[gruez]

>Private equity is far worse. It’s mean 100% ownership by a group of sociopaths who are executing on a plan to extract as much cash as possible quickly with no other goals at all.

...as opposed to the average public company? An average company might have more "average joe" shareholders (almost by definition, because private equity is typically off limits to non-accredited investors), but outside of meme stocks, there's not enough of them to make a difference. The rest of the shareholders (eg. pension funds, insurance companies, endowments, family offices) can be assumed to behave like ruthless capitalists chasing the highest returns, regardless of whether the company is public or not.

[youarentrightjr]

I see these private equity takes on HN frequently and am really baffled by the ignorance. There's a very clear difference between a public and private company - the fiduciary duty to shareholders.

There is a legal requirement for directors of public companies to act in the financial interests of all shareholders. In practice, and according to precedent, this means long term viability of the company, in other words, a sustained profitable business.

There is no such requirement for a private company. In practice (esp. recent history), this means private equity firms acquire successful businesses to "mine them" of their wealth - capitalizing their assets for personal gain, and leaving nothing left.

The question for public companies isn't how many retail vs institutional investors they have, it's whether an investor can make a claim about a breach of fiduciary duty. It's patently false to say that the institutional investors (who yes, do have more sway) aren't interested in the company acting in their financial interests.

[JumpCrisscross]

> There is a legal requirement for directors of public companies to act in the financial interests of all shareholders

No, there isn't.

The whole point of Revlon duties is that they trigger "in certain limited circumstances indicating that the 'sale' or 'break-up' of the company is inevitable" [1]. Outside those conditions, "the singular responsibility of the board" is not "to maximize immediate stockholder value by securing the highest price available."

> There is no such requirement for a private company

Are you thinking of minority rights? These vary based on whether a company is closely held or not [2], not whether it's public or private.

[1] https://en.wikipedia.org/wiki/Revlon%2C_Inc._v._MacAndrews_%....

[2] https://millerlawpc.com/rights-minority-shareholders-private...

[youarentrightjr]

Why bring up Revlon duties when as you say, their relevance is only during company acquisition or restructuring?

It's well established over hundreds of years of case law that directors of public companies have to act in good faith to benefit the company (and therefore, the shareholders).

Weird cherry pick.

[JumpCrisscross]

> Why bring up Revlon duties when as you say, their relevance is only during company acquisition or restructuring?

It’s an exception that proves the rule. In that specific case, what you’re saying applies. In all others, it does not.

> It's well established over hundreds of years of case law

Where are you getting this from?

> directors of public companies have to act in good faith to benefit the company (and therefore, the shareholders)

Where did you get that this only applies to public companies? What you’re describing is basic English and Delaware corporate law.

Also, there is a massive difference between “all shareholders” and “the shareholders”. And nothing about public companies says they can’t be structured in a way that sometimes undermines some shareholders. This comes up most commonly when different shares have different voting or blocking rights. But it’s also fundamental to the intent behind B Corps, publicly traded or not.

[youarentrightjr]

> Where are you getting this from?

I seriously doubt you're operating sincerely in this thread, given your ability to cite Revlon. But on the off chance, start here:

https://en.wikipedia.org/wiki/Dodge_v._Ford_Motor_Co.

> And nothing about public companies says they can’t be structured in a way that sometimes undermines some shareholders.

See above.

[JumpCrisscross]

> seriously doubt you're operating sincerely in this thread, given your ability to cite Revlon

I know about the topic and can correctly cite sources, herego I'm operating insincerely?

> start here [1]

You're citing a 1919 Michigan state court decision concerning the Ford Motor Company. Ford went public in 1956 [2]. The sole source you've cited is about a then-private company from over 100 years ago.

You said "there is a legal requirement for directors of public companies to act in the financial interests of all shareholders." That is wrong. It's doubly wrong in the context of public versus private companies, given it applies to all business corporations.

[1] https://en.wikipedia.org/wiki/Dodge_v._Ford_Motor_Co.

[2] https://www.fool.com/investing/2019/01/16/63-years-later-wha...

[gruez]

>There is a legal requirement for directors of public companies to act in the financial interests of all shareholders. In practice, and according to precedent, this means long term viability of the company, in other words, a sustained profitable business.

All that means is that controlling shareholders can't use the company as a piggy bank and raid it to fund their other ventures. It doesn't mean the business has to be "sustainable" or whatever. In fact, it's perfectly legal for the board to sell to a "vulture" PE firm that will sell the business off for parts, as long as the sale price is good enough.

[margalabargala]

Yes, that's the major difference between the public and PE companies that OP was highlighting. The owners of a public company can't raid it to fund other ventures. They have to sell it off to someone else to do that.

