The irony is that PEs exist largely because of pension funds. So to sum it up (not so nicely) we are transferring value from our current standard of living to pay for retirement checks for our old folks.
Pensions fund a significant part of PE and they do so because they need around a 7% return in order to look solvent. If they do not have the higher PE returns, they basically go out if cash in 10 years and everyone would scream bloody murder. But with the higher returns from PE they have 40-50 year runways and people can pretend everything is fine.
So PE firms exist to extract value from basically all high quality goods and services to show a high ROI to prop up pensions. They extract wealth by buying up companies and gutting the “extra” things in them - for luxury goods, it’s quality, customer service and warranties (like my venta humidifier or reformation dresses), for services it’s stripping the underlying excess risk management and quality control. One can argue that PEs make the business more efficient but in my opinion they just turn worker or consumer related benefits into profits (stakeholder and business benefits). It’s a transfer of value from worker and consumer to business and asset holders at a massive scale.
But sadly it’s not some evil dudes at the top doing this transfer, the market force behind it is because we promised old people way too aggressive paychecks when they retired. Pensions need to invest massive amounts of money into higher rates of return and PEs just happened to be the medium that is the most successful. Sure the people running the PE firm extract a ton of value drying up all luxury quality and robust services from the daily lives of working families, but their take home is a tiny fraction of the wealth they extract (but yes they take home a massive amount of wealth for an individual). Instead the wealth extracted shows up on a 1400$/m for some old person probably living in a retirement home somewhere.
> The irony is that PEs exist largely because of pension funds.
The irony goes way deeper than that.
A large part of PE clients are university endowment funds.
Harvard for instance has close to $60B in its endowment fund, 40% of which is invested in PE. At this point, Harvard is more an investment fund, with a university as side business.
I don't believe that's ironic. Harvard and other "elite institutions" are the places with massive endowments, not state colleges or anything. Frankly the more I think about it the more it's nothing particularly interesting, just a fractal representation of the privilege of wealth as far as you want to drill down.
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.
I wonder if this creates opportunity for spinning up competitors to these PE owned companies. If they are underinvesting in their products in order to extract value eventually their offerings will not be competitive.
This reads as apologia, blame-shifting, "I was just following orders".
People have to eat. They need water. They need a roof over their head. Nobody has to buy out all the veterinarians in an area at rates they can't say no to, have them sign non-competes and them jack up all the prices by 300% because, hey, you now own all of them. Nobody has to buy up all the trailer parks, which are normally peopple's last stop before being homeless, and then jack up the ground rent because, hey, where else are they going to go? Nobody has to buy up utilities, spend big on capex because legally you can pass on that charge and effectively double people's electricity bills.
Hannah Arendt coined the term "banality of evil" [1] decades ago and, in all honesty, I think it applies to the predatory nature of PE. It also goes for working for Palantir and a bunch of other companies. "I need to pay my student loans", "I'm just doing data science", "I'm just writing AI software that identifies when somebody is home" and on it goes.
PE serves no useful function in society. It's pure rent-seeking and incredibly predatory in many cases. ~15 years ago, there was a story about Goldman Sachs invented a derivative on the price of wheat and then essentially conspired to jack up the price of wheat [2]. This wasn't just manipulating a ticker on a Bloomberg terminal. It had real-world consequences. People starved and died because of this decision.
Yet I'm sure there were people who argued "I'm just doing legally allowed financial engineering here".
1. If you assume that P.E is uncorrelated/has a low correlation to the stock market (subject of many years of diatribes), then you decrease volatility of your portfolio by adding it.
2. Because a pension fund has a lot of years until they need start to paying out, then it is natural for it to attempt to harvest the illiquidity risk premium.
3. The "high rate of required rate of return problem" is really a defined benefit problem. A DC plan can (and probably should) just be in mostly straight indices unless it's so big it can negotiate a good fee with asset managers for other classes.
> we are transferring value from our current standard of living to pay for retirement checks
Isn’t this just what happens when you have an inverted pyramid (older population is larger than the younger population)?
> One can argue that PEs make the business more efficient
I’ve never seen it (I agree with you). To improve something they’d have to understand the business and do a bunch of work. Mostly they show up at quarterly meetings and want spreadsheets that measure some number that will go up (regardless if that number means anything).
I was thinking that Covid and widespread antivaxxer mentality would have.
But no. This will be the latest ladder-pull by the boomers and silents to extract the last bit of wealth from all the younger generations. And this will impoverish gen-x and all younger generations even more so than we already are.
lol we know that the vaccine did not stop the spread and didn’t even prevent contraction. I was double vaxxed but they did have some things correct that we were in fact lied to about.
