[yardie]

One of the tools we use was bought by PE last summer. When it was time to renew our support contract had tripled in price. I use it across 10 projects so our costs went from $200k to $500k. I let our account manager know this was unacceptable but even his hands were tied. Cancelled those contracts and let them know we were retooling with a competing tool and opensource to fill those gaps. The impression I got was we weren't the only ones. Sales were getting squeezed between customers bailing and PE management wanting to stay the course.

I've seen PE make businesses more efficient by reviewing all contracts and dropping or renegotiating ones that no longer align. Closing product lines that aren't profitable. But that is year 1-2. By year 3 they start the squeeze, layoffs, asset selloffs (stripping), and lowering quality, raising prices. That is where the real teeth of wolf are shown.

[MisterTea]

> When it was time to renew our support contract had tripled in price.

Currently in PE hell myself. Company I work for was bought out few years ago when the owner cashed out. Right out of the gate it was a numbers go up game. New sales person was hired and their first order of business was - drum roll please - triple prices! Customers balked. Some walked. In addition, some employee benefits evaporated, vacation time cut drastically, shitty health insurance switch, employee perks like the monthly pizza Fridays were canned as if ~$500/mo in pizza was going to bankrupt the company. Meanwhile, employee morale is at an all time low and quality has faded.

Perhaps there is good PE out there. Somewhere. All I see are vampires.

[Ntrails]

PE remains a source of complete fascination for me. The game is clearly rigged to produce bad outcomes at a societal level (eg no company loaded up with debt to finance buybacks/dividends and just eps ended up in a better long term financial position) - but we're completely incapable of doing anyhting about it.

[generic92034]

Yes, that is typical for a certain kind of management. Only costs that are visible and easily measurable are taken into account. Invisible costs or costs that are hard to measure are ignored, even though they may amount to a whole lot, up to the ruin of the company. Employee motivation is one example for the second type of costs, while the 500 bucks per month for pizza were easily seen and cut.

[sseagull]

The McNamara fallacy. One of my favorite fallacies vaguely related to Goodhart’s Law

https://en.wikipedia.org/wiki/McNamara_fallacy

[greedo]

Barnes and Noble seems to be doing well with their PE ownership. Definitely better than the last few decades of Len Riggio's reign.

[dickersnoodle]

I'd have said ghouls. At least vampires are sexy...

[shawn_w]

These are Count Orlock style vampires, not Lestat and Louis.

[broknbottle]

It’s interesting how accurate this is to my experience back in like 2015/2016. Almost verbatim the same playbook. If they all utilize the same playbook, it seems like there’s an opportunity to use AI + skills playbook to trim the fat and streamline these PEs firms. I’m sure it could reduce headcount, lower PE management fees, etc

[HumanOstrich]

Replacing parts of PE firms with AI is so far from being a useful suggestion here.

[cameronh90]

This is just the design of a PE fund. They run on a fixed cycle, so early on they heavily invest into their portfolio with the aim of resolving that risk and maximising the sale value by the end of the cycle.

In principle, I don't think there's anything wrong with this. All investment expects a ROI over some time horizon. Public companies do the same thing. Anyone who founds a start-up is doing it too. The only real distinguishing feature of PE is how successful they have become at aggressively optimising for market value.

The issue is that the sale value at the end of the cycle can be massively influenced by cynical financial engineering. This seems to me to be more of an issue with how every institutional investor apparently now prices companies purely on reductive metrics like EBITDA x the industry standard multiple.

The cause of the rot is widespread over-confidence in dumb financialization models shaping the system.

(Or, since it's HN: if your machine learning model is training well, but misaligned with real life: do you blame AdamW?)

[mcphage]

> how successful they have become at aggressively optimising for market value

They use money to turn value into money, which they then use to turn more value, into more money. And in the end, they have a lot of money, and all of the value is gone.

[cameronh90]

That's only possible if the financial system is valuing things systematically incorrectly.

IFF a company is truly, honest to god, less valuable than the sum of its parts, then it (or the subset that would have more value to someone else) SHOULD be dismantled, and those resources sold and reallocated to more productive use. You probably make these sorts of decisions in the capacity of your own personal finances without even thinking about it.

On the other hand (and what I believe is likely happening is) if cynical financial engineering is allowing you to turn a useful company that's valued poorly by the market into a useless company that's is paradoxically highly valued by the market, in the short term, and that keeps happening over and over again, then the tools used to calculate the market value are wrong.

