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102 sats \ 4 replies \ @satgoob 15h \ parent \ on: Review: Bad Company: How Private Equity Ruined Everything BooksAndArticles
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.
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.
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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.
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