A lot is said on the internet of the practice of loading companies with debt, but done within reason this is the financially responsible thing to do. There's even a financial theory that debt provides a disciplining effect on management[0], meaning that the management of companies with reasonable debt levels are less likely to take on unfavorable risks and more likely to find returns above the WACC.
The point of leverage is that it increases returns. Here's a really good example of that in the context of real estate, where leverage almost doubles the IRR. [1]
[0]https://www.jstor.org/stable/1818789
[1]https://www.youtube.com/watch?v=ocnMZDp52zA&list=PLyyvHNlYa0...
It’s not always an objective for the target company to go bankrupt, but if they do, the management has already pulled their money out. A company I worked for was a cash cow used to borrow and buy 3 other companies. The combined entity grew due to some growth hack stuff and one-shots, then got acquired. The PE boys made a lot of money, and the company itself was pretty much toast after the second acquisition.
What I wonder about this is in cases where the real estate is spun off into a REIT, does the original company keep shares in the REIT, or are transactions like this purely for one-time raising capital?
[0]https://www.sec.gov/Archives/edgar/data/940944/0000921895140...
> or extract value from them
Only costing "7 dental practices' worth of capital to effectively run 10 practices" is the idealized vision for what PE can and wants to do.
In practice, what ends up happening is extracting value by financial maneuvers like directing the companies they own to sell off assets, but charging a transaction fee so the PE group gets a cut of the sales. Or by owning a company and being its largest creditor -- getting to discharge liabilities as the owner by declaring bankruptcy but subsequently still maintaining control over the company as its largest creditor. [0] (Ctrl+f for "Sun Capital" in the page).
Disclaimer: I am an employee of a firm that was somewhat recently acquired by private equity.
[0]: https://www.ineteconomics.org/perspectives/blog/private-equi...