are sophisticated and recognize the valuation conflict of interest. The PE business depends on repeat business for selling their funds; the best are always over subscribed and never go shopping for investors, while the rest are marginal forever.
- infecto 7mo ago
  Did not read all of it. Yes, it is a form of private equity. Of course. You missed the context. The post kept saying VC is buying a vet shop. In that context they meant private equity. VC is not the same as what they meant to say, PE.
  - mbrumlow 7mo ago
    True.
4d4m 7mo ago
Sure there are differences between tigers and vultures, but they both eat things till they're dead.

pseudosavant 7mo ago

This is exactly what happened at a SaaS company I previously worked at. It was an awesome company with ~1500 employees, turning a small profit. Private Equity comes along, buys it with ~$2B in debt. Sticks the SaaS company with a $100M+ annual interest payment. Round after round after round of layoffs ensued. Then interest rates went up... and it got even worse. I think they are under 500 employees now. They basically laid off almost all of engineering and hired 100 new contractors in India to completely rebuild the entire platform in Node.js, as if the language it was written in was the problem. So glad to be far from that dumpster fire. Really disappointing to see a great company gutted by some private equity people who almost certainly got their bonuses before the shit hit the fan.

skeeter2020 7mo ago
This was driven home to me at SaaS company with > $80M ARR when the new CEO was parachuted in by the PE owner said in an all-hands "and we're close to cashflow positive when we account for our interest payments..." How can a software company generating this much subscription revenue NOT be making money? When it's servicing the > $500M the PE firm used to buy it. The rest of the playbook was boringly predictable: cut costs, sign multi-year enterprise deals, sell before the current fund's horizon and hope the music doesn't end. As a result I prefer the naked greed of VCs where everybody - VC, owners, employees - knows the plan is IPO because at least it's transparent compared to the dirty lies a lot of PE pushes.
- matheusmoreira 7mo ago
  It's the destructiveness that gets me. It's a perfectly good company, employees are happy, consumers are happy, profit is being made, it's sustaining itself... Then they come and just literally destroy all that. This can't be good for society. I wonder why it's just not criminalized somehow.
  - Terr_ 7mo ago
    > It's a perfectly good company [...] I wonder why it's just not criminalized somehow. Not-an-expert here, but I think part of the problem is that it's hard to draw a nice legally-enforceable line that would distinguish when it's a "perfectly good" company versus one crying out for intervention. For example, suppose a company is floundering because of executive mismanagement, outrageous compensation to the C-suite, etc. In that case, someone could LBO in, fix things up, and then sell the revitalized thing later and make a modest profit while improving the world. It's... less likely, but they could.

deleted 7mo ago

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ehnto 7mo ago

I think the free market response is that another vet with fair prices will show up, but A) that's a waste of everyones time and very inefficient and B) a real grass roots business takes time and passion, somebody to start it, buy in from the community etc. That work had already been done. To throw it all away for VC or PE to squeeze the life out of it and by extension the community, that's just sad, and a net negative for society. I don't really care about who to blame, the PE or the business owner who sold, the process is destructive.

ambicapter 7mo ago
There's only one way to combat this, which is to make it unprofitable.
- jellyroll42 7mo ago
  ...by regulating the practice to extinction
gradus_ad 7mo ago
Waste and inefficiency is real. As unpalatable as it is, cleaning up the mess of decay often requires brutal methods. That begs the question, is waste and inefficiency socially undesirable? Maybe not. Maybe not on certain scales or in isolation. But waste compounds.
- pocksuppet 7mo ago
  A certain amount of inefficiency or slack is necessary buffer in any system to reduce brittleness. When a problem occurs, a system that is running with 50% slack can recover more easily than a system with 5% slack. See Germany's rail network, where almost every time-slot is occupied by a train, and then one train is delayed, and the system collapses with nobody getting to their destination on time for the rest of the day, until the overnight buffer. In queuing problems, queue length (which means latency) is inversely proportional to slack time. If a network link is running a 90% capacity, on average there are 10 packets queued up and a packet that arrives will have to wait for 10 packet transmission times. At 99%, 100. At 99.99%, 10000. And if you try to use exactly 100% of your network link, the expected queue length is infinity, and the expected latency is infinity, which will not occur in practice because sometimes it will exceed available memory and packets will be dropped, even though utilization never exceeded 99.9999...%.

refurb 7mo ago

I mean, just getting new management, improving efficiency and raising prices of any business is… normal business? Whether a PE firm decides to buy it and do the same isn’t some nefarious act or special in any way, it’s just new owners. Let’s say your neighbor has a lawn mowing business but wants to retire, says they’ll sell for $50,000. You think great! You could run the business better, plus the old man hasn’t raised prices since 1990! But you don’t have $50k, only $30k, so you borrow $20k from your brother. Congrats, you just did a leveraged buyout. And no, it’s not risk free revenue (I think you mean profit?) because it clearly might go under and PE firms need to pony up some of their own cash too plus money raised through LPs.

ludicrousdispla 7mo ago

About eight years ago I had a chat with a physician in Texas, who had a several year old private clinic that he was planning to sell within a year to an investment firm, and it wasn't the first time he had done this. I expect all those urgent health care clinics that show up follow a similar path.

gspr 7mo ago

I absolutely believe you on the facts, and it all sounds very disgusting, but here's what I don't understand: customers and staff alike no longer like the clinic. Won't that be a huge boon to competitors, essentially ruining the VC's investment? I get that it's not so clean cut with something as equipment- and licensing heavy as the veterinarian sector. But I've heard the same story exemplified with pizza parlors instead. Won't all the good staff take all the loyal customers and go elsewhere very easily in that case?