|
Financing isn't related to capital structure or leverage. Your assumption is kind of predicated on the belief that people lending to PE are making rational choices...they aren't. The reason why LBOs took off was because S&Ls needed high-yield paper (and, to a lesser extent, there was a big buildup of Middle Eastern funds in US banks). All these deals allow the lender to risk up their portfolio, and take (in retrospect) equity risk. If you were an LBO firm, you can just sit there, create this paper...maybe it works out, it probably doesn't, and (tbh) you don't care because you get fees either way (most PE firms aren't really fund managers, they generate transaction fees for principals...that is why they employ bankers, instead of people with any experience of business). Btw, if this isn't convincing this same dynamic also caused a bubble in emerging market debt (i.e. banks needed high yield paper, bankers went to EM govts and got it). And in a downturn, this process goes into reverse. People rush into cash, and sell whatever is liquid. It isn't anything close to rational (I feel like this should be obvious, I am seeing stocks with close to monopoly positioning selling at 3x earnings...is that rational?). Now, the complexion of these deals has changed but what really drives finance is supply and demand. Another good example is CDOs, that was all supply-driven...banks wanted paper (there was a huge build up of dollars in exporters like Germany/Japan...China too but the state controlled dollars domestically), Basel rules meant there had to be some trickery i.e. banks needed to say CDOs were AAA but there was not enough AAA supply so CDOs had to convert junk into debt...but the point is...they needed the paper, so it was supplied. Totally irrational, no-one looked or cared about fundamentals but...the fundamentals don't really matter. Liquidity drives everything (if you have liquidity, you buy anything...if you don't, you sell anything). Btw, understanding this is pretty key to successful investing. Once you realise what is occurring, investing is fairly straightforward. It is only when people try to introduce artificial concepts like rationality that they lose money in large sums. |