1. As you can imagine, not everyone has the wherewithal to launch a PE firm. Only people who are well connected in the financial world will get access to the funds. People who have friends in the investment sector for instance. There's plenty of stories about how VC (which isn't the same thing) investment is hard to get a meeting for if you don't know someone in the firm. PE works in a similar way, certain people know the players and get the deals together. Of course a lot of it is a promise of future business.
2. When a firm is acquired, the M&A advisors that did the deal get paid. When a firm is restructured (from bankruptcy), the same happens. Lawyers as well. These people all get paid to make the deals happen. Part of what happens is the M&A people will talk someone in the lending department into doing the deal. And remember it isn't just one bank or one lawyer or one lender on each deal. The lenders will all take a piece of the debt, which can be sold on (eg packaged in various tranched products) to investors (pension funds etc). If you smooth out the poop enough it doesn't smell so bad.
That's what I can glean from my far corner of the financial world, while I do work in finance I'm pretty removed from PE.
Basically until pension funds aren’t bailed out by the government this will continue.
No. You heat the leech with a match and it falls off.
Fire is the cure
We have so many layers of agency in our economic system, and it isn't really a good thing.
Institutional Investment Funds (pensions, endowments, sovereign funds, etc) need returns well beyond inflation to ensure long term stability.
To do this, they will mix and match various different investment vehicles to minimize risk.
This means a fund will have a varying percentage of funds invested in stocks+ETFs, commodities+futures, cash in hand, real estate assets, IP assets, and greenfield opportunities.
Essentially, you are dealing with dozens of different financial instruments, and while you may have an above average understanding of how all these work, you won't have the resources, staffing, or ability to optimize returns on all these instruments.
This is why Funds end up having VC firms make VC investment decisions, PE firms (itself a loaded term because PEs specialize in different markets and sectors) making equity investment decisions, etc.
If you are able to specialize in one specific sector (aka have both the domain experience and the network of founders, operators, and managers) then at that point you may as well open your own firm and manage investments on the behalf of other institutional investors.
It's all about specialization.
Also, fund operating costs cannot exceed more that 2%. This means you can only really charge AT MOST 2% YoY on the entire value of the fund. That 2% will have to cover your entire expenses (salary, insurance, office space). This means most operations have to be extremely lean as there isn't much money to spread around.
Just sucks that Western pension funds hire mostly second-tier folks with the right connections, with a few exceptions here and there, or some stupid union bosses, at least from my experience in PE.
This whole conversation about PE is non-sensical. It's all based on this naive notion that PE firms borrow money to buy investments and use that money to pay themselves, more often than not bankrupting the original company, and since it was borrowed money, they can come out unscathed.
But no one can answer, why would anyone lend PE firms money if it's a bad investment? Debt normally doesn't have an upside. Best case scenario is you get paid back what you're owed plus interest.
A lot of online criticism can't even get the relevant players right and relies on naive tropes like "they're greedy" or "corruption", as a hand-wavy way to explain complicated dynamics. And then they throw out theories that could be dispelled by reading the first few paragraphs on investopedia regarding PE firms. Why is the discourse in this particular field so poor on hacker news? Low quality conversations regarding technical topics would not fly on this forum. If someone mentioned Y2K and you made a low quality comment like "greedy corporations wanted to save money by not storing more than 2 digits for the year", you would get downvoted to hell. So why does this topic have such poor comments?
I’m sure this won’t be a popular opinion, but I believe it’s basically class warfare at work. You have, here, a lot of upper middle class engineers whose egos are protected if they believe that the richer class is greedy and unethical.
Remember the housing crisis? As long as you can align the debt with an appropriate tranche, institutional investors like diversification and risk (in that part of the portfolio).
Also, these types of debt can make money in the short term. My father in law bought a beach house with a KMart bond trade. After they emerged from bankruptcy, everything was great! (Lol)
I think the real answer is more unsettling for some. PE that has volatility but is on net a profitable investment. You can smooth out volatility with volume and by spreading it around.
