[HN Gopher] Private equity may be heading for a fall
___________________________________________________________________
Private equity may be heading for a fall
Author : samizdis
Score : 242 points
Date : 2022-07-07 12:42 UTC (10 hours ago)
(HTM) web link (www.economist.com)
(TXT) w3m dump (www.economist.com)
| andrewcamel wrote:
| Speaking as someone who came from PE, agree that higher rate
| environment means both better investment alternatives and also
| more expensive capital for LBOs. That said, the firms with fresh
| capital can make a _ton_ of money buying into this environment.
| Zendesk being a great first example. Not a huge amount of debt
| required to do these types of deals. Liquidity going to hide
| under the figurative rock of fixed income means values get
| dragged down, which creates an incredible buying opportunity for
| all these PE funds. Look 5-7 years out, I 'd guess 2022 and 2023
| vintage funds will be some of the best in history.
| HealthNeed wrote:
| Forgive my ignorance, what is a vintage fund?
| tomfunk wrote:
| The year the fund started (e.g. a 2022 vintage fund is a fund
| that started in 2022)
| https://www.investopedia.com/terms/v/vintage_year.asp
| Bubble_Pop_22 wrote:
| On the other hand inflationary environments are great for
| infrastructure and Real Estate investments.
|
| If one type of private equity might be headed for a fall (nobody
| has the crystal ball) PERE (Private Equity Real Estate) and
| PEInfra (Private Equity Infrastructure) might benefit from it.
| bshipp wrote:
| Real Estate benefits from cheap money, which dries up in an
| inflationary environment as central bank juice rates. We're
| already seeing sizable jumps forecasted for the remainder of
| 2022 and beyond as this inflationary spiral finally takes off.
| mancerayder wrote:
| Why would you manage real estate with a shitty cap rate, when
| you can buy bonds that have less overhead, risk and more
| liquidity? Real estate funds are a great idea when rents are
| going up, but it isn't so clear that will keep happening. Or
| appreciation is expected. That's definitely not happening
| anymore.
| Bubble_Pop_22 wrote:
| Pension funds, insurance companies and SWFs don't reason like
| individuals, they have to put their money to work and for
| them the vast majority is govt. bonds anyway, even in the
| past 10 years.
|
| By the same token they have to decide what to do with the
| 15-20% which isn't bonds. Just as a matter of portfolio
| construction you don't want to be in equities, don't want to
| be in Venture. Only Real Estate and Infrastructure are left
| [deleted]
| recursivedoubts wrote:
| _> if investors in equities and debt markets will remember
| anything of the first half of 2022 it will be generational sell-
| offs. _
|
| A generation is 30 years.
|
| The stock market is roughly 20% off its highs.
|
| It went down 25% at the start of covid, just two years ago.
|
| In 2008 it went down 57%
|
| In 2000 it went down 42%
| nightski wrote:
| We'll see, but those events were dramatically different. I
| don't think anyone can easily predict what is going to happen
| right now by looking at those two events.
| recursivedoubts wrote:
| sadly, I don't have a crystal ball
|
| my point is only that there is a lack of perspective on how
| bad things currently are
| supernovae wrote:
| You know, from having lived through the 80s and several
| crashes in between I'd say what sucks today isn't the
| financial/jobs markets or economy but rather the people and
| how terrible we've become politically divisive. That's what
| I see.
|
| That 20% market drop from high just seems to be a
| correction and it was needed because that market high was
| based on crazy stuff anyway. But that 20% didn't do jack to
| 99% of the country. We didn't win when it went up, but
| inversely, we haven't really lost on its way down.
|
| Sure, inflation sucks but if you ask me - stalling our
| insatiable appetite to consume is probably a good thing.
| PragmaticPulp wrote:
| Very true, but 2020-2021 was unique in that a lot of young,
| first-time investors were introduced to the stock market via
| the popularity of Robinhood and meme stocks.
|
| The entire stock market may only be down 20%, but the investors
| who piled into hot tech stocks like Peloton and Zoom went from
| thinking the stock market was easy money to thinking that the
| stock market is a great way to lose most of your money. Even
| Robinhood went from a trendy young person trading platform to a
| perceived villain in the span of a couple years.
|
| The stock market that you see as a seasoned passive investor is
| completely different than the boom and bust meme stock market
| that many young people were introduced to recently. I don't
| know what the long term effects will be on those who were
| burned in the exuberance and ensuing crash.
| TaupeRanger wrote:
| The comment you're responding to is implying that the current
| sell off will continue and be a generational event - e.g. more
| than 57% like in 2008.
| bumby wrote:
| I think their point was that we've experienced multiple
| "generational events" within the last single generation.
| dcolkitt wrote:
| Equity _and_ debt. In 2000, 2008 and Covid, bonds all heavily
| rallied while stocks were selling off. That 's the reason the
| 60/40 stocks/bonds portfolio is the cornerstone of modern
| portfolio management. Historically one tends to hedge the
| other, cushioning pain on the way down.
|
| 2022 is unique in that both stocks and bonds have
| simultaneously nosedived in a synchronized a fall. We've had
| worse equity selloffs. We've had worse treasury selloffs. But
| together, this year has been historically unprecedented bad
| performance for the 60/40 portfolio.
| shostack wrote:
| It feels like the frequency of "historically bad" events has
| increased in the last few years.
| danaris wrote:
| IME, "generation" as a unit of time is usually used to mean 20
| years, not 30.
| recursivedoubts wrote:
| typically a generation is 20-30 years:
|
| https://en.wikipedia.org/wiki/Generation
|
| even by the 20 year definition, all of the events listed fall
| within that window: the .com crash bottomed in 2002/2003
| HFguy wrote:
| The rates markets (bonds) have had historic 6-month declines.
|
| And other debt instruments price off of these. Not sure the
| economic fallout has been fully felt yet.
|
| To compare to other periods, gov debt instruments increased in
| value during 2000, 2008 and 2020.
| dragontamer wrote:
| You've got it backwards.
|
| When rates go up, bonds become more useful as an investment.
|
| When the 1-year US Treasury was yielding 0.2% earlier this
| year, it was a bad idea to buy 1Y treasuries (and most other
| treasuries). Today, the 1Y is 2.87%, and suddenly a whole
| slew of investors just won't want to invest into shady high-
| risk companies anymore (Hey look, US Treasuries are yielding
| good values again. Lets buy those instead).
|
| The people who did buy 0.2% 1Y treasuries earlier this year
| (or worse, 10Y or 30Y treasuries) have lost a lot of value
| due to these higher interest rates.
|
| -------
|
| Case in point: the 1Y US Bond is literally a better rate than
| my 15Y mortgage. It makes more sense to buy 1Y bonds than for
| me to pay off my mortgage right now (ignoring tax issues of
| course)
| nonethewiser wrote:
| Max covid drawdown of sp500 was 34%
| sharkbot wrote:
| The S&P500 index is about 20% off the highs. The NASDAQ index
| is ~35% off. And some big tech names are down 70% or more
| (Teledoc, Zoom, ...).
|
| The stock market is doing alright. Some investors are getting
| destroyed. And some new investors are receiving a very useful,
| very painful lesson.
|
| (Full disclosure: I'm mainly a buy and hold index investor)
| lamontcg wrote:
| We're not even really feeling any real economic pain right
| now.
|
| Still waiting for the first month of negative employment
| numbers.
|
| That is when things are likely to start getting interesting.
