I worked at a PE fund whose name you'd know. VC has a plausible claim to value creation. Buyout is a shell game. They are arsonists that we have allowed to torch our industrial economy to the ground.

There are massive financial incentives to lever to the hilt. Back in the day social pressures restrained it. In the 1980s that all went out the window.

https://www.gsb.stanford.edu/faculty-research/working-papers...

>> It's disingenuous to say PE doesn't care. They have every incentive to preserve and generate equity value. That is literally their business.

This might be the headline intent for the public, but in practice has often not been the primary intent. PE firms often extract massive fees from the companies to recover their initial investment -- long before they realize equity based gains. I'd say VCs are more aligned on this matter, not PE.

That is simply not true. Management fees are such a small percentage of contributed capital. And, typically doesn't count towards your returns calculation.

Toys R Us. $1.8B in debts prior to PE involvement. Immediately following the deal signing that ballooned to $5B+.

Interest fees now encompassed 97% of operating profits.

PE firm only paid about 1.3% of the equity for the leveraged buyout, Toys contributed the rest (hence the increased debt load).

KKR and Bain stated that management fees, transaction fees and interest entirely covered, and more, the losses from the deal. $128M in transaction fees, $800M in management fees, and so on.

I don't believe the 1.3% is correct, as I think it's closer to 20-25%. Data I have seen supports that they put up $1.3bn of equity in the acquisition, in addition to ~$5Bn of debt (at ~7x leverage I think? -- that's more of the sticker shock). In today's market at least, you need to put up at least around ~30% of the purchase price as equity from the private equity firm.

The Toys R Us deal had a whole bunch of issues, and the business may very well have been over-levered. I do think we should bring back stricter leveraged lending guidelines, in some form.

Those fees, however, don't cover the losses the way that you think (sometimes they cover the amount contributed from the fund itself, not from its investors). I think there were only received $180M in management fees over the nearly 10 year hold paid to the 3 firms involved.

Buy companies, layoff and outsource staff. Over work those that are left. PE is already bad for employees.

I work at a PE firm. There are multiple strategies employed, but the name of the game is not to lose money. Disagree with the term "value creation" - fine - but my point is there is zero incentive to lose money. Otherwise, they would be out of business in the long term.

I am arguing for worker protection. Not protection of equity value. You inherently take on risk by deploying it, and should accept the realities of that risk.

But the core activity is still harm employees at all times. and cut to the bone at every chance to the detriment of employees, that had the original company not sold out, would have had to take better care of their employees and also require more employees as there wouldn't be redundancy between the parent and subsidiary. And all around increases the value to the workers and community. PE over leverage so they have to detriment the employees by default.

>> I am arguing for worker protection.

Why not simply fund unemployment checks, direct cash, food stamps, student loan deferrals, or more direct means of worker protection than handing the money to PE Firms (which by the way operate by design to squeeze workers) and hoping they protect workers?

We've seen this in 2009-2010 -- giving the money to banks doesn't magically make the money trickle down to workers. Perhaps some of it does, but why not make all of it trickle down by skipping the middlemen? What are the odds the middlemen will conveniently issue a giant dividend to themselves or do a stock buy-back or any other number of tricks that will achieve nothing for the workers.

> Otherwise, they would be out of business in the long term.

... that would be a fine incentive if we don't bail them out. Otherwise...

Totally agree, I thought we were arguing to bail out employees here. That's what I'm aware of based on what I've seen going on in the industry

You can make money robbing little old ladies on their way to the grocery store. Doesn't make it a socially useful activity or one that should be permitted in a civilized society.

Are you saying that buying a company and having it take on debt should be illegal?

I think they are saying that some things are lower in the line of requiring publicly funded bailouts. Like, say, perhaps we should spend the money on longer unemployment checks for the poor and middle class before we consider giant checks to risky business ventures.

Yeah, I think that most LBO's should be taxed out of existence. The industry is a destructive and parasitic.

https://www.youtube.com/watch?v=qs1DhA91fm0