This is the only explanation that doesn't depend on a source of dumb money that can never learn buying this debt.
I'd be willing to change my opinion I came across data showing that PE debt has net losses over a multi-decade time scale.
The managers of those funds make money based on deals and they move on before the deal goes south. Principal agent problem.
EDIT: lordnacho explains better: https://news.ycombinator.com/item?id=36751012
Where does the claim that PE debt is a loser come from?
According to one of the top links on google, state pension returns from PE investments is almost twice that of their stock investments if you look at 2000-2021 (11%/yr vs 6.9%/yr)
https://caia.org/blog/2022/07/20/long-term-private-equity-pe...
We're talking about private Equity debt so I would think the 11% would be cash Returns on loans.
If you make 11% per year return on your lending portfolio over multiple decades, how is that not comparable to your stock market gains?
Sure, resell of loans might be harder, but they're paying cash interest.
You're also starting from the assumption that the deals are bad. Why is that?
According to the standard narrative, lenders have been repeatedly duped into throwing billions into bad PE investments for decades.
If you had a friend who asked for a thousand dollars every month, always promised to pay you back and never did, how long would you continue to give him a thousand dollars each month?
If "talking" alone can accomplish this, I think we need to start considering the intervention of supernatural forces in these deals.
Say you have a friend who often can't pay back his debts. But he can pay 80% of them.
You have another friend who wants to lend to safe debtors. Why not get that safe tranche, the bottom 80%? He needs to show he's safe so he can take more risk. He loves going out to dinner with you.
Another guy wants to take some risk. You give him the 20%, but you also let him into some other deals that you have, so that he doesn't always lose. In fact, it turns out this guy isn't paid on the returns, he's paid on assets managed. And he's not even going to be around that long, he'll be onto the next role long before the bond is up. And they're in a bag of other stuff anyway.
Turns out you're not even the guy lending the money. You work on a transaction basis. Your next job might be as one of the friends. Or on the PE side.
So you and your buddies keep skimming a bit of the money off each year, well mixed with other stuff that you are managing.
Well smeared poop.
Consider the frequent complaints about scammers marketing substandard products on Amazon; the issue is well understood, the markers of scammers are well identified, but Amazon does nothing about it because the lesses from disgruntled customers are less than the revenue from shapeshifting scammers.
2. CLOs are definitely problematic, but the current rate of default is vastly overstated. If private credit defaults at the rate people seem to think it does, we'd be looking at a GFC-type situation. I can't say if there's systematic risk in CLOs a la MBS, but any possible risk hasn't materialized yet. The biggest PE firms today rarely default. Blow-ups such as Toys-R-Us are newsworthy for a reason.
See my comment below for more information. I'm not in PE, but I am very familiar with how the sausage is made.
This is where discussions break down because there's broad disagreements on what is and is not considered "voluntary" - there are ethical/moral traditions that claim nothing is voluntary, while others that claim everything is.
We can gain clarity by defining the opposite then: Involuntary
So, what set of circumstances would be required to declare that someone is doing labor "Involuntarily?" and thus there is no "free market" for labor.
For example, would you say that the person who is manually sorting trash out of recycling for >$30,000/yr [1] is doing so voluntarily?
Maybe someone really loves that and wants to do it and would do it for free. That's possible but unlikely. Maybe someone made decisions such that this is the only job that they can get without moving or some other major life decision. Is that still voluntary simply because they are in that position? Assuming they aren't disabled, they can always put their things in a bag and walk to some place with more options. What of people that are disabled then? How much of what they do is voluntary? You get the point
The challenge then is asking, given that there is no OBJECTIVE answer to the question of what is voluntary (Extreme example: You should be constantly trying to break out of prison, otherwise you doing what the guards tell you to is "voluntary") then "voluntary" shouldn't be a discriminator on whether society has something to say about a transaction between people.