| Right now we're still in the warm-up act.
| rsync wrote:
| I'm not sure negative employment numbers will have the
| effect you think they will...
|
| I remember a time in the late 90s when "bad news was good
| news" - which is to say, bad economic news portends looser
| monetary policy... which has been the driver of higher
| equity prices.
|
| Not saying it will work that way but ...
| selectodude wrote:
| Ironically, I think a lot of that is, to an extent, priced
| in to the markets.
| lamontcg wrote:
| I don't think we're remotely pricing in something like
| commercial real estate detonating in the financial
| markets yet.
| supernovae wrote:
| What's the concern with commercial real estate?
| rsync wrote:
| Commercial real estate is going to take a 30 or 40 or 50%
| haircut due to work from home policies and related
| cultural changes.
|
| Loans will default and we (taxpayers) will need to bail
| out the banks.
|
| It's not obvious yet because commercial leases are long
| and take time to wind down... and building owners are
| still making payments.
|
| We are in the phase where the coyote has run off the
| cliff and is still hanging in mid air ... soon it will
| plummet.
| supernovae wrote:
| I'm not seeing that trend. We haven't even seen down side
| in pricing or a full downaward trend in in new
| construction and most of the modern developments are
| doing mixed developments of retail, business and living
| spaces.
|
| There were a few % points drop at times - but most of
| that was supply dynamics and supply pricing.
|
| so much demand for commercial real estate that prices are
| up 24%
|
| It's probably a good thing for the market to cool
| prasadjoglekar wrote:
| Or, job losses/layoffs followed by foreclosures in the
| residential market that's already priced absurdly high.
| lamontcg wrote:
| Against a backdrop of a Republican party in a do-nothing
| congress which has been preaching against bailouts for 14
| years with a Democratic president that they'd like
| nothing better than to hang an economic collapse on.
|
| We're still only just starting to pop the popcorn here.
| pdxandi wrote:
| What do you mean by commercial real estate detonating?
| mym1990 wrote:
| Not sure who 'we' in this situation is, but there are
| certainly a good portion of lower and middle class people
| feeling the economic pain through rising cost of every day
| items. My outlook is that we will eventually see this
| result in a drop in discretionary spending and that is
| probably when we might expect to see wide spread layoffs or
| upticks in unemployment.
| supernovae wrote:
| These groups of people already have a negative
| discretionary spending capability, they're not going to
| swing the markets. The markets don't even really jive
| with working class/normal citizens anyway.
|
| I don't see any areas of the economy where there will be
| wide spread layoffs besides crypto markets and even then,
| those people will be swallowed up elsehwere.
| marcinzm wrote:
| >And some big tech names are down 70% or more (Teledoc, Zoom,
| ...).
|
| Zoom is still 80% higher than it was at the start of 2020.
| mgfist wrote:
| But also like 4x revenue since then (or around there)
| Patrol8394 wrote:
| > The stock market is roughly 20% off its highs.
|
| I have the feeling that we are not done yet ...
| [deleted]
| scottLobster wrote:
| You think we've reached bottom? Given the various global
| economic shocks we've already experienced and are likely to
| experience later this year, a long, relatively slow bear market
| decline is more likely than one giant drop.
|
| Keep in mind Russia is only starting to cut off Western Europe
| (which is only starting to cut off itself), so oil and gas
| prices still have lots of room to go up if Putin doesn't relent
| (which he won't). Also we've yet to price in impacts to food
| from the global fertilizer shortage.
|
| And those are just the obvious 1st order effects in the
| pipeline. The last time wheat prices went through the roof in
| North Africa it kicked off the Arab Spring and subsequent
| Syrian Civil War as side effects. There's going to be all sorts
| of fun coming out of this year, and I imagine a lot of stocks
| reliant on global supply chains are going to be ground down by
| hit after hit after hit.
|
| That's not even touching on domestic demand destruction and
| interest rates.
| jillesvangurp wrote:
| There are short term effects and long term effects. The short
| term effect is basically a lot of uncertainty, supply chain
| issues, and the market re-adjusting to not being able to
| depend on Russian energy exports. Chaos in other words.
| Putin's ability to induce more chaos is however declining.
| Except for going nuclear and starting WW III, he's basically
| played most of the cards he had. And given how his army
| performs in the Ukraine, that seems ill advised.
|
| The long term effect is enormous investments in energy and
| defense spending. E.g. Germany just announced enormous public
| spending on both. That's after decades of not doing much
| public spending at all. Other countries are likewise
| accelerating investments on both fronts. That is a lot of
| money that is flowing into the economy in the next years. And
| also a classical recipe for boosting economic growth. We're
| only a few months into this crisis and it has already
| unlocked hundreds of billions of funding in Germany alone.
| Normally, spending that big is going to have an impact on
| economies. There are companies that will benefit from this.
| And there are effects on employment, etc.
|
| Investors of course are a mixed bag of headless chickens,
| snake oil sellers, amateurs and the occasional level headed
| person with a bit longer view on things. I'd offer advice,
| but I don't qualify as anything more than an absolute
| amateur. But the one thing I know is that the short term
| behavior of stock markets is perplexing and irrational. I
| wouldn't read too much into it other than that "there's a
| thing going on and it's impacting the stock market". I would
| not expect anything less given the thing that is going on.
| What matters is what happens when that thing is in the past.
|
| IMHO, this situation is a blessing in disguise. It got world
| + dog moving a lot more aggressively on cutting their
| dependence on fossil fuels. I think that's a good thing.
| Going cold turkey on Russian gas is going to suck for a lot
| of countries short term but the current situation simply
| leaves no other choice. High prices are a great incentive for
| moving quickly. The good news is that there are companies
| itching to step in the void with solutions and they now have
| the full attention of investors and governments with very
| deep pockets.
| mschuster91 wrote:
| > Keep in mind Russia is only starting to cut off Western
| Europe (which is only starting to cut off itself), so oil and
| gas prices still have lots of room to go up if Putin doesn't
| relent (which he won't).
|
| > Also we've yet to price in impacts to food from the global
| fertilizer shortage.
|
| The US at least can protect itself from rising prices by
| prohibiting oil and food exports and thus increase domestic
| supply - they are a net exporter for both. The European Union
| however is completely dependent on either Russia or the OPEC
| oil sheiks, we will be hit real hard (but that shouldn't
| bother US stocks all too much).
|
| > The last time wheat prices went through the roof in North
| Africa it kicked off the Arab Spring and subsequent Syrian
| Civil War as side effects.
|
| _That_ one will be the real interesting part, but again, it
| 's mostly us Europeans who will feel the impact the most -
| the US can simply send off a bunch of soldiers to the Mexican
| border and continue treating people fleeing from utter
| poverty even worse than us Europeans manage to do. The US
| doesn't care all too much about Africa, Arabia and most of
| Asia except China and Russia any more, no matter what goes
| down there they won't involve themselves.
|
| The problem for us Europeans is that our leaders are
| ineffective and the crises are accumulating:
|
| - the UK government is outright collapsing at the moment and
| its society fracturing up, not to mention the economic
| consequences of Brexit or the potential split-offs of
| Scotland and Northern Ireland. I don't even want to speculate
| when they will have a stable-ish government with sane
| policies again.
