Comment by lotsofpulp
3 months ago
The way the term private equity is used is meaningless. It’s just business, and the same thing happens anytime a business is sold, because the new owners have paid a 5x or more multiple, and the reason they would is if they think they can cut costs and increase prices.
One should expect lower quality and higher prices anytime a business is sold.
>Really, one should expect lower quality and higher prices anytime a business is sold.
They really shouldn’t. And the fact this is treated as common knowledge kind of speaks to everything that’s currently broken in our country.
You're using the same words to talk about different things.
You're right, in the world we would like to live in, this wouldn't be a thing. People shouldn't expect that a business sale means a quality drop. That would be a good reality.
However, next to that good reality is the one we live in. Where people should expect quality to drop on a business sale, because that's the structure of the world we live in. Wishing the world were different isn't sufficient to make it so.
But it both hasn’t always been the case and still isn’t in large swaths of the country and the world. The 5x + enshittification phenomenon is both recent and a result of PE and “activist investors”.
“We” collectively should demand better. You act as if government is some omnipresent being that makes its own decisions. If citizens start demanding the government act in their best interests by enforcing things like anti-trust laws, it will.
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What’s the argument? Sounds like you’re sour on it
The assumption that "the new owners have paid a 5x or more multiple, and the reason they would is if they think they can cut costs and increase prices", is not universal and in many cases quite new. There are many new owners and buyers for which this is not the case. Your local bar, restaurant, hobby shop, gym, bookstore, daycare and others often transfer without the new owner looking to pay a 5x premium and maximize profits. It's only recently that doctors, dentist, veterinarian offices and other high margin social businesses are getting converted to PE.
It's the enshitification of all the existing third places and extraction of social value for profit, because people will tolerate it due to lack of choice and social need.
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But it's not just that a business was sold; it's that it (usually) was sold in such a way (leveraged buy-out) as to weaken the business and make it more desperate from jump. Doctor's practices et al. used to change hands all the time without much trouble; it's only now that PE is allowed to buy them with massive amounts of debt that they're allowed to use aggressive tactics to pay off (and pay themselves) in just a few years that we've started to have these troubles.
When you buy a house, the mortgage is associated with the buyer, not the house, and you can't just dismantle the house and sell it for parts to cover payments. Could you imagine if we could, though? Pretty soon, we'd have a lot of on-paper debt associated with empty lots that mortgage holders could simply walk away from (perhaps after a nominal sale). Then, the house declares bankruptcy and the bank is just out all that money. It's preposterous, they'd never let that happen. So, why with businesses?
>When you buy a house, the mortgage is associated with the buyer, not the house
In the US, this depends which state you are in:
https://www.investopedia.com/ask/answers/08/nonrecourse-loan...
The non recourse states are Alaska, Arizona, California, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah, Washington.
>and you can't just dismantle the house and sell it for parts to cover payments
You can do this in every state, at least with a conventional mortgage. If you default, they can pursue your other assets, except in non recourse states.
>we'd have a lot of on-paper debt associated with empty lots that mortgage holders could simply walk away from (perhaps after a nominal sale)
I don't know what "after a nominal sale" means, because if you sell a property with a lien on it, then the lien holder gets paid first. And underwriting would not let people who have a history of dismantling a house and defaulting borrow money over and over, and people need a place to live, so I'm not sure why anyone would take out a mortgage to dismantle a house. The scenario makes no sense, as raw materials are cheap, and labor costs are expensive.
> It's preposterous, they'd never let that happen. So, why with businesses?
Because the lender agreed to those terms. No one forces a lender to lend money without a personal guarantee.
https://www.investopedia.com/terms/p/personal-guarantee.asp
> > and you can't just dismantle the house and sell it for parts to cover payments
> You can do this in every state, at least with a conventional mortgage.
Legally, you generally can't, because the terms of the mortgage will prohibit it. Practically, you probably can get away with it, as long as you actually make the payments, unless the dismantling requires recorded paperwork that comes to the lenders attention, because how will they know? But if you fail to make payments, then the lender is likely to care about the condition of the property, and then, in addition to collecting your debt on the mortgage itself, the lender will have a cause of action against you for breach of contract. (And such breaches of duties under the mortgage also will often be within the scope of "recourse carve-outs" in loans in non-recourse states.)
>>and you can't just dismantle the house and sell it for parts to cover payments
>You can do this in every state, at least with a conventional mortgage.
No you can’t. Mortgages require you to keep the property in good repair. Your lender won’t let you start taking the house apart to sell pieces of it because that lowers the overall value of the property.
extending the example, for PE, the mortgage is actually in the name of the house and you can take out additional loans in the name of the house to pay yourself the down payment that you used to purchase the house (while simultaneously stripping everything of value inside of it)
Believe it or not, most buyers aren't interested in weakening the asset they just paid 5x for
Well a lot of times these “businesses” were sold to existing employees or family members who were going to run it themselves and it usually wasn’t for a huge multiple.
In many cases they weren’t sold at all just passed down to heirs. The differentiator is that PE has figured out that they can offer enough to bypass the traditional methods of business continuation.
I would frame it differently. Due to advances in communication and automation with the use of software, business owners can market the business to a far larger group of buyers, and business buyers can buy from a much larger pool of businesses.
Everybody likes seeing those 10%+ annual returns in their 401K (or their local government's taxpayer funded defined benefit pension plan), but no one likes how the sausage is made.
Most PE roll ups are not in your 401k - that’s what private equity means.
While some may eventually find enough success to IPO and subsequently enter a big index, the past few decades of VOO / buy-the-market growth owes far more to tech stocks than what’s being discussed here.
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Most of the businesses people are complaining about are inherently local. Doctors, dentists, sports teams, plumbers, electricians.
When PE buys them in the majority of cases they continue to market them like local business and in most cases they go out of their way to lake them look like local businesses.
What you’re talking about happened decades ago when Walmart, McDonalds etc… ran a huge chunk of the mom and pops out of business. This is the next round where they go after businesses that don’t benefit as much from nation wide advertising and branding.
People don’t tend to pick their dentist based on nationwide advertising/brand recognition.