Extreme (unreasonably IMO) freemarketeers view individuals as atomic complete units and that's the end of the story. So irrespective of starting or current positions EVERYTHING is voluntary and the world is all-v-all pvp no hold barred competition. That's who is in PE and finance, so that's what you're up against.
Your abilities are teaded agains all other ppl's abilities in a free market.
There are complications to this view, but the example with sorting garbage, in my mind, is actually an easy case. Yes it is definitely voluntary.
Thank you. So would you say the following is a correct interpretation of your argument:
"Any action or set of actions is voluntary, provided there are at least two choices"
Follow up question which I do not mean sarcastically or anything other than explicit:
Do you consider "Die/cease to function" a persistent choice? That is to say, if there are only the following options: [x, die] then because die is an option, anything for x is always voluntary?
So your choice is "work", or "starve and die" - the person offering the job is not creating the "starve and die" choice, therefor it is voluntary.
Your choice is "work", "I will beat you" - this in involuntary.
Your choice is "work for $1,000,000", or "work for a bar of gold" - this is involuntary because the person offering the choices created the choices.
Rephrasing: As long as there are two independent people making offers, your choice between the two offers is voluntary. (Do not forget the 3rd option: accept neither offer.)
Would you like to work for the American Garbage Collection Company?
Would you like to starve?
Aha, you've volunteered to work as a garbage collector.
I think this isn't what people think of as voluntary. Sophie's Choice is a better description.
I mean you wrote two basically the same companies, while I clearly said "independent", and you wrote "Would you like to starve", i.e. these companies are telling him work for us or don't work at all, while I clearly wrote that the person giving the choice must NOT create the choice.
And in Sophie's Choice the camp Dr setup both options.
I have to ask: If you are going to ignore what people say to you, why do you even bother replying? If you just want to tell people your opinion post it as a top level comment, not a low effort reply.
I then make a very obvious example where there are two independent companies offering similar crappy jobs. Plus your 3rd option.
There's no one person giving the choice, there are two companies and your third option. Perfectly conforming to what you say:
> clearly wrote that the person giving the choice must NOT create the choice
Ok? So there is a situation, a very obvious one, that arises from the conditions that you're claiming making something voluntary. You have two different companies offering substantially the same thing. Now it is voluntary when the outcome is no different from if there were just one company offering the (only) choice.
That is clearly something you will have to explain. I know you can't see how many upvotes a comment has, but I can tell you it doesn't seem like I am the only person who has spotted this.
> And in Sophie's Choice the camp Dr setup both options.
But it is also a term that means "an undesirable decision that has to be made".
Before you accuse other people of not reading, I think it's worthwhile to have a scan for irony.
You are upset that the person does not have good options. But that does change anything - deciding to accept a job offer does not make the work involuntary.
You are focusing out the outcome, but outcomes are not the question here, choices are. The employer is not responsible for the way the universe exists, and they are not forcing the person to live in it.
>the person giving you the choice is not the one creating the choices
Who is creating the choices if not the people who are offering the jobs?
>So your choice is "work", or "starve and die"
So then you've answered my second question above, which is, if there is a persistent acceptable choice of "die" then any alternative must be voluntary.
My question is, from your perspective unless someone is physically restrained then anything they do is purely voluntary?
Is that a real question? The universe create the choices. This person offered a job - they are not God, they do not have control over the person. They simply offered a job. I guess you would rather they didn't offer the job?
> My question is, from your perspective unless someone is physically restrained then anything they do is purely voluntary?
Obviously. Although there are other kinds of restraints, threats for example.
I mean, any other definition leads to contradictions and ridiculous situations where employers are blamed for offering jobs to low value occupations.
I can't find it right now, but someone wrote an essay that basically boiled down to how when people help others, instead of getting credit for what they did do, they get blamed for what they could have done.
That's what you are trying to do. In such a world no one is willing to help anyone.
Don't do that, it leads to a horrible world.
"The Copenhagen Interpretation of Ethics says that when you observe or interact with a problem in any way, you can be blamed for it."
