Comment by kalleboo
2 years ago
B is not true. It's more profitable to extract lots of value in the short term and kill the company and then move on to the next victim, continually showing great profit spikes and cashing out yourself, than to slowly extract value over the years.
The system is full of perverse incentives.
You’re forgetting that we operate in a world of limited resources, and the opportunity cost of poorly allocating those limited resources.
PE are like autotrophs, or literal vultures if you prefer. They recycle poorly allocated resources and return them to the market so that someone else with a better use (read: more profit) can buy them. It’s a niche in the market, like autotrophs.
This probably is the better move for long term profit. Not for the PE company specifically, but for the market as a whole. All those newly freed assets can now be consumed by new companies making more profit.
In theory, this is supposed to benefit everyone (though it doesn’t, for structural reasons). A new company with more profits means more taxes for governments, more profits that can be paid out as wages to workers, and the profits indicate consumers want whatever the new company makes more than RL’s food.
It’s also worth noting that PE is a reflection of market opinion. Companies that the market believes in are worth several to many times the value of their assets. There’s no way to acquire them, gut them for assets and make a profit.
Why is this perverse? It seems desirable. IF there are other opportunities that generate more value, you would want to cash out of the lower ones and invest in the better ones.
IF there are no options that generate better value, the company wont be liquidated.