Review: Bad Company: How Private Equity Ruined Everything \ stacker news ~BooksAndArticles

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Review: Bad Company: How Private Equity Ruined Everything

392 sats \ 11 comments \ @stack_harder 13h BooksAndArticles

I can't remember how I stumbled on this one, possibly after watching a video about PE destroying Toys'R'us #979856

Basically, the author uses different people in different industries to talk about the effects of PE on their lives and the industries it gets involved in.

Since it's a dry topic, the main driver is the stories of the people, a Toys'R'us worker, someone from a PE-owned apartment block, and a journalist (PE also acquires newspapers, apparently).

The author explains how private equity uses leveraged buyouts (LBOs) to acquire companies using mostly borrowed money, loading the target company with debt. This means that the company being acquired is used as collateral for the loan and the acquired company the assumes the debt. They then extract the value through fees, asset sales, layoffs, or dividend recapitalization, leaving husks of once-thriving businesses.

The idea is to buy, strip, and flip.

I don't know how this stacks up to other books about PE, and the book's bias is clear, but generally, the whole industy seems a bit gross and what I find particularily gross, is when these things fail, the executives always get their massive bonuses, just like in the GFC, the rats at the top are never held accountable.

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30 sats \ 8 replies \ @Scoresby 12h

I'm sure there are some deals that work out like this, but there doesn't seem to me to be any particular reason why private equity investors are harmful but other forms of investment are not.

I bet you could find as many cases of private equity producing a useful company or increasing the efficiency in a business that was otherwise going to go bust.

Do you have any sense why the author thought this one form of investment was bad while other forms (presumably) not bad?

102 sats \ 5 replies \ @stack_harder OP 8h

PE is a totally different beast that eventually sucks a business dry and kills it.

Standard investing is lending money with the expectation of a return, and that money is then used to make the business more profitable, which then increases roi.

102 sats \ 4 replies \ @satgoob 7h

A couple things here:

"Standard investing is lending money" - sometimes you're lending, but that's not everything - like owning a share of company is having actual equity ownership in that company

Private equity as a broad category is just a distinction that is an equity investment that is not public. It isn't necessarily bad, as @Scoresby mentions. This is what I do for a living / am trying to do - am in startupy mode - but at a smaller scale, so I get frustrated with the broad strokes classification of PE as "bad".

Equity can be used in similar functions to debt - for example, companies below a certain size range have limited access to debt, or if a company needs to turn around its performance, it might be higher to lend. Individuals investing aren't usually thought of as "private equity" but high net worth individuals or firms are, but nonetheless this is private equity investment.

In a vacuum, if I get together a bunch of stackers and form Stacker News Ventures Fund I and buy a company at a very good price and it continues to perform well with current management, and you all make a 30% annualized return, is that a bad thing? If so, if you got that from an investment in a public stock, would that be a bad thing?

A lot of business owners are retiring and need to sell in order to get their liquidity. If a kid's not taking over (and who knows, the kid could tank the business), who can pony up, say, $10-20mm to buy out the business? Probably is going to be a private equity fund.

More broadly, it depends on the strategy and role of the fund. For example, a lot of small acquisitions need to improve systems to make companies scalable (i.e., some don't have good accounting systems, reporting, marketing, whatever) and broadly need to just take more market share to grow, and shareholder value is generated from that. I don't see anything wrong with that.

0 sats \ 2 replies \ @stack_harder OP 7h

Getting 30% annualized return would be good, sure, as long as it wasn't mainly from asset stripping and prioritising short-term gains over long-term health.

15 sats \ 0 replies \ @Scoresby 6h

In the case where a company is failing, a PE fund buying the company and liquidating it sounds like the market functioning to increase efficiency.

In the case where a company is not failing, but a PE fund acquires it, my question is how come the company wasn't able to sell itself to a buyer who wanted to keep it running? If a company is turning a profit, then it makes more sense for buyers to keep it running.

Now, let's say there is a circumstance where a company is not making very much profit, but has many assets that can be sold off to produce a short term return for the PE fund. Who are the assets being sold to, and why are the buyers able to make a better use of them (better use is implied because they are buying them -- why buy what you can't make money on?)

I don't believe private equity or private credit somehow get exempted from the basic rules of capitalism: if they are doing something that someone else can do differently and make more money, that someone else will out compete them.

If more money can be made by keeping a company together and operating it, PE funds that want to liquidate won't be able to compete with investors who want to buy the company in order to operate it.

Think about it this way: if all the PE fund is doing is buying a distressed company and then selling the assets off, the person buying the assets form the PE fund is far better off just buying the distressed company -- if a profit can be made by operating it. Why would the buyer of the assets put up with the middle man?

I'm sure there are circumstances where PE does things that don't make market sense due to fiat distortions and regulations. But in general, my limited window into PE is that it helps the market be more efficient.

0 sats \ 0 replies \ @satgoob 7h

My point with that is that seems to be a subset of companies and is not inherently a trait of private investment

You can just acquire and run a business with the goal of generating sustainable value

0 sats \ 0 replies \ @satgoob 7h

Also, these funds manage and invest on the behalf of pension funds, insurance cos, endowments, and others so they're

That being said, they have been getting rich on fees at the higher levels, but the market is adjusting

50 sats \ 1 reply \ @nkmg1c_ventures 11h

There is a frequent kind of PE takeover where they come in, fire people, sell off assets, and generally financialize the company with shell companies to get creative with accounting. The business basically gets hollowed out and the original operations that were successful aren't invested in.

143 sats \ 0 replies \ @siggy47 10h

No doubt about it. Chapter Five of Bitcoin Is Venice talks about capital strip mining.

32 sats \ 0 replies \ @nkmg1c_ventures 11h

This guy made a few videos on the topic

https://www.youtube.com/watch?v=gqtrNXdlraM (The Death of American Capitalism)

https://www.youtube.com/watch?v=b_Aq3pCtsZo (The Private Equity Buyout of Music Production)

0 sats \ 0 replies \ @d680ecaa8e 11h

Bad reviews are destructive to the business.