[0] https://forum.effectivealtruism.org/posts/QXpxioWSQcNuNnNTy/...
It’s extremely rare for a forced sale. Usually it’s a public company and shares are purchased on public exchanges, or for privately held companies the board and shareholders approve the sale.
It’s not that these are the only people impacted by the sale, but it’s the best method possible to govern sales.
You could argue that it's the government, medicaid and medicare especially that are taking away from them ... but that doesn't make as good a scapegoat as banks and pension funds. Sorry, not pension funds, I mean evil private equity investors ...
>2. When PE loads up a firm with supposedly unsustainable billions of debt, someone is on the other side of that transaction, lending the billions. Who does that and why? Are they perpetual suckers, unaware of the decades of experience we have doing this?
Ready for a fun conspiracy theory? Guess where most PE guys start (i.e., where their base professional network is developed, where their expertise is, etc.). If you correctly guessed "Ivy League undergrad and business schools" and "investment banking", you can probably tell where I'm going with this. The gameplan is simple: lend your buddy the money to buy the business. Now you have a line to the person who has the most access to data about, if not control over, the direction of the business. Wherever it happens to go, you can be ahead of the market. He's happy because the decision to be lenient or aggressive about repayment lies with his own contact - you.
How do you get businesses to agree to your terms? Well, they hired consultants at some point. Oh, those guys are your buddies, too. You have acquaintances on the BoD, too.
Why go through all the trouble? Besides the fact that you're becoming filthy rich, you also have the opportunity to remove rivals and consolidate markets under an n-opoly. More money. More control.
>"Unpleasant things are happening, we need some sort of regulation" doesn't seem like a sufficient basis for socially beneficial action.
How about fraud and insider trading?
But if the business is privately held (because the borrower used the loan to buy the business), then what market is the lender going long/short against in this hypothetical conspiracy? Other (public) businesses in the market? Potential investors when the PE firm sells and takes the business public?
That. Or, you have been shorting the company for some time, because you know it has been targeted for demolition. A PE takeover is the signal that you no longer need to hedge those shorts; the company, loaded with the debt used to purchase it, will soon go bankrupt, and you will be absolved of closing your short positions, for all practical purposes.
This may not apply to the subject of the article (PE firms buying medical establishments), but it may speak to the character of their new strategy. Perhaps they won't kill this goose because they payer has endlessly deep pockets.
I think it's just the opposite: you'll be forced to close your short position when the PE company buys. When PE firms "take over" a public firm, they generally take it private, and the takeover involves buying all outstanding shares, typically at a premium over current share prices.
> Why is private equity ending up with all these resources?
Because they have cash, mostly from pension funds and insurance companies.
> Who is selling to them and why?
The doctors running the practices, more generally they're rolling up companies in relatively dispersed industries where they believe they can make money.
In the best case, this is because replicating administration across many SMEs is much less efficient than centralising it. In the worst case, it's a way to buy them companies with the cash flows of the company themselves, and pay out fat dividends while gutting the actual business.
Why didn't this happen before?
Really low interest rates super-charged the amount of money that PE could borrow , and helped them raise money because insurance and persion funds needed to get above premium returns which were hard to find because of said really low interest rates.
Additionally, banks became much less likely to lend money since the 2008 crash (because of requirements around capital buffers) so PE was basically the only game in town.
Honestly though, I think the good times are over for PE, as most of the industry (and finance in general) has been cushioned by a low interest rate world, and as debt starts to cost real money we're gonna see a _lot_ of these bets unwind.
> When PE loads up a firm with supposedly unsustainable billions of debt, someone is on the other side of that transaction, lending the billions.
Banks. Again, these loans are assets, and assuming that the business continues as normal and interest rates don't rise, these were OK(ish) risks. More importantly they built a bunch of relationships with the PE people, so it wasn't about any one individual loan, but rather the constant amount of deal flow.