Selling off a public company like that is generally not trivial and is not surprise sprung on shareholders.

[JumpCrisscross]

> owners of a public company can't raid it to fund other ventures

This is a constant source of litigation in public and private companies alike. A recent prominent case on the public side was National Amusements constantly fucking up the sale of Paramount if it didn't have special goodies for Shari Redstone.

> Selling off a public company like that is generally not trivial and is not surprise sprung on shareholders

Merger law is largely state corporate law. If you have a Delaware C corporation, you're operating under more or less the same merger rules irrespective of how your stock is traded.

What may be misleading some folks is that in a private company, these deliberations are typically covered by NDAs. In public companies, it happens in the open. With private companies, someone needs to get pissed off enough to sue. Herego the understandable availability bias.

To drive home how misleading this purported delineation is, consider that some of the largest private equity managers (e.g. Blackstone and KKR) are themselves publicly traded.

Private equity has tons of issues. Tons. In some industries (e.g. healthcare) it shouldn’t exist. But this tripe about public companies having duties to shareholders which private companies don’t is nonsense.

[raw_anon_1111]

> This is a constant source of litigation in public and private companies alike. A recent prominent case on the public side was National Amusements constantly fucking up the sale of Paramount if it didn't have special goodies for Shari Redstone.

Instead they had to give “goodies” personally to Trump in the form of a $15 million bribe…

[JumpCrisscross]

> Instead they had to give “goodies” personally to Trump in the form of a $15 million bribe

More of an in addition to than instead.

[youarentrightjr]

> All that means is that controlling shareholders can't use the company as a piggy bank and raid it to fund their other ventures

Yes, you're getting it now.

> It doesn't mean the business has to be "sustainable" or whatever. In fact, it's perfectly legal for the board to sell to a "vulture" PE firm that will sell the business off for parts, as long as the sale price is good enough.

As discussed elsewhere in this thread - the sale itself is required to maximally benefit the shareholders.

[raw_anon_1111]

Public companies are interested in quarterly profits. But for the most part still have longer term goals and don’t purposefully make decisions that will make the company worse off in the long term.

Apple is not going to sell off all of its real estate into separate company, force the other half to rent it and then sell off the rental holdings. Even when it was almost bankrupt it didn’t “shut down the company and give the money back to shareholders”.

The former is a standard PE play. I’ve been part of the “roll up small companies and enshittify them and go public” playbook. I was the lead architect at the parent company designing the software system that integrated the disparate systems of the target companies.

Funny enough I worked for a startup that I loved in 2018-2020 and only left because a job at BigTech fell into my lap. After leaving BigTech in 2023, the company that acquired the startup I worked for (a PE backed acquire and enshittify company) offered me a job as the architect to consolidate their systems based on a referral. I booed out after having a lot of discussions with their internal management and one with a representative from their investor.

It’s hell being under the thumb of a PE companies management (not the internal management) they second guess everything and the level they were hiring me for, I would have dealt with the PE investors representatives directly

[CPLX]

> I see these private equity takes on HN frequently and am really baffled by the ignorance.

Probably a good time to note that you’re posting this comment on a website created by a private equity firm for promotional purposes.

[youarentrightjr]

Zing! Gotem! Reddit moment xD

[dzjkb]

quite the opposite actually, your comment adds nothing to the discussion

[CPLX]

If someone is baffled that the tone of a private equity company’s message board is pro private equity then I think it’s an excellent reminder.

I think it’s useful to point out that Silcon Valley is a rapaciously predatory and financialized business climate precisely because because they spend so much time and money on PR to convince everyone otherwise.

[avrionov]

The biggest difference is not the morality of the management of the two types of companies, but the type of business they are into.

Many private companies are growth businesses. On the opposite side, private equity targets businesses which are stable, but not growing or declining. PE looks for products which have high cost to switch or products with no alternatives.

So when private equity buys the business they extract money in 3 ways: - Raise their prices. This is similar to the public companies, but they do it more aggressively, because their customers don't have a choice. For reference see, what VMWare did after it was bought by Broadcom (Broadcom is a public company which acts as a private equity). - Reduce costs, via layoffs and cutting smaller products. Also done by public companies, but the difference here is the magnitude. It is quite common for Private equity owned companies to have several years of 20% layoffs, until the original workers are completely replaced by workers in cheaper locations. Or not replaced at all which leads to a worse service. - And finally the third way a private equity extracts money from the acquired company by providing "services". Employees from the PE company are elected on the board of directors of the acquired company. A PE executive can become a CEO of an acquired company. PE companies have satellite companies, which provide legal, administrative and financial services to their companies.