|
| - France is headed for difficult times, similar to Obama's
| last six years Macron will have to live without a
| parliamentary majority
|
| - The Dutch government is _still_ unstable and it 's highly
| unlikely Rutte will survive his term
|
| - Germany... well, Olaf Scholz is no leader, doesn't want to
| be a leader and frankly he should resign. The coalition
| itself is beginning to tear apart, particularly because of
| the financially extremist FDP.
|
| - Europe _still_ doesn 't have any sort of common concept on
| how to deal with immigrants and refugees, partially because
| Viktor Orban and the Polish PiS keep blocking anything that
| would require them to house their fair share of migrants or
| even pay in solidarity. Meanwhile at the borders, horrible
| crimes against humanity are reported regularly (beatings and
| illegal pushbacks at the Poland-Belarus border, refugees
| being extorted by Greek border police to aid in illegal
| pushbacks at the Turkish sea border, refugees dying at the
| Spain-Maroccan border in Melilla, people drowning at sea
| because aid ships are regularly seized by Italian police,
| ...). The Turkish dictator Erdogan keeps using refugees or
| the threat of sending them as a political way of extortion.
|
| - Germany has long undermined any sort of independency from
| Russian gas and oil, and now we're doing dirty deals with
| Qatar instead of forcefully modernizing industry and housing
| or doing _anything_ to meaningfully conserve energy.
|
| - Prices in the EU are exploding: rent, energy, food. And our
| politicians don't have the will or the financial power to
| assist those in poverty.
|
| Europe is getting fucked hard, the US may escape that same
| fate if Biden and especially his Democrat Senators get their
| shit together.
| BlargMcLarg wrote:
| >The Dutch government is still unstable and it's highly
| unlikely Rutte will survive his term
|
| I'd be incredibly surprised if anything of note changes in
| the next few years. The population is way too fractured
| already. The elderly vote to keep what they currently have,
| the home owners vote to keep things as is, the people
| vested in assets will vote to keep things as is, not enough
| young people to vote against the status quo, and no party
| ever seems to get enough votes to truly have a significant
| say in the matter. This situation seems to be present in
| most countries, too.
|
| >Europe still doesn't have any sort of common concept on
| how to deal with immigrants and refugees
|
| Because _actually_ dealing with this requires rethinking
| things from the ground up, and rethinking those things
| requires governments to do the very things they 've been
| postponing for decades now. Taking immigrants in as-is will
| hurt the middle class first and foremost, which has been
| the class to bear the brunt of the burden for every other
| crisis.
|
| That same middle class includes millions of young adults
| struggling to find a place in life, get things going,
| facing a job market which continues to get more brutal
| regardless of a 'sellers market', and continues to face
| higher prices and a future where the social benefits they
| were taxed for won't be available to them. Safe to say,
| that middle class is slowly getting fed up and done with
| this.
|
| Meanwhile, we continuously have to feel guilty for even
| considering the 'haves' would have to start sacrificing
| something for the sake of society, despite the fact not
| doing so inevitably means the 'have-nots' are sacrificing
| things anyway. I wish I was kidding when I say I've heard
| my fair share of 'think of the poor retired landlords
| retiring by 50 and living off of your rent money', said
| without sarcasm.
| WanderPanda wrote:
| Sure communism would help us and actually work this time.
| And even if it doesn't at least it accelerates the path
| to heaven for millions of people. It is historically
| pretty reliable in this regard.
| BlargMcLarg wrote:
| You have to make a serious leap in logic to go from "stop
| making the middle class carry the brunt of the burden
| every time" to "communism is the answer to everything".
| [deleted]
| TheCoelacanth wrote:
| I'm not sure we're at the bottom, but I'm quite certain that
| stocks won't drop any farther in the first half of 2022.
| hpkuarg wrote:
| Is this a statement on the fact that the first half of 2022
| is over? ;-)
| recursivedoubts wrote:
| i do not think we have hit the bottom
|
| i expect a secular change as rates increase and all sorts of
| things that worked in a declining interest rate environment
| stop working, coupled with increasing global trade issues
|
| i do not have a crystal ball
| cloutchaser wrote:
| Keep in mind that at 10% inflation in the US, 20% inflation
| worldwide, nominal earnings will probably be increasing in
| most companies. And eventually the stock market will build
| the money devaluation into the prices (i.e. nominal stock
| prices will go up)
|
| So while the market might only be down 25% which isn't the
| biggest drop ever, 10-20% inflation on top that makes the
| actual drop larger. It also might mean the bottom in closer
| than it would normally be.
| jliptzin wrote:
| In my experience we've hit bottom when everyone agrees we
| haven't yet hit bottom. Which seems to be around now. In
| other words everyone who was going to sell has already sold.
| Unless more surprise bad news comes out.
| nostrademons wrote:
| If everyone agreed we haven't yet hit bottom, we wouldn't
| be having this conversation. You just argued that we've hit
| bottom because everyone agrees we haven't yet hit bottom.
|
| It's like how on the cryptocurrency subs everyone's always
| debating whether we're in crypto-winter yet. Having been
| through 3 crypto boom/bust cycles, we aren't in crypto-
| winter, because _people stop posting on r /cryptocurrency_
| when it's real crypto-winter. It's the same with other
| markets: it's not about sentiment, it's about abandonment.
| When we're in a real bear market, everybody forgets about
| their stock portfolios and gets a real job because they
| need the money to survive.
| newaccount2021 wrote:
| Joel_Mckay wrote:
| People will always gamble when its other peoples money. And for
| those who did not find true inflationary shelters to soften the
| impact, things are going to get worse before they improve.
|
| Admittedly, I too was stuck with some laggard energy ETFs for
| years thanks to being naive enough to listen to a banker once
| (tax event trap), and even that garbage has bounced back like a
| dead cat (I have to donate to VOKRA every-time I repeat that
| colloquialism).
|
| We live in strange times... ;-)
| mancerayder wrote:
| >People will always gamble when its other peoples money. And
| for those who did not find true inflationary shelters
|
| You mean like real property? Some of us tried very hard to
| purchase real estate and failed.
| Joel_Mckay wrote:
| I am not bullish on dirt backed holdings these days. While it
| is easy to fall into a FOMO mindset in a manipulated market..
| eventually the gamblers left at the table always lose. Annual
| sales are down 43%, record prices pumped another 5%, but
| inflation is up 7.5% and growing. i.e. you may yet end up one
| of the lucky ones if you time things right. ;-)
| dominojab wrote:
| nsxwolf wrote:
| Does this mean people will stop ruining restaurant chains and
| dentists offices?
| uoaei wrote:
| This article is little more than a signal to the PE industry to
| sink their claws deeper into the regulatory apparatuses of the US
| government. And they'll do it, because we have a very ineffective
| regulatory system.
| cs702 wrote:
| The private equity industry -- excluding VC, which represents a
| small fraction of total capital raised -- relies extensively on
| debt (LBOs, debt-financed infrastructure deals, debt-financed
| real estate deals, etc.), i.e., borrowing to juice returns. It's
| not a coincidence that the industry was born in the 1980's, when
| interest rates in the US began declining, after the Fed had
| increased them to combat high inflation in the 1970's. Ever
| since, for four decades now, interest rates have only declined
| and declined, in fits and starts, making life easier and easier
| for borrowers of all kinds:
|
| https://fred.stlouisfed.org/graph/?g=RveY
|
| Many private equity deals that arguably were economically viable
| when the 10-year treasury's annual yield was ~0.6%, less than a
| year ago, may not be viable now that the 10-year treasury's
| annual yield is ~3%, and are likely to suffer financial distress
| if interest rates rise further -- say, 10-year treasury yields of
| ~5%, ~6%, or more. If that sounds high, keep in mind that the
| last time the Fed had to deal with high inflation, in the 1970's,
| the 10-year treasury yield rose to a peak of ~16%!
