Comment by ToucanLoucan
8 hours ago
Somebody really good at the economy needs to explain to me how a PE firm buys a company using the company it’s buying as collateral for that financing, and then somehow, that acquired company is the entity that debt is attached to.
Imagine if us poors could buy a Hummer EV financed against itself and then the truck had to self-drive for uber to pay its own payment, under penalty of being put in a crusher. Oh and you get paid by the thing for the privilege of being bought.
But that’s exactly what happens when someone buys a Hummer with an auto loan?
You put 10% down (say $10,000) and the bank lends you $90,000 based on the lien they have on the hummer.
No different than a leveraged buyout - PE firm buys a company with cash down and takes on debt for the rest of the purchase using the assets of the company as collateral.
It makes a lot more sense if you think of it in steps - negotiate buyout agreement with owners, close purchase with cash and take ownership, then as CEO have the company take on debt and use the loan proceeds to close the deal.
Just like if you went to a dealership and negotiated a deal where you purchased the hummer for $10k, they transfer ownership to you, then you go to the bank and get a loan using vehicle as collateral then pay the dealership the loan proceeds to close the deal.
Where I think you’re confused is the “how do they take a loan on an asset they don’t own?”. The answer is they don’t. It’s multiple steps and they own the company they use as collateral.