[tvladeck]

> if PE didn't burden them by taking out loans against the company's assets

if this were the true problem, i.e. if there were a profitable business that just wasn't making enough income to service its debt, then the enterprise would continue to exist after restructuring the cap table.

adding debt to the company just changes the cap table, it doesn't change the profitability of the underlying company.

[yyyk]

But it can make internal investment impossible and make the entire company act in cost-cutting mode, which isn't necessarily helpful to maximize profit. Eventually, the profitable business would stop being profitable.

[tvladeck]

it doesn't make internal investment impossible. it just changes the pockets it comes out of. well, actually it doesn't even do that, because either way it would be coming out of the cash owned by the PE shops, whether it sits on the books of the company or has been paid out to its owners. they can always decide to invest more into initiatives that show a promising return. the issue here is not the structure, it's rather that the owners of these shops made mistakes, which will happen. but the incentives are not misaligned.

[yyyk]

Maybe internal investment being 'impossible' is too strong a word, but practically it's very unlikely after the company has been taken over and is piling debt.

"either way it would be coming out of the cash owned by the PE shops". They don't have to invest you know. After all, the company is now unprofitable. Obviously it's just inefficient. Why give money to an inefficient company from your core profitable business, when you can break the company up and use the profit from looting it in your core profitable business which you're good at?

It makes much more sense for PE finance to siphon funds for use in a field they have expertise in (more finance) than try to manage companies in various fields (like retail) they're so not expert on, especially when the companies are in the debt.

[rileymat2]

Is this true if you manage to extract some of the capital leaving the debt?

[tvladeck]

yes, in the sense that everything that's on the cap table (including special dividends, etc.) won't affect the P&L, except for the interest payments. but investors in the company treat interest payments separately, because it's just part of apportioning who on the cap table gets what. that's why investors often look at EBIT (earnings before interest and tax) and enterprise value as opposed to market cap, as enterprise value includes the value of the debt.