|
| Over the same past four decades, valuation multiples have only
| risen and risen, in fits and starts, making life easier and
| easier for those who make money by buying businesses, holding
| them for a while, and selling them down the road. For example,
| here's the ratio of US stock market capitalization to the size of
| the US economy (GDP):
|
| https://fred.stlouisfed.org/series/DDDM01USA156NWDB
|
| The rise in valuation multiples over the past four decades makes
| sense, given that the net present value of any business is
| inversely proportional to the discount rate used to value its
| future profits, and discount rates are equal to prevailing long-
| term treasury rates plus a premium. If interest rates continue to
| rise, valuation multiples are bound to decline too.
|
| --
|
| EDITS: Changed language in response to comments below so it
| better reflects what I meant to write in the first place.
| pirate787 wrote:
| Regulatory and tax changes in the 1980s created private equity.
| Declining interest rates juiced it, as has computerization, but
| the fundamental change was Reagan's policy of financial
| deregulation and reducing capital gains and marginal rates so
| that entrepreneurs had more money to invest.
| missedthecue wrote:
| What specific regulatory changes occurred in the 1980s that
| created PE? KKR, a pioneer of the industry, was started in
| the '70s and they did a landmark $380 million deal in 1979,
| which is billions in today's money.
|
| The first LBO was of Orkin Pest Control in 1964 and there
| were about a half dozen other LBOs in the 60's.
| snake_doc wrote:
| > The private equity industry -- excluding VC, which represents
| a tiny share of total capital raised -- relies extensively on
| leveraged buyouts (LBOs), i.e., borrowing to juice returns.
|
| In 2021, buyout was ~30% PE funds raised, VC was ~10%, growth
| was ~10%. "Tiny" is not true anymore.
| https://www.bain.com/insights/private-equity-market-in-2021-...
| cs702 wrote:
| Thanks. Yes. I changed "tiny share" to "small fraction," and
| noted that the industry is much more than LBOs. Note that
| many other kinds of PE deals -- e.g., infrastructure, real
| estate, distressed secondary investments -- are done with
| lots of leverage too.
| qwertyuiop_ wrote:
| Very insightful. Do you work in finance ?
| balderdash wrote:
| Most LBOs aren't really that interest rate sensitive, let's say
| you buy a company for $100m dollars 12x EBITDA, and 15x
| unlevered free cash flow ($7m), you would have put $50m of non
| amort. debt in the business @ 3%, so had a $1.5m interest
| payment. Lets say that doubles to $3m, earnings would have to
| be cut in half to not be able to service debt...
| engineeringwoke wrote:
| It trashes your IRR though. Now what does the sponsor make?
| formercoder wrote:
| IRRs have been waning the last few years anyway, to the
| point folks will look at 12.5%. There is a lot of money
| chasing PE allocations. Of course top quartile funds will
| just pull further away from the pack.
| balderdash wrote:
| Not really, that rule of thumb is that if you can grow
| EBITDA at higher percentage than the EBITDA multiple you
| bought at, thing will just work out fine (e.g. buy at 20x
| need 20% cagr on earning over the next 5 years)
| engineeringwoke wrote:
| There was a recent Economist article that said that 6% of
| the performance in PE is driven by earnings growth. It's
| a Ponzi scheme built on debt because PE has so much money
| that they just trade around companies at higher
| multiples. Lol imagine believing in synergies, or that
| the trash you guys make is somewhat legitimate at all.
| Cutting shit to the bone and sending it to the next guy
| isn't good business.
|
| Enjoy the money and the carried interest loophole while
| it lasts. Community Health Systems? Dex Media? I'm not
| one of the fools that will buy it. Maybe it helps you
| sleep at night or whatever but if rates continue to
| spike, all the trash adjusted EBITDA nonsense will all
| die and you guys will lose your shirts.
| cs702 wrote:
| [EDIT: the data in this paragraph is WRONG! See comment
| below.] 12x EBITDA? Unlikely. According to the article, the
| average valuation multiple for US deals to take firms private
| is 19.3x EBITDA.
|
| A 3% rate for a leveraged entity? Unlikely. Current high-
| yield spreads are in the neighborhood of 500-600bp, on top of
| treasury rates.
|
| So, you'd need 60% more debt (19.3/12) to keep the same
| capital structure [EDIT: this last sentence is WRONG! The
| amount of debt needed would be the same, because the correct
| EV/EBITDA multiple is 12.3x. See comment below.], and the
| debt would be 2-3x more expensive, leaving much less margin
| for a downside scenario, say, in the event of a prolonged
| recession, rising rates, and/or declining valuation
| multiples. If all three of those things happen at the same
| time, things could get... ugly.
| balderdash wrote:
| With regards to your comment on the rates, most LBOs are
| done with floating rate loans/ bank loans/levers loans, as
| such they trade at a spread over libor/sofr, which chops
| ~3% off your interest rate...
| mbesto wrote:
| > According to the article, the average valuation multiple
| for US deals to take firms private is 19.3x EBITDA.
|
| That's on a PIPE, which is a small subsection of all PE
| buyouts. Average multiples for ALL buyouts is 12.3x in NA:
|
| _Average buyout multiples in 2021 rose 9% to 12.3x in
| North America, and, despite a slight decline, still stood
| at a lofty 11.9x in Europe (see Figure 14)._
|
| https://www.bain.com/globalassets/noindex/2022/bain_report_
| g...
| cs702 wrote:
| _You 're absolutely right_. In haste, I misread the data.
| I updated my comment to indicate I was wrong about this.
| Thank you!
| mbesto wrote:
| All good! It's a total nuance to this space so I can
| understand if someone got it wrong anyway.
| abirch wrote:
| Correct. Many of the large private equity companies were
| started in the 1980's when the rates were significantly
| higher than they are today.
| M3L0NM4N wrote:
| Sorry but ain't no way 10 year is going to 5-6%... I'd wager
| it's very likely peaked at 3.5% and it won't break that again
| (for this cycle).
|
| Valuation multiples are (relatively) crushed, and I don't think
| we'll see much more of a multiple compression. What we will
| see, in both private and public markets, is when businesses
| adjust their earnings forecasts for the (very likely) impending
| recession. If you look at Wall Street numbers companies are
| still forecasting growth pretty every quarter through 2023.
| Now, that doesn't seem very likely to me.
|
| The deal is, the public markets will overreact as always and
| sell off harder, but private equity will stay more fairly
| valued because of it's inherent lack of liquidity (two wrongs
| make a right).
| cs702 wrote:
| Oh, I very much _hope_ you 're proven right. I mean, almost
| no one wants higher interest rates -- except the Fed, whose
| priority is curtailing inflation. I'm not sure anyone can
| predict rates accurately. Consider that just over a year ago,
| almost everyone was talking about rates going _negative_ ,
| and look at what actually happened!
| M3L0NM4N wrote:
| I mean I speak out if my ass and don't want to pretend to
| be the sole arbitrator of truth... I'm far from it. But the
| odds of the benchmark rate going negative were very slim.
| The Fed didn't need to counter deflation with interest
| rates when they could just print print print.
