Comment by jostylr

The optimal version of a PE is to take a failing business and either turn it around or carve up assets and reallocate people to do something useful and profitable. The more a business is failing, the cheaper it is to takeover and for the PE to do the work of a fungus. But this process can also become a disease if it is too easy for them to takeover, taking a healthy host and carving it up. This is mimicked in real life when conditions turn a fungus into a hostile organism on something that is living; maybe it is just a little sick but the environmental conditions help the fungus more than it ought to leading to it being a killer instead of a resource freer.

The real question to ask is why can they take on so much debt? And for that, one needs to acknowledge the fact that, particularly for the well-connected, debt is easy to obtain as banks essentially create money for loans. There are constraints (otherwise the banks would make themselves trillionaires), but the constraint is not the quantity of money. This creation of money through lending leads to inflation which further supports operating via debt as those who take out loans see the real value of the loans decrease. The banks just made up the money so there isn't a direct loser from the inflation other than everyone who has to deal with increased prices. You can think of it as a broad, regressive tax on the population to fund these firms doing far more than they should.

With an actual constrained money supply tied to real wealth in the economy, the PE firms would have to focus on the best deals which means the businesses that are truly dying and their role is to turn the nonproductive assets into something productive.

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I asked ChatGPT to critique my answer (which is unaltered above) and it said to tone down the lending being propped up by inflation and instead emphasized the following:

>Inflation can help leveraged borrowers, but in PE the bigger structural advantages are: • Interest deductibility (a massive tax subsidy to debt) • Limited liability (upside captured, downside partially socialized) • Fee extraction independent of performance • Ability to load debt onto the acquired company, not the PE fund

I then asked it to answer the question without regards to my context and it basically said PE is different because of

> • short ownership horizons • high leverage • strong control • financial returns as the primary goal

Here is the link to the short conversation if interested: https://chatgpt.com/share/6963a0de-7a04-8012-8c36-afef5dd74f...