[ahzhou]

It’s basically the acquisition (buying out) a company using debt-financing (leverage). The typical plan is usually to use business revenue to finance the interest payments, optimize the business via cost-cuts or roll-ups, and flip it for a profit in 5-7 years. Like most things, PE can be helpful or destructive depending on the execution and the exact strategy for flipping.

At its best, it’s bringing in experienced operators and maturing a company into something that is stable, before selling it to an acquirer or IPO.

At its worst, it’s saddling a weak business with debt, hiring terrible execs, and making unsustainable cost cuts to stave off an implosion.

The strategy matters a lot. Some funds specialize in “distressed assets”, for example and are very good at carving up dying company and selling it for parts.

[coastermug]

Thank you, this is a balanced and detailed response. I don’t personally “buy” the narrative that all LBOs are destructive. After all there are entire funds devoted to LBOs and how would these PE outfits carry on getting loans if their companies constantly defaulted?

[ahzhou]

Thats right. At the end of the day, PE investors need to make their returns and blow-ups like Toys-R-Us did not make good returns. That said, there are systematic problems with the incentives involved.

1. PE investors tend to be VERY financially savvy, but sell to less skilled investors. If they see that they have the chance to sell one of their assets at a great price, they don't have any issue with anyone holding the bag. There were at least a few IPOs/SPACs that left the (relatively less-savvy) public holding the bag.

2. PE investors tend to be be finance-minded, not operations-focused. That means that their planned optimizations think about the financial health of a company, not the "real" health. Culture can suffer because of this, for example.

3. PE is very interest rate dependent, and low interest rates / bad investors can (and probably did) make the tech bubble worse.

[greesil]

I'm very interested to see what's going to happen to private equity now that interest rates are above zero. At the very least I have to imagine some of the loony schemes like buying up houses are going to stall.