Comment by thijson
3 hours ago
I wonder if this creates opportunity for spinning up competitors to these PE owned companies. If they are underinvesting in their products in order to extract value eventually their offerings will not be competitive.
3 hours ago
I wonder if this creates opportunity for spinning up competitors to these PE owned companies. If they are underinvesting in their products in order to extract value eventually their offerings will not be competitive.
I think in theory it does, but in practice the customers of PE-bought companies don't update their priors fast enough.
If a company being purchased by PE meant that they lost the vast majority of their customers as soon as contractually possible, then the possible value extracted by PE would drop off a cliff.
This isn't necessarily the fault of the customers - we're all dealing with a lot of information to process.
And, up until recently, it was reasonable to attach reputation to brand instead of to owners.
And I think that's a lot of what PE exploits - the gap between people's belief about a brand's reliability/reputation, and the fact that the actual reliability has been a function of who the actual owners of the company are for many years - but people are still attached to the old mental model.
(there may also be some value for PE to extract from assets aside from customer relationships and the higher-order "brand value", but I suspect that that's secondary - if I'm wrong please correct me)
> eventually their offerings will not be competitive.
How so?
If you read the article it provides a good example. Fire truck businesses with a 4 year backlog and high margins. This is less competitive than the situation prior to PE consolidating it when it had much lower backlog and ~3% margins. Seems like a clear market opportunity.