| ProjectArcturis wrote:
| I agree on the 10-year. We might get Fed Funds above 5%, but
| the market won't expect that to continue for 10 years.
| (Mathematically, the 10-year yield should equal the expected
| average Fed Funds rate over the next ten years).
|
| I disagree that valuations have been crushed. You qualified
| that with a "relatively". We're lower than at the peak of the
| bubble of course but Shiller PE is still 30, higher than any
| time other than the dot-com bubble and the current bubble.
|
| Private equity firms will choose not to write down the value
| of their assets, but the actual transactable prices will
| probably drop further than public stocks.
| RC_ITR wrote:
| >Sorry but ain't no way 10 year is going to 5-6%
|
| People like to say this because of how negative the
| consequences would be, but that is not a reason why it won't
| happen.
|
| FWIW, given that it would only affect the US Gov't's new
| issuances, it's not impossible for them to let it happen.
| M3L0NM4N wrote:
| I think this administration and the current Fed chair are
| very averse to the negative consequences, that's why I'm
| saying it.
| RC_ITR wrote:
| I would love to have heard your thoughts as of 1Q21 on
| 3.5% using the same inputs.
|
| There were brand-name crossover (I won't call them HFs)
| folks claiming that we would never see positive inflation
| ever again (right before that fateful Apr-21 print)
| M3L0NM4N wrote:
| You're right, in 1Q21 I probably wouldn't have even
| guessed 3.5%
|
| But what do you mean by positive inflation though? Like
| CPI > 0% YoY? Cause that's the craziest thing I've ever
| heard.
| RC_ITR wrote:
| I mean I won't name names, but yeah. Best-fit line on CPI
| was pointing to below zero within the decade (and a
| common statement was 'humans see crossing 0 as a major
| milestone, but numbers do not') and we had already seen
| deflation more or less happening in Japan [0] Italy [1]
| Switzerland [2] Greece [3] and other small economies with
| slow-growing population.
|
| Hell, depending on what you believe about globalization
| and the nature of capital formation, one can still make a
| compelling contrarian argument that the developed world
| will see significant disinflation until we start getting
| serious about global warming (or global warming gets more
| serious, which is likely what will come first).
|
| [0]https://fred.stlouisfed.org/graph/?g=Rw9J
| [1]https://fred.stlouisfed.org/graph/?g=Rw9M
| [2]https://fred.stlouisfed.org/graph/?g=Rw9S [3]
| https://fred.stlouisfed.org/graph/?g=Rw9W
| jollybean wrote:
| So your summary point applies irrespective of whether companies
| are leveraged with debt or not. Cost of Capital is rising
| across the board.
| ezekiel11 wrote:
| what does this mean if your company is acquired and run by a
| private equity? will the rising fed rate mean that they are
| looking to cut out the highest salaries? am I better off not
| takin a higher salary because that might paint a red target
| on myself?
| jollybean wrote:
| It just means that when entity A wants to buy entity B,
| they have a general 'cost of capital they use to determine
| whether or not they want to buy something - and it doesn't
| matter if it's with cash or debt really.
|
| If you're an employee worrying about stuff, well, I
| wouldn't unless you're the CEO and have the power to make
| huge investments ...
|
| If you are a very profitable company, i.e. 'cash cow'
| without a lot of debt, then private equity may be
| interested in buying your company with heavy borrowing,
| using the profits to pay for the debt.
|
| Another way to look at it is, the company is not taking
| enough risk given the price of cash available in the
| market.
|
| One thing a company might want to do is take on debt and
| extend the business.
|
| If it's a private company with strong board control, and
| the shareholders don't want to sell, well, then you don't
| have to worry.
|
| As for companies that do get acquired, this notion that PE
| just wants to screw things up short term etc. is a bit
| bullshit. Burger King was acquired by that famous Brazilian
| outfit, and they turned the company around. In that case,
| probably some execs got fired to clear the path for the new
| vision, but it will vary case by case. The company might
| get split up into components. Maybe there is a garbage part
| of the company dragging on revenues. Maybe that supposedly
| crappy part of the company is actually more 'long term' and
| killing R&D would hurt the company, but that's surprisingly
| hard to establish. A lot of R&D is a waste.
|
| With rising interest rates, debt becomes more expensive,
| and companies have less to worry about getting bought out
| like this - of course, companies that are carrying debt
| have a greater burden.
|
| In summary, companies probably need to adjust a bit given
| interest rates. This is where a good CFO comes in.
| guiriduro wrote:
| > A lot of R&D is a waste.
|
| If its speculative, then its either going to deliver a
| multiple of its investment, or just be a cost, but one
| that may be worth it to explore an opportunity. I doubt
| that R&D which proves no viable product is feasible, or
| no market exists, is more wasteful than allowing a
| business to wither on aging uncompetitive product lines
| for want of proper R&D.
| ezekiel11 wrote:
| thanks I feel good now, I almost turned down a 4-bagger
| offer until I read your comment, but I am a bit wary, the
| new CFO is a bit of an unknown. am I going to show up on
| his radar now? I feel like the business can't run without
| what I built and my maintenance, in-depth knowledge of
| the critical business processes.
| jollybean wrote:
| Oh Jesus, get an investment banker to help you with these
| things, don't worry to much about what random 'me' has to
| say about it. I mean - it's actually not that complicated
| at the end of the day once someone becomes 'financially
| literate' but the underlying conditions of any deal
| matter 100x more than general patter of VC, PE and
| interest rates. There are people (investment bankers) who
| do this day and and day out and it's like riding a
| bicycle to them. Find one who cares enough to know about
| the details and doesn't push you into a deal because they
| want the commission, which will be their big incentive.
| They may just require a fee. Try your peer network out
| for that.
| [deleted]
| spamizbad wrote:
| I don't think LBOs are that sensitive to interest rates are
| they? There was a ton of them in the 1980s when rates were
| still in the double digits.
| [deleted]
| swader999 wrote:
| Interest rate trends are more of a factor.
| blabberwocky wrote:
| LBOs haven't been the defining structure of PE for a while now,
| though leverage is still a key ingredient. The massive growth
| of the "PE industry" over the last decade has really been on
| the credit side (which does include equity plays, e.g., in real
| assets and distressed debt that leads to equity positions)
| despite the low interest rate environment.
| paganel wrote:
| Do you happen to know if "private credit" (I don't know if
| that is the actual correct term) is a big part of PE's
| investments? I stumbled upon mentions of it more and more
| during the last 2 years (I'd say) and it kind of gave me some
| "this can't be structurally right"-vibes. Or maybe that is
| just a very small market, comparatively speaking, and I'm
| talking bs, hence my question.
| blabberwocky wrote:
| Yes, it's now a major business for the big PE firms (which
| today are really diversified investment managers) with AUMs
| that can significantly exceed that of (traditional)
| corporate PE. But its their credit vehicles that invest in
| credit. So their corporate PE funds might do buyouts or
| growth equity or whatever, but won't generally be direct-
| lending or buying securitized debt.
| mbesto wrote:
| It's absolutely part of the investment structure. It's no
| different from buying a house that you would rent out for
| yield. If your yield outpaces the costs (maintenance,
| taxes, utilities, AND the mortgage rate) then you are
| basically have an arbitrage. This is no different from what
| PE does and is why they typically leverage ~50% of the
| acquisition price.