In a hypothetical zero interest rate world I can keep paying you the $0 "interest" to not have to pay back the billion. Only when the interest rate goes up do we find out who actually had any intention to ever pay back the original.
Maybe the current bets will unwind, but I'm not sure that means there won't be a good time era of another round of bets. After all, interest rates were very high in the 80s, and that was a heyday for PE, right?
Like, definitely some PE firms will survive, but I'm willing to bet (not short though ;) ) that an awful lot of them will go belly-up/be unable to raise more funds in the next 5-10 years.
Most of the cash (50-90% - changed through time to time) comes from the banks - leverage, the investing commitments to the PE firm by e.g. pension funds and private invetors, take only a small portion of the equity. The leverage enables the high returns of PE funds, the high debt burden on the company incentivizes the PE firm additionally to make the bough company more efficient and profitable. But this has changed through the last few years. PE firms are starting investing more of their investors money, due to lack of banks providing big loans for big transactions.
2.) Underwriting banks issue the debt for the PEs. They get paid handily, both from the constant debt payments PE firms take out of cash flow and from repeat underwriting business as investment bankers for future deals. Banks have their own ways of disposing junk debt that fails, but usually PE debt doesn't fail - the only ones being shafted are the company employees and the company itself. The management of the company, the owners and shareholders of the company, and the PE firm itself all make out of it like bandits.
Nowadays, the traditional bread and butter of PE, such as leveraged buyouts, are mostly gone, with most of the returns coming from other avenues such as Real Estate (like buying up homes in Western cities), Emerging Markets and more passive investments in family/practitioner-owned businesses, like the Healthcare space.
so what does that even mean? do you mean that they are doing traditional LBOs in emerging markets?
To give an example, the RJR Nabisco takeover cost KKR north of $30B in the 80s. Massively leveraged takeover that ended up flopping so hard because of the amount of debt that KKR loaded up Nabisco with. But if a PE firm were to seek a similar Emerging Market equivalent opportunity, say Ulker Biskuvi in Turkey, it would only cost it $500 million. The PE firm does not need to load the company with debt - they can simply cut costs in the company, increase cash flow and make pay from that, eventually listing/selling off the asset on the local market (on the other hand, a Nabisco relisting would have been a nightmare for banks).
A similar thing is happening in India currently - Blackstone is buying up commercial real estate by the boatload in India. Expensive for local PE firms, but relatively much cheaper for Blackstone compared to buying stuff in Europe for instance.
2) Older doctors, stomatologists etc... Running an individual practice is a challenge, requires constant investment and learning and at some point in life there is an incentive of larger cash out.
And why? Because as West deindustrialized potenial for profit lays in high-value services. Instead of an aluminium smelter you purchase 100 of orthodontist practices. After purchase you cut on costs, raise prices and the investment pays out rather quickly....
Exploiting financial loopholes is like hacking. We see more hacking these days because more people depend on these systems, and more exploits are found.
Note: "hacking" can be defined as using a system in a way it was not intended to be used. Hacking is also punishable by law. PE firms and the like should not get away simply because they are following the law, as they are abusing the law in the same way as hackers abuse computer systems.
I listened to a podcast interview with a financial professional who advises public pension fund boards. What he said in all but words was that, yes, the political appointees who actually vote on decisions are perpetual suckers.
Political appointees are not the ones making investment decisions. At most they are setting very broad themes. For example, political appointees are the ones that say all investments must be carbon-neutral.
Political appointees are making investment decisions by choosing the people who make investment decisions.
PE as an investment strategy was pioneered by KKR in the 60's, beginning with the acquisition of family-owned businesses facing succession issues. The strategy exists because there's really poor liquidity for private companies. If you're a founder who wants to sell your stake, you either:
1. Sell to a strategic buyer
2. Sell to an individual
3. IPO
4. Sell to PE
1. A strategic buyer, such as Walmart, may not be interested right now.
2. An individual probably doesn't have enough enough money to buy the whole thing
3. An IPO saddles the business with reporting requirements that simply don't make sense for a supermarket with only 10 locations
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> When PE loads up a firm with supposedly unsustainable billions of debt, someone is on the other side of that transaction, lending the billions. Who does that and why? Are they perpetual suckers, unaware of the decades of experience we have doing this?
