Re:How Does the Private Equity Market Work?
by Spooky23 on Saturday October 12, 2024 @03:37PM
(#41821802)
They “sell” stuff to closely held entities and then lease them back. The principals take a vig from everything.
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.
Re:How Does the Private Equity Market Work?
by hack_fraud13 on Sunday October 13, 2024 @03:04PM
(#41830625)
Thanks I appreciate the clarification. You're referring to a leaseback, right? From the research I've done, I've mostly seen it happen in the context of real estate, e.g. with Darden when Starboard Value took over [0]. I think the rebuttals to management on slide 38.
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...
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...