This is illustrated by how PE commonly trashes trusted brands. A brand doesn't show up in your EBITDA. If you trash a brand quickly enough by cutting costs and quality, some institutional sucker will buy the company because they haven't clocked that the current EBITDA is elevated due to asymmetry in how quickly the costs come off and how quickly the revenue falls off after burning the brand.

They've simply valued the company wrong.

[mcphage]

> That's only possible if the financial system is valuing things systematically incorrectly.

Well… yeah. I mean, it seems clear that the market is pretty bad at valuing companies. At the very least, valuations are based on a combination of (a) measurable attributes, and (b) vibes. (a) will always be incomplete, and runs into all of the same measurement problems that everything else does. And (b) is really unreliable.

Plus, PE companies are not especially interested in long timelines, whereas companies can eventually provide a lot more value that they’re worth right now.

And that’s not even getting into situations where they own enough of the market to not care about losing customers.

[cameronh90]

> PE companies are not especially interested in long timelines, whereas companies can eventually provide a lot more value that they’re worth right now.

The value of a company does include the value of future returns. The standard model is net present value. In theory, if the market is valuing those future returns correctly, a PE fund would probably just do the value maximisation through investment and genuine business rationalisation, and skip the financial engineering phase of the cycle. I believe this is actually what most PE managers would prefer to do. They generally don’t actually want to burn their efforts for a short term fake valuation boost. They are still people after all. It just seems to be what the market wants them to do, and they prefer money.

> the market is pretty bad at valuing companies

The market has always been bad, but probably more randomly bad, historically. Different people had their own finger-in-the-air methodologies and an estimated market value of a company had a lot more random noise around it.

The issue is now that ~every large institutional investor is valuing companies in the same wrong way, which creates opportunities for, essentially, an arbitrage between reality and their dumb models which these types of PE funds are exploiting.

It also creates systemic risk to the financial system. When everyone is making the same mistake, “independent” market participants aren’t really independent. This is in essence what any bubble is, but usually isolated to people misreading the fundamentals of a particular sector. If the techniques behind financialisation are themselves a bubble, however, we could be in for one hell of a pop if the market realises. Like when the market realised they’d been valuing subprime mortgage books wrong in 2008.

[samat]

Language is the house of the being

I believe you are using the wrong language

> some institutional sucker will buy

They are committing fraud in the high trust society. Literally sucking blood from our kids and grandkids who would have to rebuild, if that’s even possible

[everybodyknows]

> some institutional sucker will buy the company

What sort of institutions would try to take on operating such a business? And when does word get around, and the pool of suckers dry up?

[lmm]

> What sort of institutions would try to take on operating such a business?

Essentially anyone - other PE funds, competitors merging, the general stock market if you take it public. And they're not wrong want to buy it - there's a valuable business there - they're just bad at assessing the right price.

> And when does word get around, and the pool of suckers dry up?

One born every minute. And it's hard to even notice you're being taken for a ride as opposed to mismanaging the business you bought or just being unlucky.

[freejazz]

>That's only possible if the financial system is valuing things systematically incorrectly.

...have you looked around? Some of the biggest companies in our economy basically just serve ads...

[mint5]

“ In principle, I don't think there's anything wrong with this. All investment expects a ROI over some time horizon”

Huh? Why is there nothing wrong? Yes they wouldn’t make the investment if they didn’t think they had a way to get ROI, but how does that entitle them to one at any cost or make it necessarily moral?

As an extreme example, If I invest to create a company that is clearly exploitive and addictive, nothing is wrong in principle and I’m entitled to my roi?

[cameronh90]

Bringing morality into it opens a whole can of worms that I don't think we have the tools to answer.

My view is companies don't have a conscience, and any expectation that they are going to independently act with moral righteousness is unrealistic. Any perceived conscience is either for marketing (green/pinkwashing), or the sum of the morals of their owners multiplied by their willingness to exert any moral authority over the company.

Besides, if you try to imagine a company having an independent conscience, what even would that conscience be based in? I'm vegetarian and think it's immoral to eat meat, but obviously I'd be insane to expect companies to divest from meat based on my peculiar moral position.

In most cases, people do not exert any moral authority over anything they own. Do you actively select your pension investments based on your morality and vote in the shareholder meetings? If you do, I'm genuinely pleased and happy that someone is. But the reality is most people don't give their investments any thought beyond "line goes up", so companies end up acting as ROI maximisers.