Many people offer debt, from private credit funds such as Golub Capital to bank syndicates. The best lenders are not suckers and the best PE funds rarely default. Oftentimes, the PE fund itself is collateral. PE funds that regularly default will have a difficult time finding a lender.
People also misunderstand the purpose of debt. It's simple math:
You want to buy a company for $100M. You can buy the entire thing with cash and sell it again after it doubles in 5 years, netting yourself $100M, giving you a 1x return.
Alternatively, you can pay $20M and borrow $80M at a 10% interest rate (simple interest for ease of calculation). When you sell it for $200M in 5 years, you net $200M - $20M - $80M * 0.1 * 5 = $140M, giving you a 7x return.
Obviously, you've also increased the risk - your business must be capable of paying off an extra $8M a year in interest.
The lenders in a PE buyout are securing that loan on the assets of the purchased company. Real estate, brand names, IP, capital equipment. Their worst case scenario is that stuff all gets sold off and they get paid back from the firesale proceeds.
That's just a group of people buying a company and selling it off the assets for a profit.
If you zoom out a bit stuff like this is, I think, why modern products tend towards increasing monetization, selling of data, rental instead of ownership, etc. You either treat your customer like garbage, or you get bought by PE and replaced by someone who does.
2 - its usually employees, and sometimes even customers, who are non equity shareholders but long term beneficiaries of the health of the company. Workers usually are not organized well enough to repel a a saavy PE firm. But careful, in some cases, PE may be liberating a firm being sucked dry from low-productivity workers or richly paid pensioners. Its hard to know which is which unless you are diving into the details.
PE is not wrong, just like unions are not wrong, but what matters is what is their management style. Parasite, or builder?
In at least some of the cases, the answer is absolute corruption with PE paying the other party “on the side” to sign off on a deal only a sucker would agree to.
See for example this piece of investigative journalism into Medical Properties Trust and just how many red flags and obvious bribes were involved (not to mention potential murder to cover up their misdeeds!!): https://prospect.org/health/2023-05-23-quackonomics-medical-...
Example with a retailer from the UK, which turned costly for the investment bank: https://www.youtube.com/watch?v=DKYKT4pvYYA&pp=ygUTZnQuY29tI...
(I’m also not talking in general but rather about certain specific cases/forms.)
"Wrong" is applicable to this reply rather than the original post.
Centrally planned benchmark interest rates below market equilibrium took capital away from activities that produced value today and handed it to people who promised unrealistically optimistic future growth. Central planning doesn't work.
People have gone from criticising the FOMC to openly mocking it. Google 'transitory meme'.
TL;DR - PE can't exist in its current form without extreme power/ownership imbalances within the firms they take over and run into the ground. This has probably been increasing over time, hence why PE has been getting worse over time.
1. Why is private equity ending up with all these resources? Who is selling to them and why? Why didn't this happen before? It's not like PE is new.
2. When PE loads up a firm with supposedly unsustainable billions of debt, someone is on the other side of that transaction, lending the billions. Who does that and why? Are they perpetual suckers, unaware of the decades of experience we have doing this?
I don't necessarily think the conventional prestige media narrative around PE is wrong, but it never seems to get around to asking these basic economic questions. It can't be as simple as some metaphor where bandits are roaming the economic countryside pillaging innocent victims. Voluntary transactions are occurring and we need to understand why to address any underlying issues.
"Unpleasant things are happening, we need some sort of regulation" doesn't seem like a sufficient basis for socially beneficial action. Whatever underlying issues are making healthcare an attractive PE target will probably persist, and maybe get worse, if all we do is pass some kind of "PE bad, stop PE" law.