While not all PE is a scam, there’s definitely something about a Leveraged Buy Out that looks exactly like a scam.
In the Toys ‘R’ Us example, the company sold for $6.6B. The shareholders who collected that clearly got something, and presumably $6.6B is what they wanted to agree to sell. But, the PE firm didn’t pay that much, they only put in $1.6B, and borrowed $5B. The bank lending to the PE firm was probably completely safe, as they had Toys R Us immediately take out a $5B loan to pay that part back. Which also means, Toys R Us borrowed $5B to not have shareholders anymore, but got no other value out of that loan. It’s hard to see how that expense helped add any value to the company at all.
It also means, the PE firm didn’t care much about the difference between $1.6B and the sale price. They cared a little, as they want to get a return on the $1.6B, and the extra couldn’t be so much that it destroyed Toys R Us prior to getting that return. But, the diddn’t need to get a return on $6.6B, only the $1.6.
This is always my wonder too. Why would someone loan Toys R Us $5B to pay off the PE firm for buying it. Alternatively, assuming it’s not a new loan, but a transfer of responsibility from the PE firm to Toys R Us, why would the original PE lender allow that in the loan contract instead of requiring the PE firm to keep the debt directly.
Spreading out the risk so it’s super thin is the only explanation I can think of too. If a pool of investors fund makes 100 bets for a $1, and 99 fail, but one of them returns $105 on that initial $1, then the aggregate pool made $5. Nobody is paying attention to the failures. In fact, they’re all hoping that it’ll be 98 failures and 2 that each make $105, for $110 gain on that original $1.
