the sponsor aggressively pays down debt (benefiting from interest tax shield) and after 5-7 years, exits via a sale to another sponsor or an IPO. the sponsor’s goal is to achieve an IRR of 20% via multiple expansion, debt paydown and increased margins/growth.

TLDR - PURE EVIL

sorry i couldn’t bear to read another retarded take from someone with strong opinions on something they don’t understand

(http://www.autoadmit.com/thread.php?thread_id=3935747&forum_id=2.#35737462)

Also I give your analysis of lbo economics an F

(http://www.autoadmit.com/thread.php?thread_id=3935747&forum_id=2.#35739505)

lmfao how fucking walled off from the world do you have to be to think a typical consumer buys 75% of their shit from etail?

75% of americans are too fucking afraid of CC theft to even use a CC online

you're confusing your social circle for "typical"

(http://www.autoadmit.com/thread.php?thread_id=3935747&forum_id=2.#35738003)

(http://www.autoadmit.com/thread.php?thread_id=3935747&forum_id=2.#35737668)

but could see an argument where general unsecured creditors are the ones getting screwed by equityholders and secured creditors tag teaming them.

(http://www.autoadmit.com/thread.php?thread_id=3935747&forum_id=2.#35737803)

of course,

*simply creates out-of-court restructuring plan otherwise identical to pre-pack Chapter 11*

(http://www.autoadmit.com/thread.php?thread_id=3935747&forum_id=2.#35737898)

(http://www.autoadmit.com/thread.php?thread_id=3935747&forum_id=2.#35737769)

You painted the picture of some stable business that gets wrecked by corporate raiders. A private equity guy might paint a picture of a grossly underachieving company with subpar/lazy/overcompensated/entrenched management and obvious ways to become more efficient. In theory private equity can improve the company and return it to the market as a significantly better enterprise.

Also, private equity is also about financial engineering. In corporate finance theory there’s an optimal level of debt that maximizes value of the company. When a company doesn’t have enough debt, PE solves that problem (too lazy to explain the idea of an optimal level of debt if it isn’t intuitively clear to you)

You could say it’s good for society that companies more efficiently,

(http://www.autoadmit.com/thread.php?thread_id=3935747&forum_id=2.#35737786)

"But private equity firms made a host of mistakes and compounded them by turning these retailers into debt vehicles, all the while maximizing dividend payments. As David Dayen reported in The New Republic last year, the two private equity firms that acquired Payless “paid themselves $700 million in dividends in 2012 and 2013.” Betting on low interest rates to persist was a mistake that has ultimately bankrupted dozens of retailers."

lol it wasn't a mistake at all - its literally exactly what they set out to do. Borrow to fund acquisitions when rates are low, pay yourself as much as possible and flip it before rates go up and the company goes tits up. Unless they are holding equity not a single one of these guys gives a single fuck what happens to the business after they exit.

(http://www.autoadmit.com/thread.php?thread_id=3935747&forum_id=2.#35738720)

if the issue were just the capital structure, then they’d cancel the equity, convert the debt to equity and keep runn8ng the business.

(http://www.autoadmit.com/thread.php?thread_id=3935747&forum_id=2.#35737795)

so debt leads not just to reorganization, but liquidation.

(http://www.autoadmit.com/thread.php?thread_id=3935747&forum_id=2.#35737814)

OK on a macro level the Toys-r-us shareholders that sold to Bain re-invested in the economy so that equity surplus was invested somewhere. Obviously not in Toys-R-Us. But maybe it's better to give going concern businesses a bit of cushion to weather a short-term storm. Instead of liquidating immediately after one wrong move.

(http://www.autoadmit.com/thread.php?thread_id=3935747&forum_id=2.#35738023)

this is less a referendum on PE than it is on amazon continued gaping of brick and mortar dinosaurs.

(http://www.autoadmit.com/thread.php?thread_id=3935747&forum_id=2.#35738040)

In real life, bankruptcy is catastrophic for a company. People with options leave. You can't hire. You're paying 5x the rate for new debt (even working capital lines).

The companies PE steers in chapter 11 are often not planned for the long term, as well. They're planned for maxing their numbers at their exit horizon 4-5-6 years down the road. Sponsored companies have much higher rates of going chapter 22.

(http://www.autoadmit.com/thread.php?thread_id=3935747&forum_id=2.#35740021)

i’d be interested to see the stud6 you’re quoting on ch22 and pe ownership, though.

(http://www.autoadmit.com/thread.php?thread_id=3935747&forum_id=2.#35740584)

But it will still operate it as an office building...

That's what the people blaming P/E are missing. If this was a profitable business, they would sell it to someone to operate it as one. But its not, so they're liquidating it.

(http://www.autoadmit.com/thread.php?thread_id=3935747&forum_id=2.#35737910)

No one is actually there to run a long-term business - that is never the objective. The objective is to flip the business or pull as much out as possible during the fund term. It should be obvious how this strategy can completely ruin an otherwise decent company over a 5-10 year period.

(http://www.autoadmit.com/thread.php?thread_id=3935747&forum_id=2.#35738636)

1.) Interest payments are deductible. Accordingly, if you're a business owner or potential acquirer, debt is artificially cheap when you're looking at your weighted average cost of capital. The government has made overtures to simmer this down (leveraged loan guidelines of no more than 7x EBITDA being allowed on a company, new tax bill limiting deduction on mega-levered companies), but none is enough to actually change the calculation. Interest deduction should have been abolished. No reason equity costs should be post tax but debt costs should be pre tax. As it is, investors/owners always have an incentive to max out debt instead of putting in (much more stable) equity.