On top of that the acquired company has to pay the loan which was used to be acquired.

[rs186]

Let me explain this with a simple example:

* If a company controlled by PE goes bankrupt, shareholders (PE) likely make a profit * But if a publicly listed company goes bankrupt, shareholders lose their money

In other words, PEs almost never lose money, so they could extract the last bit of a company, even more short sighted than shareholders of a public company

[JumpCrisscross]

> If a company controlled by PE goes bankrupt, shareholders (PE) likely make a profit. But if a publicly listed company goes bankrupt, shareholders lose their money

This isn't remotely true. Plenty of private equity investments go bust before they can pay themselves back. And plenty of public company investors milked a company for interest payments or dividends into the ground.

> PEs almost never lose money

Private equity funds regularly lose money. Usually to lenders.

You're complaining about leverage in general. Probably not private equity per se.

[gruez]

>* If a company controlled by PE goes bankrupt, shareholders (PE) likely make a profit

That's not necessarily a bad thing, or sign of anything sinister. If a business is failing, and you buy it for pennies on the dollar, and despite your best efforts it still goes under, so you liquidate it, you can still turn a profit if the price you paid is lower than what you got from liquidating it. That's not bad, because private equity (or anyone else, for that matter) isn't expected to operate as a charity. The only reason they're willing to stump up the cash to buy the business in the first place is the expectation that they'll make money. It's also not bad for the original owners either, because the fact that they hold to PE rather than someone else, or liquidating it, suggests that the PE offered a better deal than either.

>But if a publicly listed company goes bankrupt, shareholders lose their money

Often times yes, but sometimes not, eg. hertz.

[youarentrightjr]

> despite your best efforts

Citation needed.

[ksenzee]

If you’ve ever spoken to employees of a public company that was sold to private equity, you’ll know how much of a difference there is. It is a significant difference.

[CPLX]

> The rest of the shareholders (eg. pension funds, insurance companies, endowments, family offices) can be assumed to behave like ruthless capitalists chasing the highest returns, regardless of whether the company is public or not.

Right but they are seeking the highest returns as equity holders typically, usually through things like stock buybacks.

Private equity firms have much more devious ways of looting the companies, like management fees, acquiring other portfolio companies, and various other tricks.

If you’ve ever seen the Goodfellas scene where they bust out the nightclub, that’s quite literally their business model.

[gruez]

>Private equity firms have much more devious ways of looting the companies, like management fees, acquiring other portfolio companies, and various other tricks.

"looting the companies" is non-nonsensical when they also own it. It's like saying a scrap yard is "looting" the cars it bought by taking out the valuable parts to resell or whatever. The rest of the stuff might make sense in the context of the LPs getting screwed over, but not in the context of portfolio companies that they own.

[andrew_lettuce]

PE puts very little of their own money into the deal though, while they own it they don't buy it. They use incredibly high leverage and often saddle the company with monstrous debt, then loot the assets to pay the interest and take management fees while doing all this. Red lobster is a great recent example. They sold off all the real estate, then had stores lease it back, turning profitable locations into losers. They often do the same thing with manufacturing, goodwill, brandnames and sales channels.

Think of this like an oil well. If you pump off all the gas, you depressurize the reservoir and can never get the oil. You need to slow your production to get the oil first, but private equity is happy to skim the cream and leave the milk to spoil.

[mbesto]

> PE puts very little of their own money into the deal though, while they own it they don't buy it.

This is simply untrue. A typical PE firm creates a GP fund using LPs money. This GP fund typically does a management buyout (which means 50.1% of more) of several companies using a mix of equity (e.g. GPs capital) and debt (banking lenders). So by every definition of the word, they absolutely own the company.

[CPLX]

What you’re saying just isn’t true.

Looting the companies is accomplished by stacking up debt and then giving themselves the money. Occasionally there are a few variations like looting a pension fund or taking a high quality product and making it horrible and selling that until people notice.

It’s literally their business model, it’s happened thousands of times and is a very clear fixture of the modern American business climate.

If you don’t know this it’s because you aren’t looking or it’s in your interest to say you don’t know this.

[mbesto]

> It’s literally their business model

It's literally not. It happens to be the business model for a subsection of private equity (usually large cap) and its the one that gets most headlines. There are roughly ~5,000 M&A events per year (often involving PE) and yet you'll hear about 5~10 at most cases where the company gets loaded with debt and stripped of assets. The large plurality of PE groups are buy and hold for 4~7 years and are largely focused on EBITDA expansion.

> If you don’t know this it’s because you aren’t looking or it’s in your interest to say you don’t know this.

No offense, but you clearly don't know what you're talking about.