Comment by jmyeet
2 days ago
In American politics, this has been an incredibly successful strategy, most notably starting with Reagan. It's called "starving the beast" [1]. The playbook is simple:
1. Cut taxes
2. "Pay" for those tax cuts by cutting expenditure;
3. Those programs begin to fail because of the funding cuts;
4. Use those failures to justify further cuts, usually by privatizing something or some form of public-private partnership, which is nothing more than a transfer of government wealth to the already-wealthy.
We saw something similar play out recently with Jane Street in India [2], which seems to boil down to market manipulation between options and the underlying securities.
Back in the 1980s we had corporate raiders who were famous for buying up companies that were trading below book value and then simply breaking them up for parts and selling those parts. I'm sure this went as far as corporate raiders manipulating the price.
Private equity is the latest form of this cancer. Here's the PE playbook:
1. Raise a bunch of money;
2. Buy some company with a large amount of debt, a so-called leveraged buyout ("LBO");
3. Once you control the company, take out massive loans on the company's assets;
4. Sell off any real estate holdings, often to some interested party who most certainly isn't at arms length, possibly for a discounted price, to raise further capital then lease back those holdings you need, ideally with complicated leases that hie the true future cost;
5. Use those loans to pay back the original investors and loans;
6. Sell the debt-ridden husk to whoever is stupid enough to buy it.
Now (6) is the tricky part because you have to make it look like the company is profitable, that you've added value by cutting costs or otherwise increased efficiency. And you do that with complicated debt. Sort of like ARMs in the subprime crisis.
I cannot think of a single success story with PE that has created a successful company that hasn't imploded. I belive most PE funds lose money too. Why anyone would buy a company that a PE fund has gotten its hooks into is beyond me.
I suspect you can make a market-beating fund that simply follows the index but does not buy any PE-infected company.
[1]: https://en.wikipedia.org/wiki/Starve_the_beast
[2]: https://www.ft.com/content/6789512f-8775-450b-b0a6-9d9d0c371...
> Why anyone would buy a company that a PE fund has gotten its hooks into is beyond me.
From my own life experiences, I believe that, across a population, there is no correlation between the amount of money people have and their individual rational decision making ability.
> I cannot think of a single success story with PE that has created a successful company that hasn't imploded.
Safeway had a leveraged buyout in the 80s, and was so successful the merger/acquisition with Kroger was blocked due to monopoly concerns. Hilton also had a leveraged buyout.
PE exists to buy bargain bin companies and extract maximum value from them. Sometimes that’s actually rehabilitating the company. Usually they are just the best at milking a dying cow.
2 examples, one from half a century ago?
I can’t think of one
Here are two
Why only two?
1 reply →
By this point, I suspect that PE is simply a sophisticated liquidation service. Where an owner doesn't want to deal with a company anymore and want to cash out, but can't just easily sell everything. By this perspective, any fault on a company's discontinuation lies solely with whoever sold it to a PE as it's him who actually wants to kill it.
I consider PE to be equivalent to a crypto rugpull.
There's PE the theory and PE the practice.
The theory is that the buyers improve operational efficiency, restructure the business, dispose of underperforming assets, etc and "transform" the business. As another commenter reminded me, there are a handful of examples of this, most notably HIlton. And any of these successes will throw around "operational efficiency" a lot. Maybe Blackstone really did massively improve Hilton's operations. If so, I still consider it an outlier.
PE in practice seems much closer to the 1980s corporate raiders. It's done by people who have zero understanding of the business and zero interest in it. They've essentially decided to do a rugpull and ripoff the new owners so the "financial engineering" is how to structure the exploding debt in such a way that the new buyers don't realize it before it's too late.
That seems to be the case with many high-profile cases such as Toys'R'Us and Red Lobster.
I personally think this model of loading up a company with debt to pay off the LBO should be illegal.
"cannot think of a single success story with PE that has created a successful company that hasn't imploded. I belive most PE funds lose money too. Why anyone would buy a company that a PE fund has gotten its hooks into is beyond me."
It's funny that the narrative where a bunch of generally smart well connected people renowned for their greed set money on fire for decades doesn't make you rethink your priors.
There's actually a fair amount of research.
Pure performance https://www.nber.org/digest/jul12/private-equity-performance
Effects on employment and productivity E.g. https://www.nber.org/digest/feb20/economic-effects-private-e... Notable numbers for me are for public vs private firms. Apparently principal - agent problem is a real thing!
Tangential on how betting your own money is more efficient than other's https://www.nber.org/papers/w13061