It lowered the chances, and in case of getting sick it also massively lowered the chances of getting the worst side-effects, exactly like any other vaccine does.
It's a shame that even highly educated populations do not understand a basic fact of immunology.
Everyday I am infinitely grateful I have the ability to understand nuance, and the mental firepower to be able to comprehend data coming from sources rather than tiktoks, twitter, and hyper-partisan news orgs.
No one ever said the vaccine would prevent transmission. What they said was that it !could! prevent transmission. But no one would know before studies were done. What they did say is that it would lower mortality rates. Which it did in fact do. But the factors of transmission and spread were dice rolls. And everyone with first hand knowledge knew that from day one.
But, you are in fact correct, you were lied to. But not by anyone with knowledge of the vaccines, but by the grifters you hold up has being "a beacon of truth". The grifters who read "Vaccine has a chance it could slow or stop transmission" and turn around and say "They are promising it will stop transmission!" just so they can tear it down later as "another victory for TRUTH!".
Exactly. IN cases of national or world-level event, governments and government related bodies (WHO) will do whatever they can as not to cause a widespread panic. And if that means lying, they will absolutely do that.
A world-level 6 week pause would have burned covid and a whole lot of other diseases out. But no. Poor capitalists need their 3rd yacht, 13th vacation home, etc etc etc.
As for me, my SO worked in health care. And Covid is a SARS. We have decades of effects and response. The shit's airborne. WHO knew that. CDC knew that. But they lied and lied and lied.
We take our healthcare in our own hands. I'll critically listen to the "experts" and deal with med doctors for prescription drugs. And Im definitely interested in my own manufacture of pharms https://fourthievesvinegar.org/ . But yeah, the wider and general the message, the more propaganda it likely is.
And we also have a good stock of PPE now, including a few tyvek suits. And everclear is 95% alcohol and $30 here for a handle. Best sanitizer you can easily acquire and food safe to boot.
EDIT as comment to WarmWash:
No. The WHO and CDC lied about Covid being an airborne infection. They refused and refused, up to then redefining what an "airborne infection" is.
Covid is a SARS. Airborne. SARS requires BSL3 to handle properly. https://en.wikipedia.org/wiki/Biosafety_level#Biosafety_leve... "Biosafety level 3 is appropriate for work involving microbes which can cause serious and potentially lethal disease via the inhalation route."
I dont need international experts to tell me a stream of bullshit, when I can look at the type of disease and go "wellll fuck, airborne. time to wear masks outside the home and no parties or events. and go to store when its not busy."
Was Covid as bad as SARS? No. But is SARS response something that can be compared to what we should have did for Covid? Hell yeah.
Huh, that somehow reminds me of Crassus from Rome [1]
> The first ever Roman fire brigade was created by Crassus. Fires were almost a daily occurrence in Rome, and Crassus took advantage of the fact that Rome had no fire department, by creating his own brigade—500 men strong—which rushed to burning buildings at the first cry of alarm. Upon arriving at the scene, however, the firefighters did nothing while Crassus offered to buy the burning building from the distressed property owner, at a miserable price. If the owner agreed to sell the property, his men would put out the fire; if the owner refused, then they would simply let the structure burn to the ground. After buying many properties this way, he rebuilt them, and often leased the properties to their original owners or new tenants.
>Upon arriving at the scene, however, the firefighters did nothing while Crassus offered to buy the burning building from the distressed property owner, at a miserable price.
Article doesn't really dig into the angle I personally find most horrifying, strip-mining social capital.
In my area PE is gobbling up mom-and-pop apartment complexes, plumbing companies, restaurants, and generally making customers and employees alike pretty miserable.
Hard-working founders should be able to cash out, but there has to be a better system than this one. Succession, maybe. Not that we should push an unmysterious destiny on our children, but maybe more ought to consider pulling one?
> Hard-working founders should be able to cash out, but there has to be a better system than this one. Succession, maybe.
The large PE buyouts that came from the ridiculous ZIRP period could deliver better financial stability than handing the business down.
I know two families with businesses that attracted huge PE offers in the past few years. One of them took the buyout and the family members slowly left their jobs at the company because they effectively been early retired by their buyout.
Now the kids are looking at new businesses to buy and start for themselves with this new financial freedom that has come to the family. One of their considerations is starting another business in or around their old line of work that was sold off. They have to wait until the contractual non-compete expires, but if the PE owners are really making both the employees and customers miserable then it becomes a golden opportunity for experienced operators to come in and run a good business in the vacuum. Even many of the old employees have expressed a desire to join.
