[mbrumlow]

No dude. Read it again.

The VC lends (the money from the bank) which the vc borrowed, to the clinic.

They are a sort of middle man. It the clinic is on the hook to the bank and the Vc takes fist cut before playing the bank.

Eg. The vc only risked the company they were buying, and gets paid first.

[NoboruWataya]

If the VC borrows money from the bank and lends it to the clinic, the clinic is not on the hook to the bank. The clinic is on the hook to the VC and the VC is on the hook to the bank. Which means that if the clinic goes under, the VC takes the loss because it still has to repay the bank.

(Edit: To be clear, I agree with the other commenters that none of this is what VCs do. I'm just pointing out that the way this is being described doesn't even work on its own terms. Needless to say, LBOs are not "risk free".)

[mbrumlow]

Nope. The clinic is the collateral to the bank. VC stand to loose nothing.

It does not happen overnight. But what happens is after they take control of the clinic or company they change the sales model to boost reoccurring revenue, this then allows the clinic or target company to take loans out. Because they look good on paper. The company then pays VC back when then pays bank back.

This can be done in about 6mo to 1 year process with some companies. The initial out of pocket expense is small and paid back very quickly.

I also forgot. Sometimes they will take the newly owned company and merge it. During that process they extract more money and load more debt onto the remaining entities, again making the VC money.

In some cases they can even get huge tax benefits by loading the company with debt which offsets the tax bill of the final entity.

When these transactions are done, within the span of a day multiple companies are created and merged and absolved.

There is little to no risk for the VC

[JumpCrisscross]

> The clinic is the collateral to the bank. VC stand to loose nothing

This is actually a case where using the correct terminology clarifies.

VCs don’t do LBOs. Private equity firms do. When their deals go bust they lose the equity they invested. That equity is the first layer to take a loss. When that happens, the lenders—whether they be banks or private credit firms—take over the company, often converting some of their previous debt into equity.

There is a lot of risk in LBOs. It’s why they have such a mixed record.

[skeeter2020]

PE includes buy-out (leveraged and not) and VC transactions. PE is typically any medium to long term equity investment not traded publicly on an exchange. Even this is cloudy now that the PE firms themselves are going public.

LBOs are also not a black and white classification, at least not the way they were in the Gordon Gecko 80's, with varying levels of target-borne debt financing specific to the deal. So while I agree "VCs don't do LBOs", PE does both LBOs and VC deals, with the PE firms doing their own style of fund and deals.

I found this book (though dated) to be a more academic analysis of PE: https://www.wiley.com/en-us/Private+Equity%3A+History%2C+Gov...

don't buy it; try your local library.

[JumpCrisscross]

> this is cloudy now that the PE firms themselves are going public

The public or private status of the manager has no relation to private equity being cloudy. Out of all of the delineations, PE is a pretty sharp one. VC is PE. Private credit is not. It’s private debt. Not equity.

[hrimfaxi]

> It does not happen overnight. But what happens is after they take control of the clinic or company they change the sales model to boost reoccurring revenue, this then allows the clinic or target company to take loans out. Because they look good on paper. The company then pays VC back when then pays bank back.

This was the missing bit for me. Thanks for taking the time to explain!

[fireflash38]

Who are the bagholders in these scenarios?

[skeeter2020]

The PE sales pitch is often that the target company can benefit from expertise management and/or there is value locked in it that can be captured. Both of these claims are... marginal? Studies around the "expert management" claim tend to show this is not true, based on pre/post returns, but it's hard to account for the long term, because PE also tends to focus on sales with very specific characteristics & time horizons (and associated cost savings) that benefit a 5-7 year fund that sells the portfolio company (wait for it) around years 3-5.

Which is a long-winded way of saying the bag holders are anyone invested in the long-term success of the company: 1. employees, 2. customers, 3. owners (i.e. the next PE fund) when the music stops, i.e. what we saw when interest rates went up impacting debt financing, and (real or not) AI-eats-SaaS impacted valuations. I'll add 4. "the public" if the company is big enough, with various levels of goverment and employment, taxes, etc. lost but I think it's more the smaller organizations in aggregate that hurt at this level than any specific company.

[klondike_klive]

What's the betting that it's (somehow, eventually) the taxpayers?