So: the main way we enforce morality on companies is ultimately the government. If you want companies to act morally, you set the rules such that an ROI depends on following our democratically agreed set of regulations. Maybe that even harms economic growth but we still consider it worth it (which is typically how we think in Europe, but look at our economies are doing!). However, the company and its investors are still acting as ROI maximisers.

[mint5]

That is a baffling response, no one suggested corporations have consciousness.

The poster said “I don’t think there’s anything wrong with this” are they a corporation? If they are, apparently they do have consciousness because they say “I think”

And yes some people do in fact try to vote with their dollars. Canadians are doing it plenty right now for an easy example.

That companies’ sole purpose is to maximize shareholder value, usually near term, is basically a toxic social construct and fairly recent. It’s not grounded in anything other than greed.

[alexpotato]

> By year 3 they start the squeeze, layoffs, asset selloffs (stripping), and lowering quality, raising prices. That is where the real teeth of wolf are shown.

To play devil's advocate:

Doesn't this also open the market to new entrants?

e.g. young person looking to start a HVAC company in the old days couldn't compete with the established firm that already had contracts and the local market wasn't big enough for two players.

If the established firm gets bought by PE and driven into the ground, wouldn't the newer more nimble firm now have a better competitive market position?

[the_sleaze_]

As long as customers choose services based on quality.

The HVAC for example - the large firms around you do not run HVAC/plumbing/electrical, they run marketing companies that happen to schedule and bill H+P+E service appointments.

That being said I've never heard or encountered a single services company in the US that can't find business, in fact it's the opposite. They're trying not to drown themselves in front of a fire hose.

[quickthrowman]

> The HVAC for example - the large firms around you do not run HVAC/plumbing/electrical, they run marketing companies that happen to schedule and bill H+P+E service appointments.

Maybe if you’re talking about the small residential market, that’s not where the money is.

The large HVAC/Electrical/Plumbing contractors in my area all perform their own work, including the one I work for. Large contractors do commercial and industrial work, not service calls for homeowners. Doing service calls homeowners sounds like a nightmare, personally.

Bain Capital just bought Service Logic which is a holding company for HVAC contractors. They own a couple of the local HVAC shops and they all have their own PMs, sales, estimating, and field staff.

[mbesto]

> As long as customers choose services based on quality.

If the market doesn't reward this then maybe quality isn't important to the customer. Could be price, location, availability, etc. - PE can absolutely create that value even when they roll up 70% of your local HVAC market.

[donmcronald]

I think part of it is that as the incentive for new entrants goes up, some of those entrants are downright awful. So, there’s a risk of getting someone terrible, the reward of getting someone awesome, and the existing choice of getting predictable mediocrity.

A lot of small business owners in the trades are pretty bad at the business side of things, even if they do great work.

[roenxi]

Yes, if it is possible. The issue when economic strip mining becomes the best strategy are usually from somewhere deeper in the system. It wouldn't be a shock if the root cause was some inane regulatory decision that means the market isn't being allowed to reach a sensible equilibrium.

[cyberax]

A lot of markets can't support more than a couple of competitors. And in many cases, you can't easily open a new company because of upfront expenses. E.g.: an emergency room.

[FireBeyond]

> And in many cases, you can't easily open a new company because of upfront expenses. E.g.: an emergency room.

Let me introduce you to the Certificate of Need.

If you want to open a new hospital or facility like this in a town, you need a Certificate of Need from the Department of Health in your state. This ostensibly shows that there is a need for your facility because it is underserved. In actuality, it asks your competitors to say whether they'd reduce services or close beds if you opened your facility. While there is some community research etc., a lot of it comes down to "do your competitors think they can stay profitable enough if you open up shop?", and if they don't, no CoN for you.

[alexpotato]

This is true but to use your example of an emergency room:

It's not uncommon in more rural areas to find a business that is essentially "more than an urgent care but less than an emergency room". e.g. they aren't doing trauma surgery but they can deal with broken limbs, severe lacerations etc that an urgent care couldn't handle.

My point is that while it's true that there are "step functions" in certain services, this is not always the case.

[bell-cot]

When it's an essential service for "everyone", and the economics make healthy competition unworkable, the traditional solutions have been municipal ownership and publicly regulated utilities. Those include Fire Departments, Water & Sewer Dept's, Electric & Gas companies, ...

[alexpotato]

> Those include Fire Departments

I remember watching a discussion about privatizing the local fire department aka the town pays a private company to run the fire department.