The bad PE phenomenon buyout is annoying, but businesses that become miserable for the customers and employees are not stable long-term businesses. When they decline because competitors show up to do a better job and retain better talent, it becomes a transfer of money from the lenders to the old owners and an annoying churn in the local business scene. As we see more of these failures, the willingness of banks to lend for these buyouts will go down.
I think part of the problem with the succession idea is that a lot of people in these positions worked these hard jobs to try and give their kids a better life. They encouraged their kids to go to school for their passions and now those kids are in careers far removed from what their parents did.
Instead of succession, I wonder if there is a way to make it easier for these people to sell their company when its time to retire to someone who is looking to start the next step of their career. A lot of software engineers joke about becoming farmers, but if they could instead make an easy transition into a small business by buying a small business, we could prevent PE from raiding things.
The vast majority of people can’t just go out and buy a machine shop or laundromat and then start running the business. It’s a risky asset, not like a house where you put down 20% and any bank will loan you the rest. I’d love to own a small franchise restaurant or something in my town but they cost millions that I don’t have.
And that’s before you even make it to the question of “can the person that manages to buy it actually live off of it as a lifestyle business?”
This scene from Ubik has been coming back to my mind very often recently:
The door refused to open. It said, “Five cents, please.”
He searched his pockets. No more coins; nothing. “I’ll pay you tomorrow,” he told the door. Again he tried the knob. Again it remained locked tight. “What I pay you,” he informed it, “is in the nature of a gratuity; I don’t have to pay you.”
“I think otherwise,” the door said. “Look in the purchase contract you signed when you bought this conapt.”
In his desk drawer he found the contract; since signing it he had found it necessary to refer to the document many times. Sure enough; payment to his door for opening and shutting constituted a mandatory fee. Not a tip.
“You discover I’m right,” the door said. It sounded smug.
From the drawer beside the sink Joe Chip got a stainless steel knife; with it he began systematically to unscrew the bolt assembly of his apt’s money-gulping door.
“I’ll sue you,” the door
said as the first screw fell out.
Joe Chip said, “I’ve never been sued by a door. But I guess I can live through it.
> Hard-working founders should be able to cash out
Why? Operating a successful business should be remunerative on its own, or else it's not successful. Owners who don't want to do it anymore can let it become worker owned. If they don't want it, it can dissolve. What else do you need? The very concept that the end of a successful business is a big payday for its creator is itself the poison here. There is no end just another workday, success is ongoing not final. This is natural and correct.
When my parents started farming they had about a half dozen large loans for the base farm, land, equipment, buildings and an operating loan to purchase seeds and other inputs in the spring.
When they retired they didn't have any money in the bank besides the proceeds from their final harvest, but all their loans were paid off. That's where the profits went -- paying off the loans.
The farm was their retirement savings. They sold it off for high six figures, and that's what funded their frugal but comfortable retirement.
The neighbor's son bought the farm; I hope he's pretty much paid off the loan he took out to buy it.
But that's how it is supposed to be. You "just" need to have a system that incentives banks and small entrepreneurs to take on that risk, and makes it not a good investment for PE.
I generally agree, but this point of view shifts the blame from one big, evil, soulless PE firm to thousands of small shops owners that just wants to "retire comfortably". It's not easy to sell because one can easily sees oneself as that small owner, but not as a big evil PE.
It's the same with gentrified zones: yes there are some dark patterns going on as well, but mainly is previous, smaller owners that want to make big bucks by selling to someone with money from outside rather than someone local like themselves for less money.
My guess is owner-operator selflessness is a key ingredient in a lot of beloved small businesses. I don't know for certain that the winning personality for getting a business off the ground on all the bad days is the same one that raises rates proportionally with their success.
So it becomes all-or-nothing. It's my friends and neighbors when I'm working, when I sell-out it's purely business. No in-between.
I agree. It's a major problem that people who are usually, not always, already very well off decide to do a final "fuck you I got mine" and sell their business to a company they damn well know is going to strip it for all it's worth.
Statutory antitrust regulation would be fantastic. Instead of litigation, the regulators, corporations, and shareholders know when a business must split or divest. The firm files a plan, it gets approved, everyone wins except monopolists.
free market capitalism will always end like this though. the end goal of capitalism is the consolidation of all things into a megacorporation or oligarchy that controls everything, creates nothing, and earns infinite money
Why is this downvoted? To me, it seems like a self-evident conclusion. Even the supporters of the current system would probably agree with it. When you have a system that encourages endless growth at absolutely all costs, while placing no limits at the amount of power a single entity can hold, what other outcome can there be but the biggest players absorbing everything into themselves and using their influence over people and governments to guarantee their dominance?
