All investments have risk. Some have more than others. Pension funds, insurance companies, etc. are all considered “sophisticated investors” which is actually a term used by the SEC for any “person” with a network of over $1 million. There is nothing wrong with risk. It is only through risk that there is any reward. Private equity management is only one such mode of investment. Funds that invest with private managers (which is what the term means) layer those risk into a portfolio that reaches their need for income with which to pay the pensions of its members. There is nothing sinister about it.
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Bizarre. If anyone, including Mitt Romney didn’t repay the bonds there is a very simple recourse. You sue them. If you could prove their used the money for dividends instead of making debt payments, you would win. Not sure what you are saying here.
The ownership of businesses like this end up concentrated in the hands of a vanishingly small population.
This undermines flexibility in the economy and diverts money flows away from potentially local-type owners, who might partner with local businesses, to a tier of firms that have every interest to take advantage of economies of scale and partner with other businesses within the private equity world, rather than the local hopeful who might actually do a better job and implement new types of business methods.
The typical USA leveraged model sets up the trigger for this situation. The amount of money the private equity people are able to siphon is incredible - it is not atypical to see a debt structure where the junior unsecured portion is paying 15 - 20% per year interest.
This incident is a metaphor for and a reflection of countless others.
i’ve yet to come across a private equity business that encourages advancements in business in order to benefit from the improved economic conditions that would create. They are short-termist (5 year funds), and seek to maximise IRR at the expense of all else.
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You have mixed so many unrelated factors here. A hedge fund is not a private equity fund. The “bonds” you keep referring to no longer exist. The terrible private equity fund that was owed the money swapped their debt for stock in the company. They are now on the same page with the employees whose livelihood depends on the success of the company. if the company goes under, Ares Capital loses everything. How is that not fair? You say if it fails “the rest of the citizens will pay for any costs.” Please explain how that would happen? If it fails you will just buy your Fender guitar somewhere else. Mutual Funds do not invest in private equity. Mutual funds are baskets of publicly traded stocks. Retail investors do not invest in private equity funds. Throwing in terms you obviously have heard but don’t understand doesn’t make your argument. If you don’t like private equity, don’t invest in it. If you don’t like it, don’t shop at stores they own. Or, start your own fund. Go out and convince people to invest in it and go out and buy a portfolio of companies. I will tell you a story. I once bought a company from three guys who started it. I paid them $7 million for it. The first thing I did was get rid of them. That saved me nearly a million a year. Then, I got rid of their company airplane, company ski condo, Florida condo, company fishing lodge, company fishing boat and a slush fund they used for personal vacations. None of those things things had anything to do with the business. I was able to hire about six more productive employees and gave the staff a better benefits program and stock options which they never had. In two years, the company was making more than I paid for it. I used my shareholder’s capital to acquire an under performing asset and fix it. They were very happy. The guys who sold were very happy because they got two million each and I was happy when I sold it to a private equity company for about ten times what I paid for it several years later. Today, it does about $150 million in sales. Had the three guys who started it still owned it, it would still be doing the $4 million in sales they were doing. Today, the company employs many more people, serves many more customers. That is called the best use of assets. I am unsure why that is a bad thing?
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The private equity industry both helps and hinders economic and sociological development. 40 years ago, ok small and profitable, but now, hugely powerful.
So many founders of businesses, with incredible ideas, aim at an exit to private equity - they want to get rich. That’s great, no-one would mind being rich, but it stifles innovation, short of profit-focused research programs at pharma etc.
There is an increasing movement from founders to not do this. It’s small, but growing. Word is out about the strictures private equity money puts on you, especially when you don’t have bargaining power at the initial deal. People now understand that if they take the money, they yield the independence and ‘spark’.
Of course, a multi-million payoff is fine. But often, you end up tied to the business for years anyway, and your money has an array of conditions and time periods before you get it, which begs the question - why not simply try to self-finance?
Check these out:
• Y-Cam, an internet video surveillance business.
• Social media tools Status People and Fakers App.
• Triggertrap, which makes products that give users creative ways of triggering their cameras.
• Bloom VC, the UK’s first rewards-based crowdfunding platform.
• Webcredible, a digital and user experience agency.
The very inaccessibility to, and awkward nature of, private equity, has enabled the growth of crowdfunding. That is fantastic.
Private equity and VC are often seen as ‘Masters of the Universe’. They’re smart, smarter than the average bear, and they work hard. But what they really have is money.
Private equity harps on internally about what economic benefit they provide - and numerically, they do. But if crowdfunding takes hold properly, and displaces the private equity model, I suspect the benefits will be much greater.