| clairity wrote:
| to nitpick, neither yield outpacing costs nor PE is
| arbitrage. arbitrage is structurally zero-risk, while
| those other cases have relatively small but non-zero
| risk, since yield, costs, interest rates, regulations,
| etc. can change over the lifetime of the deal. arbitrage
| generally happens due to a mispricing and an opportunity
| to buy and sell at (approximately) the same time.
| cs702 wrote:
| Thanks! Yes. I updated my comment.
| Blackstone4 wrote:
| There is a structural element to consider since PE has raised
| huge amounts of dry powder and will continue to do so....which
| means there is huge demand from committed capital that has to be
| invested...not sure it will go away any time soon since the dry
| powder will help support valuations to a certain extent even if
| they come down with higher interest rates.
| mbesto wrote:
| If by fall you mean from its all time highs, sure, but theres
| still so much money allocated that needs to be spent:
|
| _After 10 years of steady growth, dry powder set yet another
| record in 2021, rising to $3.4 trillion globally, with
| approximately $1 trillion of that sitting in buyout funds and
| getting older (see Figures 8 and 9)._ [0]
|
| There was an all time high of 490 buyout funds closed in 2021.
| What is very likely is that many of these new funds (I see a lot
| of them...the 8-man shops that came from MDs at places like KKR,
| Carlyle, Apollo, etc.) will just fizzle out.
|
| Like everything else, it's just gettting corrected.
|
| [0]
| https://www.bain.com/globalassets/noindex/2022/bain_report_g...
| [deleted]
| Havoc wrote:
| Not hearing much about this within PE though.
| fdgsdfogijq wrote:
| Recently heard this description of PE:
|
| Private Equity is an arbitrage on bloated companies. Typical
| cycle is innovative startup -> efficient corporation ->
| beauracratic corporation. PE firms buy the companies late in the
| cycle and then cut the fat. Commonly also seen in activist
| investors. This is a needed function that will never go away.
| niffydroid wrote:
| In my view, someone from the uk, they generally buy companies
| and strip as much money as they can out of the company by
| selling bits off or they buy it and load it up with debt and
| then take as much money as they can out.
| curiousllama wrote:
| Out of curiosity - did a PE person tell you that?
|
| It's a bit of a romanticized view. Like a junk yard mechanic
| opining on the circle of life.
|
| Some PE firms definitely resurrect companies. But a lot are
| junk yards for companies: they buy to divest & accelerate
| lifetime profits to today, knowing they'll just dispose the
| husk at the end. Others are monopoly plays: "roll ups" of
| local/regional players until there's just one option left and
| they can raise prices. Still others are growth plays: they're
| willing/able to take bigger risks, for bigger rewards. And
| others exist too.
|
| Notably, all would likely describe themselves as arbitrage on
| bloated/mismanaged companies.
|
| But that doesn't make it true, really
| zjaffee wrote:
| There's another type of PE out there beyond what you've
| described which is, the owner of a moderately sized privately
| owned firm (doing somewhere between 10-100 mil revenue a
| year) wants to retire and sell it off, and PE firms are the
| only ones who can afford to buy it for the 100mil+ price tag
| it warrants.
| nostrademons wrote:
| _That 's the point._
|
| A lot of people view companies as fundamental and bankruptcy
| as bad because companies are the biggest "things" you can
| point to in the economy. But the economy itself doesn't think
| in those terms (it doesn't really think in any terms, not
| being alive). The fundamental assets in the economy are land,
| labor, capital, and information, and a firm is just a way to
| _organize_ those factors of production to do something
| useful. Over time the optimal way to do things often shifts
| so that whole companies become obsolete, but the incentive of
| everyone involved in a company is to make sure the company
| keeps existing.
|
| The role of a P/E firm or corporate raider is to buy the
| company, strip all the assets off, sell them to other
| companies that will use them more efficiently, lay off all
| the employees, and force them to get other jobs. Which sounds
| utterly cruel if you think of the company itself as a thing
| whose existence you want to preserve, but if you think of the
| company as an organization of convenience which should be
| dismantled and reconfigured when economic & technological
| conditions change, you are just paving the way for other
| companies to flourish.
| grey-area wrote:
| That's a nice fairytale.
|
| Let's be honest here, PE firms exist to make partners rich,
| not to reallocate misused capital and force people to get a
| productive job. Their mechanisms are described by the OP
| and may _sometimes_ result in those things but those are
| not the goal or the motivation.
|
| Bankruptcies are a necessary evil but they are always
| awful, traumatic experiences for employees, and often PE
| will force reorgs, acquisitions and layoffs not because
| they are best for the economy or employees but because they
| are best for the new owners.
| nonameiguess wrote:
| I was thinking something like this yesterday when someone
| posted a blog post about an evolutionary perspective on
| product market fit. That ended up being a bit of a misnomer
| and it was really an article about the observation that sex
| sells, and people are motivated by sex because of
| evolution, but I was thinking what the article should have
| been is the real evolutionary perspective is competition
| itself. Nobody other than you as a founder gives a shit if
| your specific company succeeds. All that matters is that a
| need is addressed, some product fits some market. As a
| consumer, I don't give a crap who is at the other end of a
| transaction profiting just so long as I get the product I
| need. As an investor, thanks to diversification, I don't
| really give a shit which companies make it and which don't
| just so long as an entire sector grows. Even as an employee
| in an industry where it is very easy and quick to find a
| new job and it usually involves a pay raise, I'm not sure I
| care all that much if my employer continues to exist. I'm
| not even really sure you should care that much as a
| founder. As long as funding sources continue to give you
| money and you use some of that to pay yourself, if one idea
| fails, try another. Don't get too attached to whatever
| you're working on right this minute, just so long as at
| least one thing you try eventually works.
|
| Think of like the commercial equivalent of the United
| States and every constitutional republic that has followed.
| We don't have kings. Institutions should outlive regimes.
| Dynamic markets are healthy markets. Chaos is a ladder or
| something like that.
| [deleted]
| curiousllama wrote:
| > the optimal way to do things often shifts
|
| My only quibble is how you frame "optimality" as an
| objective parameter, shifting with the tides of time.
|
| Monopolies are usually optimal for the owner. Similarly, PE
| rollups are optimal for the owners. You're right, of
| course, that when you value a company in terms of
| "fundamental assets" then PE strategies make total sense.
|
| But if these companies are simply organizations of assets,
| then why create them? The general purpose of companies is
| production: to make a profit, yes, but also to provide a
| value surplus to customers.
|
| People dislike PE not because they're cruel, but because
| people get that they "optimize" for owner profit over
| customer surplus.
|
| A necessary tool? Certainly, it often is. But optimal use
| is important too. With a cost of capital near 0 ... why
| wouldn't the tool be overused, destroying economic value it
| was meant to create?
| nostrademons wrote:
| In the presence of competition "optimal for owner"
| equates to "optimal for the system at large", because
| competition between PE firms will bid up the price they
| pay for the initial company until it's fair, it'll bid
| down the interest rate the bank charges, it ensures that
| the assets actually go to the firm best able to make use
| of them, it provides landing positions for the employees
| who are let go and then can get the best salary possible,
| etc.
|
| In the absence of competition misallocation can occur,
| and that's why it's the governments job to stomp out
| monopolies. (Something that they've been sucking at, but
| if you want to argue for better anti-monopoly enforcement
| I'm all for it.)