Opposition folks use the line:

"You used to have a shield on your building that denoted you had paid for fire coverage. The old fire departments would drive past the unshielded buildings while fighting the fires."

(this is, of course, no longer the case but love to mention this discussion when ever privatization comes up)

[FireBeyond]

This is fairly recent. And of course even if you have coverage, there's no real guarantees.

Grants Pass, Oregon, has privatized fire. And there's three companies that service it, one is good, one is alright and the other... well, I was going to tell you to watch a YouTube video but after years its been deleted. Some hints: Title "Worst Fire Department in America". They roll up to a fully involved house fire with two engines that are 50+ years old, are hamstrung by the fact that they are staffed with kids in jeans and wildland coats (bunker gear, let alone SCBA, are nowhere to be seen), actually getting water on the fire is an issue because 1) someone has to sit in the cab to keep their foot on the throttle to give the pump any power (this "notmally" is controlled from the panel) and even then the pump is screaming at 3000+ rpm about to die any minute (this is maybe 2, 2.5 times what the pump runs at), there's no sense of strategy.

They call for mutual aid from Rural/Metro who shows up, helps them get a little ground on the fire, only to be told to leave the scene (so the company doesn't have to pay them) and the fire predictably takes over. It was horrific.

At least, though after too many of these calls, the Oregon Fire Marshal actually de-certified this company.

[cyberax]

> (this is, of course, no longer the case but love to mention this discussion when ever privatization comes up)

But this very thing happened not that far in the past: https://www.nbcnews.com/id/wbna39516346

[Spooky23]

That happens, bro. Pretty common in some places.

[xboxnolifes]

Unless the new company ends up more competitive than the pre-PE company, does it matter? Thats not a good outcome, thats just a period of bad time between 2 good times.

[mmooss]

In this case, why doesn't someone else see a market opportunity and sell competing tools for less?

[nwatson]

Medium / large companies won't take the risk on smaller operations selling a new focused tool unless it's a major pain point. They'll pay more for less risk, assuming the PE-managed company will go out of their way with account management to address all their concerns.

AVGO/Broadcom in some way acts like a big PE firm, rolling up other software companies, integrating them into their huge suite of offerings, ousting the new integrated offering's competing tools from the customers environments and selling the increment, and cutting off smaller customers not willing to subscribe to the huge suite.

[jandrewrogers]

Companies have finite attention. Taking on the risk of switching tools often has a higher cost than paying more for the existing tools. There is a significant opportunity cost offsetting the savings. Trying to compete on price with a tool a company already uses is usually an exercise in futility.

A core function of enterprise sales is figuring out where that opportunity cost threshold is. PE often targets industries that are currently (in their estimation) priced well below that threshold.

[mikestew]

Because capitalism and customer brand awareness don’t work like your Econ class told you. There is a lot more nuance, starting with the inertia of customer’s awareness of brand reputation. But don’t listen to my ramblings, this comment in this thread does a better job than I would:

https://news.ycombinator.com/item?id=48295440

[convolvatron]

sure. not just that. certainly part of the issue is that the market is not perfect information.

but there are plenty of other reasons as well.

starting a new venture, whether from the foundation of an existing company or doing a new one takes investment and carries risk. maybe the sales relationships the existing company had were the results of decades of investment. maybe the ownership or the employees had a specific skillset or maybe they used tooling that could be bought easily anymore. maybe they had an important and established relationship with suppliers.

maybe PE moved in because the business was viable, but not really growing and there isn't sufficient upside to motivate investors.

or the business only existed because the owner just loved that thing so much and funded it at a near-loss out of family money.

or the business was based on a huge capital investment or ownership of property in a key location that happened 20 years ago and isn't possible to replicate because of changes in the environment.

there are 1000 reasons why these things aren't spherical cows.

[yardie]

Their competitors did exactly that!

Moved right in with the same old price so I didn't even have to expand the budget and they threw in training for free!

[Melatonic]

Seems like their might be an opportunity to start a private equity that buys extracted software businesses for pennies on the dollar and then revive those businesses with actually valuable (to the customer) practices

Or maybe by then nobody trusts the name of the original company and it's just useless

[gopher_space]

Sharp fast-movers poached the extracted software business' last remaining reliable clients and clueful devs while you typed that post. It is now worth its weight in Herman Millers.

[hermitcrab]

>One of the tools we use

Does it begin with A and end with X? ;0)