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yes they were in trouble in 2009. But how much trouble were they in back in 2007 when Bain bought them? Despite the high price paid, I’d guess that they were in some degree of trouble, otherwise Bain wouldn’t have bought them. PE firms target the weak, that’s what they DO. They’re not really “managers” or “turnaround” specialists. They identify companies that have low stock prices relative to the value that can be stripped from the company. They load the company up with high levels of debt, fire a few people and see what happens. If the business cycle turns and the company becomes profitable, they sell, preferably before anybody realizes just how much debt that they have saddled the company with. If the company fails to become profitable, they use financial chicanery to maximize the extraction of money from the company before they take it to bankruptcy (where THEY are the creditors) or sell the rump at a loss.
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This is where and how Land Value Tax would be better, fairer, and better for the economy: There would be no inheritance tax, no income tax, just a tax on the value of the land you live on or ‘own’ (in a sense, the Land Tax is the rent for the the land, paid to the Commons). The farmers’ tax, usually, would be low, as the land is unimproved and doesn’t/didn’t cost the public much.
The rich elites owning a pied-à-terre, say one or two floor at 15 Central Park Avenue, would be taxed (a lot!), every year, for this improved, valuable property. Note, a lot of the improvements are paid by the public: the police, the subway, the waterworks, etc.
In the current system, cash-rich people can buy cheap land/properties/resources, sit on their investments for a few years while they bribe local goverments into making public-paid improvements (roads, sewer, water, cheap labour, etc), they then sell this property at great profit.
Bonus: their profit is taxed at a rate at least half of what you pay in hard, back-breaking work.
yes they were in trouble in 2009. But how much trouble were they in back in 2007 when Bain bought them? Despite the high price paid, I’d guess that they were in some degree of trouble, otherwise Bain wouldn’t have bought them.
No. In fact when Bain bought Guitar Center it appears to have been at the height of its success,
Guitar Center reported revenue gains of at least 12 percent every quarter since 1998. Sales climbed 14 percent to $2.03 billion last year, a sixfold increase since the company went public in 1997.
At the time, GC stock was going for about $50/share, and Bain had to pay $63/share to acquire the firm.
Nice survey of different explanations of GC’s woes here, but it looks like a series of issues including the debt from the Bain acquisition, mistakes made afterward by Bain, GC’s continuing to open stores at the height of the recession, and increasing growth by competitors.
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If you believe that that is simple, then you’re woefully deluded about how the legal system works in practice.
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In that story, you did a good thing, no questions asked. That is emphatically not the scenario being questioned here.
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If you eliminate the income tax and inheritance tax and capital gains tax and try to make up the difference in what is essentially property tax, I suspect the net result would be that rent goes up and lots of poor people are forced out of their homes.
Now if you had proposed a wealth tax that applied to financial and not just real assets, that might actually start to deal with the core problem.
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Well, the poor people wouldn’t be paying income nor sales tax. They’d have enough money to pay the increased rent.
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What is the point? All that happened was a company got into financial trouble and couldn’t make its debt payment. The debt owed to the lender was worth more than 50% of the value of the company, so the lender became the owner by agreeing to give up the debt in exchange for stock in the company. It is now up to them to prove they can run it better than the previous owners. They are at total risk. There’s nothing sinister about it. it is done all the time. Very few start-ups, the ones that survive don’t have to ask lenders (usually early angels) to convert debt to equity. I really don’t get the problem.
I don’t understand the legal system? I agree I am not a lawyer, but I had many working for me, both as employees and as retained counsel. I’ve been many acquisitions. I’ve done debt to equity deals many times and I really don’t think you have any idea what you are talking about.
for you and me?
perhaps.
For organizations that afford for rooms of lawyers, like Bain and Ares capital?
This is exactly how “how the legal system works in practice.”
What Mittens and co do is to use corporate bankruptcy to insulate themselves from the repayments. The bondholders only have direct recourse against the limited liability company that issued the bonds.
The bondholders could in theory bring an action to claw back the money from the Bain fund but that would be expensive and likely throwing good money after bad because by then the fund has paid out the dividends to the initial investors. So any recovery would take a third stage.
The fact that one of the only two viable political parties in the US nominated this corrupt fraud dealer as President is beyond disgusting.
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A typo that autocorrect didn’t register: I’m sure you meant “net worth” instead.
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I’m not really sure I understood what you meant. You weren’t implying knowledge by osmosis, were you?
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OK so this is all meandering snip-snipe.
Let’s get onto something meaningful and digestible.
I posit that private equity is dreadful for any area that involves any degree of social investment: Healthcare, retirement care, education.
I reckon private equity is useful in areas where inadequate competition stunts markets: Bicycle stores in the UK, train tickets in the UK, airlines (maybe).
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Ok, they can sell tickets, but for Bob’s sake, we need to bloody nationalise the actual ‘trains going places and the organisation thereof’ bit again. At gunpoint if necessary. While I’m on, we need to do that with the F.A., as well. Just for the lulz.
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