2.) And, with that incentive, it's now far too easy to actually get too much leverage on a large company. Interest rates have been artificially depressed for a decade. People have to take tons of risk to get a 6% return in the fixed income market. Instead of lowering predictions, investors have piled on fixed-income risk. Other than during a few hiccup periods, banks can't make these levered loans fast enough. Infinite demand from funds, endowments, pension authorities. The banks keep almost none of the loans/bonds on their BS, so they have no incentive to give a fuck what is in there, other than to make sure they can sell it to the market, which isn't hard. Banks take 1.5-3.0% as a fee, so this is hugely profitable for them and they love doing these "risky" loans (where risk aint on them, other than maybe the period between signing and thier selling the debt). So PE guys have every incentive to max out debt, and every opportunity to do so. Having all this debt makes the company far more volitile. Interest rates, cap market freezes, even short term industry turmoil push companies into bankruptcy that would have been fine by a wide margin if traditionally funded.

3.) Standard for pricing most companies in this world is by using a "multiple" of their EBITDA (with a few comp and DCF analysis thrown in). Look back period for the numbers is 3-5 years. This incentivizes 3-4 year planning by investors (so, for exmaple, they cut people and operations that are necessary for long term success, stuff and stack distribution channels, do everything to juice numbers and engineer paper success at expense of stability). They try to hide their wizardry. It's a game of cat and mouse.

4.) S-OX and similar have made being public far too expensive. Going private has massive cost and information advantages just as a legal and employment arbitrage. You can slash and burn half of your legal, accounting, compliance and similar staff once you're private. You can cut half of your advisors.

5.) Not as big of a deal as it's made to be, but carried interest taxation is bullshit. It's clearly earned income, taxed at capital gains. Allows more people to go into PE and make more funds, as it effectively doubles the higher up's after-tax pay.

All this leaves companies always private (lowest number of public companies in several generations right now), and always two bad reports, or an interest rate movement, or an inability to roll debt, from being in bankruptcy. It's exactly what the system has incentivized. Other countries are much smarter about this. Not socially optimal.

~PE AGC

(http://www.autoadmit.com/thread.php?thread_id=3935747&forum_id=2.#35739853)

separately, i’d point out that banks DO hold some risk (eg, term loan As, revolvers) but yes the riskier debt is syndicated (though not without very real risk to the bank, which you seem to brush aside)

also i don’t think the caricature of pe firms as pure merciless raiders is actually right. they aggressively cut costs and limit expansionary capex, sure. but they do have to return the company to market in a relatively short period of time. so it’s in their interest to not actually destroy the firm’s long term viability, regardless of which approach maximizes short-term debt paydown

also, to clarify, PE valuations are principally based on a multiple of LTM EBITDA. to fiigure our whether an investment makes sense, they use an LBO model to look *forward* (not backward) to estimate the sponsors returns on the investment given a few different variables (leverage, cash flow during the investment, interest expense on the debt, valuation of the company at the exit). your point generally stands - they’re obviously more focused on the short term than say a strategic buyer

(http://www.autoadmit.com/thread.php?thread_id=3935747&forum_id=2.#35740134)

I was straight PE, so my experience in credit is only after I joined a fund. Still, I've closed about 100 deals in firm and at fund, and I've never seen a term loan A in an LBO. LBOs are always term loan B, generally with a 2nd lien or bond layer below the senior secured debt. Banks hold the term loan on their books from the time we sign the purchase agreement (and the banks sign commitments) until the time they can sell the loans/bonds. That's real risk, but it's often short and very well compensated. But banks often have the debt sold a month or so after commitments signed. Our guys have to go and market the debt with them, and we know when the book fills up. Revolvers are held by real banks, but they have protections bonds and the current TLBs dont (financial requirement covenants where company can't have too much debt, for example) protecting the bank where the other investors are naked. Companies regularly file chapter 11 with their revolving line undrawn for that reason. Banks of course take risk, but when 2007 happens again and credit markets crater, it's the investors that will be done here as a balance sheet matter, not the banks. Banks may be done here if all their practices stop, but that's separate.

Leveraged lending was huge the past 4-5 years at all major banks. They make tons on it. It has its own section on investor calls now because it drives bank results in a way it never did. It's so lucrative on the risk/reward side, many PE firms have set up their own mini-leveraged-lending desks to place debt, to cut the banks out of it and keep that 2-3% of loan proceeds for themselves. They wouldnt be doing their own ibanking if this niche wasn't lucrative. They don't do it in other areas.

On the corporate raider point, it depends on the firm. Some are more hands off. Some come in and fire everyone on day two, especially if its being bought from a founder or taken private.

(http://www.autoadmit.com/thread.php?thread_id=3935747&forum_id=2.#35740447)

I wouldn’t really argue with any of your points here. There is no doubt PE can have adverse consequences for certain underperforming businesses. There is also no doubt it’s partly just financial engineering made possible by the various legal advantages for debt over equity (eg, tax shield, bankruptcy priority).

But i think we’d agree than any overly broad hot take like “PE IS RUINING AMERICA” doesn’t make much sense.

(http://www.autoadmit.com/thread.php?thread_id=3935747&forum_id=2.#35743532)

All they do is leverage access to cheap money to suck companies dry between cycles - and then get out before the cycle comes due so they usually are not around for the BK when it hits.

IIRC there was a story where Warren Buffett was asked if he could name anyone in the LBO space that he respected as a businessman and he said he couldn't.

(http://www.autoadmit.com/thread.php?thread_id=3935747&forum_id=2.#35740521)