|
| There's wide-ranging literature on why companies exist
| [1], but it's not for production. Individual laborers
| independently contracting with each other can produce
| value, and do so without the monopoly risks mentioned in
| the last paragraph. Usually theories of the firm center
| around transaction costs: it takes money to identify,
| review, trust, and collect payment from other firms you
| do business with, and so you can improve efficiency (up
| to a point) by centralizing all the producers in one firm
| under a management hierarchy that doesn't pay them
| directly but is tasked with optimizing output. Other
| theories of the firm have shown that management doesn't
| _actually_ optimize output and (surprise surprise)
| optimizes for their own status, promotions, and other
| human motivations instead, but as long as the deadweight
| loss from them being self-interested is less than the
| search costs of contracting with another company, it 's
| economically rational. P/E operates essentially by taking
| on that search cost of dismantling the company and
| selling it on the open market, and pockets the difference
| between the deadweight loss of manager principal-agent
| problems and those search costs.
|
| Cost of capital being 0 is a separate issue. The effect
| of this is to make any investment with positive returns a
| good one, regardless of _how_ good it is, which creates a
| lot of bloat and misguided investments in companies. It
| 's essentially making the economy a target-rich
| environment for P/E.
|
| [1] https://en.wikipedia.org/wiki/Theory_of_the_firm
| curiousllama wrote:
| > In the presence of competition "optimal for owner"
| equates to "optimal for the system at large"
|
| I'd humbly suggest that the system is comprised of more
| than mere owners.
|
| > There's wide-ranging literature on why companies exist
| [1]
|
| Indeed. Are you suggesting they describe examples of
| firms that don't produce, and never intends to do so? I'd
| be very interested to learn about them, as I'm surprised
| to hear someone imply The Theory of the Firm describes
| organizations without output.
| hestefisk wrote:
| Beautiful articulation. Very clinical though. You should
| become a writer.
| CPLX wrote:
| This is not an accurate description/metaphor.
|
| The best way to describe PE is as a means of exploiting
| principal/agent issues:
|
| https://en.wikipedia.org/wiki/Principal-agent_problem
|
| People take over organizations and loot them for personal gain.
| It's the simplest business model imaginable.
|
| In fairness that's not the only PE model. The other model is to
| buy up competing businesses, engage in anti-competitive
| practices, and extract monopoly rents from a sector.
| kmeisthax wrote:
| Theoretically, yes; in practice most private equity is no
| better at management than the people they are replacing. Often
| times they miss the fat and cut the bone instead.
|
| It's hard to actually see what provides company value and what
| is actually expendable. Remember that the whole idea behind
| free markets is that you _can 't_ perfectly know and
| precalculate every input and output of an economy; you want a
| distributed set of economic actors making decisions for
| themselves. And large businesses are not immune to this - they
| operate not like tribes, but like little mini-economies unto
| themselves. If we actually could "cut the fat", command
| economies would have worked and America would have collapsed
| instead of the Soviet Union.
| snarfy wrote:
| I've never seen it work that way.
|
| Typically they cut a bunch of expensive overhead, like
| employees, which juices the books to make it look much more
| profitable, then sell to someone else left holding the bag of a
| dead shell of a company. Cut long term viability for short term
| gains.
| amanj41 wrote:
| Depending on the parent commenter's definition of cutting the
| fat, I don't see your understanding's of PE as being much
| different
| speed_spread wrote:
| One view does not exclude the other. Predators have a role in
| ecosystems, culling the weak and the sick from the herd. PEs
| are corporate predators, preying on bloated orgs, killing
| them, returning whatever value still held (trademarks,
| patents) back to the "environment".
|
| But of course that "pure market" viewpoint doesn't take into
| account the social costs and individual pains these
| operations entail.
| youngtaff wrote:
| Apart from they wreck perfectly viable businesses...
|
| Let's take Debenhams in the UK as an example
|
| - Used to own all it's stores - Got bought by PE (who
| attached the debt they used to buy Debenhams to Debenhams
| so the PE group now owe zero) - Split the stores from the
| retail operation but made the retail operation lease them
| on ever increasing rents - Sold the stores to British Land
| - Eventually Debenhams retail can't afford the rents (as
| they only ever increase), and the debt payments so goes
| bust
|
| Similar patterns with PE acquired companies not being able
| to afford their debt payments is common, coupled with PE
| companies extracting any free cash as a dividend shortly
| after purchase
|
| What PE companies are doing isn't culling the weak but
| extracting the most they can from businesses and then
| leaving suppliers, employees, pension scheme members to
| pick up the cost
| kolbe wrote:
| That's not what he's talking about. Ruthlessness has its
| role in a robust ecosystem, but screwing with a company in
| a way that destroys its viability simply to trick some
| retail investors and pension funds into buying the
| worthless shell is not part of a robust ecosystem.
| lmz wrote:
| Maybe it weeds out the more stupid investors.
| che_shirecat wrote:
| unironically, yes. in an ideal capitalist system, money
| should flow to those who can best allocate it, so stupid
| investors losing $$$ to more savvy investors in financial
| pvp is the market working as intended.
| unity1001 wrote:
| You missed another step - after cutting the employees, they
| make the rest work two or three times more. Instant profit.
| listenallyall wrote:
| If this were commonly true, who are the dumbasses buying
| companies from private equity funds, and why would they
| continue to buy them? And, whether your statement is true or
| not, why should I (or anyone else) feel bad for anyone who
| would buy back a company that has been gutted and has no
| future? This is business, people are supposed to be
| professional and to differentiate opportunity from disaster.
|
| Lastly, "Cutting long term viability for short term gains."
| actually sounds somewhat noble. Why should a company exist
| for 50 years when all of its usefulness (i.e. profit) can be
| extracted in 5? Let everyone move on to something else
| productive. If you owned an oil well you could exhaust in 5
| years, you'd do it, not sip at it for the next 50.
| selimthegrim wrote:
| >If you owned an oil well you could exhaust in 5 years,
| you'd do it, not sip at it for the next 50.
|
| a) why when you can hold back and affect the price b) this
| logic had better change soon or we are all screwed with
| climate
| youngtaff wrote:
| Other PE funds... it gives the original fund a way out and
| typically a gain to show for it while bumping the problem
| to the next fund
|
| Was an article about this in the Financial Times recently
| listenallyall wrote:
| Since people hate PE funds so much (after all, they are
| usually led by billionaires), why is there so much
| despair over one PE fund selling another PE fund a lump
| of garbage? I'd think many people would celebrate.
| pfdietz wrote:
| Sometimes squeezing the last drops of juice out of a doomed
| lemon is the economically most efficient thing to do. The
| purpose of a company is to serve the interests of its
| shareholders (within the bounds of law), not to survive
| indefinitely. We all know cases of companies that squandered
| value in vain attempts to stay alive, when they just could
| have slowly put themselves out of business and returned the
| last years of profits to their shareholders. Kodak, I'm
| looking at you.
| amelius wrote:
| Sometimes bad things turn out to be good things. But most
| often, they are not.
| chmod600 wrote:
| What's the alternative? If a company is essentially a
| zombie, what is the ideal outcome?
| vkou wrote:
| Ideal outcome for who?
|
| The owners? The customers? The employees? The country?
| Competitors? My 401K? The creditors?
|
| Some of these stakeholders net-win when zombies die, and
| some of them net-lose. The economy isn't a zero-sum game,
| but particular categories of actions in it _can_ produce
| net-negative outcomes for one of these groups. You can 't
| just wave a large brush and say that everyone net-wins
| when this happens. It's a case-by-case thing.
