If they fail, we suffer as those businesses we depend upon fail and disappear. Everything from big national chains to your local doctors office can be destroyed in this way.
But if private equity succeeds, we also suffer.
Private equity is… private. Normal people have our savings invested in public markets. We can’t easily invest in private equity, and we shouldn’t because it’s too risky.
But imagine a world where every strong business goes private and only failing businesses are public. The wealthy take everything private so they don’t have to share the wealth.
IMO any business over a certain size should be forced to be public and no option to go private again.
There's many flavors of private equity, but the predatory ones tend to buy businesses that are slowly failing, and turn them into something that hits a brick wall and completely fails.
If it was a mostly well functioning business with good prospects, likely the current ownership would be less interested in selling or a sale to similar ownership could be made.
Dental clinics owned by a dentist sell to a new dentist all the time. If they're being sold to PE firms, it's because the business of being a dentist is changing and not in a good way. Dental insurance is a hassle and doesn't pay well, finding customers can be hard without accepting insurance, hiring staff is hard (at least in my area), young dentists may not have the capital to buy out retirees, new equipment is expensive but patients like being wowed.
That's the opposite of what happens with PE. PE firms don't buy fairly priced, well run businesses. They (typically) buy underpriced, poorly performing but cash flow heavy businesses that would benefit from leveraging up and making operations more lean.
Think about it, if a business is fairly priced and well run, PE firms have no incentive to buy it because where do they generate returns?
I don't like PE firms but there's no doubt that they force businesses to operate better, and ultimately that benefits people like you and me who have retirement savings, because PE firms aren't getting their money out of thin air.
PE has access to business models unavailable to the original owner.
- Buy all local dentist clinics at an enticing markup then increase rates.
- Buy businesses and migrate them to tech where the PE firm holds an advantage. For example, a PE firm that runs its own payment gateway.
- Buy a business that complements a larger business to reduce churn or increase sales.
They do not force businesses to "operate better." They force businesses to operate at a higher EBITDA, purely for their own benefit. Sometimes by chance this results in improvements for the employees or customers, but more often it ultimately results in a worse experience for both and the eventual demise of the business after the PE firm has taken sufficient profit to generate its target returns.
Until the definition of why a business exists changes, you can purely measure a business success over how much money it makes for the owner, legally.
Should that be the case? No, I don't agree. But as it currently stands, that's how things are.
Better ROI: yes!
Better Customer Prices: No!
Better Business Operations: Yes.
Better Customer Experience: No.
Better Profit Margins: Yes.
Better Care: No.
Better Shareholder Returns: Yes.
Better Employee Compensation: No.
Financial entities you rely on (pension funds, insurance companies, and universities among others) invest, and you may be getting access yourself thanks to Trump!
> IMO any business over a certain size should be forced to be public and no option to go private again.
What on earth is the rationale for this policy? If you build a successful company, you're required by law to give up control?
Unfortunately, there are a lot of armchair spectators that don't understand how the economy actually functions; and they've got brigades that go after people that do actually know who speak out (based on certain keywords).
As a result, its totally not worth talking about since the point of no return has largely already come and gone and we're stuck in a hysteresis trap.
People don't see how the things we are seeing today were predictable outcomes given choices made at the money-printer level (i.e. Fed/Private Banking).
No deposit requirement, is no reserve money-printing. It always fails, but I'm sure someone will say... but this time will be different. Needless to say, any discussion on economics is basically flame bait these days with a lot of delusional people on both sides of the aisle.
Fractional Banking (RIP, Circa 2020).
They have very strong incentive because debt holders have first dibs on the assets if EA goes belly up. Equity owners (ie. PE) are the last to get paid, so it's very much in their best interest that EA doesn't even lose a tiny bit of money, because such losses are magnified through leverage.
And thanks to the current administration you will soon be able to direct 401k money to them.
It's hardly "backdoor" when pension funds and other institutions could always have bought private companies. If anything the recent shift to ETFs and passive investing is a move in the opposite direction. In the past such institutions would have managed their portfolios in-house, ie. private equity.
They're trying to sell assets bought with cheap money and a lower acceptable rate of return to buyers with higher financing costs and a higher risk free rate of return.
They're going to be holding onto those assets for a while, until they either accept that they need to eat the loss to get liquid or their paper losses are inflated away.
Please keep being greedy. You know where this is going.
But maybe that's an unfair point of view. Is there a steelman case to be made for PE?
I listened to https://freakonomics.com/podcast/are-private-equity-firms-pl... but didn't come away with a rosier view of them.
Defined benefit pension plans shouldn't be a thing in the first place: they're too risky for workers, employers, and taxpayers alike. All pensions should be replaced with defined contribution plans like 401(k) where assets are safely held in individual named accounts.