|
| Eddie Lampert's corporate plundering of Sears is an
| example of just about everyone but him (Maybe including
| him? It's hard to tell) losing.
| pfdietz wrote:
| It's likely to be positive for all of those, even the
| employees. Who gains from the destruction of value?
|
| > stakeholders
|
| I hate this term. It's a deliberate attempt to blur the
| boundaries of who owns something and who does not. It's
| not shoplifting if I'm a stakeholder in this pack of
| cigarettes, right?
| fdgsdfogijq wrote:
| This definitely happens, but its up to the buyer to know what
| theyre buying. Thats how free markets work
| RajT88 wrote:
| I've seen both. A place I worked once got bought by PE, and
| they cut development costs for a product which was becoming
| less and less relevant anyways. There's a variety of opinions
| about that.
|
| You look at Toys R Us, and a few other major retailers, it is
| as you say.
| kgwgk wrote:
| Even the successful PE stories get bad press - as they
| often involve painful restructuring. But the big failures
| do get much more coverage for obvious reasons.
| twodave wrote:
| I think it's fair to assume both exist. The (small) company I
| work for sold to PE in 2019. They basically dumped a bunch of
| money in to help us scale up quickly. It hasn't all been
| great, but revenue continues to grow and we have (many) more
| employees than before from top to bottom. I expect they'll
| probably try and move on soon to realize their gains, but the
| next buyer definitely won't be receiving a "dead shell"
| unless they somehow fail to retain the employees during the
| transition.
| dhzhzjsbevs wrote:
| We got juiced by PE. Hiring went to absolute shit. Nobody
| knows whos in charge anymore. Decision makers have all left
| the company. I just make everything up as I go along and
| people go with it because I've been around so long nobody
| will question it.
|
| Total shit show.
| mbesto wrote:
| > Typically they cut a bunch of expensive overhead, like
| employees, which juices the books to make it look much more
| profitable, then sell to someone else left holding the bag of
| a dead shell of a company. Cut long term viability for short
| term gains.
|
| This really only exists in large cap deals. Most middle
| market deals are _actually_ about long term
| viability...mainly because they have to sell to other PEs or
| strategics that will underwrite the long term viability
| during diligence when they go to buy. Large cap on the other
| hand will typically try to IPO it where the public investor
| might be left holding the bag (or creditors, or employees).
| jankyxenon wrote:
| The goal of PE firms is to exit their investments. Do you
| think PE is a long running greater fool scam, where there's
| always a foolish buyer available.
|
| Or, do you think sometimes the buyers are not getting a dead
| shell?
| JackFr wrote:
| Wild that what's obvious to ransom HN commenters hasn't been
| noticed by the guys buying the dead shells of companies.
| You'd think that it would be important to them.
|
| Or maybe that's anecdotal and not necessarily the brought
| trend.
| StanislavPetrov wrote:
| >Wild that what's obvious to ransom HN commenters hasn't
| been noticed by the guys buying the dead shells of
| companies.
|
| It isn't so wild when you consider cases like Sears, where
| Eddie Lampert in effect used a variety of shell companies
| to sell off the profitable parts to himself.
| che_shirecat wrote:
| obvious outlier skewing your perception of the market as
| a whole. if the sears/eddie lampert case was the norm,
| why would PE deals ever happen?
| teekert wrote:
| So, what does this mean for my mortgage?
| HWR_14 wrote:
| Make sure you don't have an ARM. ARM holders might see their
| payments skyrocket when it goes off the fixed rate.
|
| If you currently have a fixed rate mortgage then you are locked
| in and in great shape. Nothing will change monthly in your
| mortgage. The "what does this mean" could be that you can
| comfortably afford to live there but that moving would become
| much more expensive that you are stuck in your current home for
| five years.
| leoh wrote:
| In some cases, one can "port" their mortgage; ie sell their
| existing place and keep paying down the mortgage and buy a
| new place
| HWR_14 wrote:
| I don't know what that would mean. You sell your house as a
| owner-financed thing? It still doesn't get you the cash up
| front to put down on a new house.
| bombcar wrote:
| Shouldn't mean anything as long as you can keep paying on it.
| Finnucane wrote:
| If it's fixed rate. Anyone who took an adjustable loan at a
| time when rates only had one way to go (up) is gonna be
| boned.
| saiya-jin wrote:
| and that's the trick, once fixations end those easy-to-pay 2k
| will become 4k (or 7k)
| thedougd wrote:
| ARMs sold today are typically it the 5/1,7/1,10/1 variety.
| The terms outline the maximum increase per year and
| lifetime after the fix ends. A doubling or tripling of
| payment immediately at the end of the fix term would be
| unusual.
| sails wrote:
| Somewhat interesting perspective on PE in this Bloomberg podcast,
| which does a reasonable job of explaining why ~23:30
|
| 1. PE has had an easy run - rising interest rates and rising
| value of equity
|
| 2. Guest finds shocking - Given 1, PE returns net of fees and
| adjusted for leverage have become very pedestrian relative to
| S&P500. If the IPO market slows due to interest rates, then this
| may trap PE institutional investors.
|
| https://omny.fm/shows/odd-lots/jim-chanos-on-why-some-of-the...
| NelsonMinar wrote:
| The one reliable thing about private equity is the very high
| fees.
| youngtaff wrote:
| And how little tax they pay
| [deleted]
| niceWokr8 wrote:
| It's clear to anyone who looks at a stock chart from 2020-2022
| the entire economy was artificially pumped and we're living
| through the dump.
|
| I don't really know what else people expect voting for
| gerontocrats who have made their names on leveraged buyouts,
| insider trader, gaming the courts after their businesses commit
| fraud and the like. Neither "side" of the political spectrum is
| innocent of such things, including the voters.
|
| Elder Americans are straight up grifters, free loaders with no
| ability to accept the rest of the world is not a post-WW2 crater.
| They were able to win big easy, they are the gold star for
| nothing generation, due to the rest of the world having been
| obliterated shortly before their birth.
|
| Electing Romneys, Feinsteins, and the rest is lunacy. They have
| no idea how to do productive work as the world rebuilt itself
| without them; they all huddled in offices learning how to design
| models decoupled from reality, convincing themselves of their
| genius and work ethic as their families expropriated earnings
| from workers; because of course they're owed a cut for producing
| nothing. It just makes perfect sense.
| philovivero wrote:
| I'm struggling to find something useful in this comment. I'll
| just pick one point.
|
| > Elder Americans are straight up grifters, free loaders with
| no ability to accept the rest of the world is not a post-WW2
| crater
|
| Compare against younger Americans who are straight up grifters,
| free-loaders making up crypto coins and NFTs and other garbage
| that wastes precious natural resources for their scammy
| activities?
|
| In case my point isn't clear, you're attributing to some class
| of people an attitude that equally applies to all other classes
| of people, but in a way that somehow implies it's special to
| that one.
|
| I guess the one useful tidbit I can get from your comment is...
| well... it's already a tired cliche, albeit true: neither
| American political party is the friend of the little people.
| And although those parties are dominated by Feinsteins and
| McConnells, there are still Bernie Sanders and Rand Pauls.
|
| So... what do we do about that? Other than discriminate against
| some class of people that's your personal outgroup?
|
| Maybe work at a local level to elevate more Sanders and Pauls?
| kaydub wrote:
| Really? Rand Paul is who you go with?
| N-Krause wrote:
| https://archive.ph/X7W0p
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