These mega-strong players always kill themselves and collapse. We can see this on the global geopolitical scale (which fundamentally acts as a true free market), where all the empires have always fallen.
The stressing part is when they are at their peak, so people would like to use regulation to short-cut right to the collapse part.
The only example we have a true free market victor that hasn't collapsed is humans, who have totally and completely dominated all other life on Earth, but man, it's certainly not looking good for us right now.
But does that collapse happen because of some universal axiom about controlling humans, or were those empires merely limited by what was possible in their era? This is the first time in history we have so much military power, ways to exert influence that's truly world-spanning, the most sophisticated technology and the most thorough surveillance ever - all at the same time. Whatever barrier there might be, who's to say that today's megacorporations won't be able to push past it?
We haven't had a free market in the United States in awhile. It's public-private partnered market fixing. Which is good for the consumer, many times, though not all the time.
Is there a difference in terms of outcomes? In the final form of a complete 'free market' without a government, the biggest entity would simply replicate the same levers of power that a government has through private militias, issuing scrip, having their own private courts and so on. But, since the US has a powerful government, it's much cheaper, simpler and more stable for them to just buy out as much of it as possible and use the same power through a proxy. Admittedly, the US government is not completely controlled by them, so it could still get much worse.
In my experience, most self-proclaimed "capitalists" either lap up the scholastic propaganda that capitalism is the 'bestest' economic system in the world, or are a real capitalist and don't have to give one fuck about what others say.
And most of these types NEVER read past, say, page 20 of https://www.gutenberg.org/files/38194/38194-h/38194-h.htm , Adam Smiths treatise on capitalism. Here's a few failures that Smith wrote back in his initial treatise in 1776. I think so far, we're failing every one of these, and basically speedrunning all the terrible warnings Smith wrote about as accomplishments.
Gross inequality was even mentioned there as something to significantly avoid. Book I, Ch. X, Part II; ~p. 50
Principal-agent problems in joint-stock companies. Managers of other people's money "cannot be expected to watch over it with the same anxious vigilance" as owners, leading to waste and negligence. Book V, Ch. I, Part III; ~p. 312-313
Mercantilist policy distortions. Protectionism, export bounties, and import restrictions enrich narrow merchant interests while reducing national wealth by intentionally misallocating capital. Book IV, Ch. II-V; ~p. 183-213
Underprovision of public goods. Markets fail to supply infrastructure (roads, bridges, canals, harbors) and institutions that benefit society broadly but yield no direct profit to private actors. Book V, Ch. I, Part III, Art. I; ~p. 303-305. https://www.independent.co.uk/news/world/americas/us-cities-...
Dehumanizing effects of extreme division of labor. Repetitive specialized labor "renders [the worker] as stupid and ignorant as it is possible for a human creature to become," impairing civic and moral capacities. Book V, Ch. I, Part III, Art. II; ~p. 324 . Even in the 1800's this got so bad that Karl Marx wrote about this in both of his critique of capitalism AND the communist manifesto.
Merchant collusion and monopoly power. Smith warns that "people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices". Book I, Ch. X, Part II; ~p. 54 . Hello, eggs, meat packers,oil products (gasoline), grocery chains, electronics (RAM), health care. Collusion after collusion, and almost no enforcement.
Im not communist, and probably not socialist. But its clear as day as to the failures of capitalism. And as a stopped clock is right 2x a day, capitalism does handle some problems better than any previous system. But we can do better. Lots better. But the entrenched power holds on to capitalism as fervent as a religion, and not dispassionate analysis.
How will that work - for example Y Combinator classes. They cannot be acquired? What about acquihires? Cant stop that - employees have their own agency.
> How will that work - for example Y Combinator classes. They cannot be acquired?
For the record: national economic policy shouldn't revolve around Y Combinator classes and similar startups.
I'm totally fine if it turns out a sensible antitrust policy completely destroys the acquisition exit pathway for tech startups. I'm not saying one will, but I'm saying that's a cost I'm willing to pay.
YC startups could just become mature businesses. Nothing wrong with providing a good service, earning a good profit, and employees maturing into stable careers.
I think the really important question is HOW this will happen. If you mean for the state to buy them at fair market value, nobody will object to that, not even if it closes the door to private equity.
But that's not what you're talking about, is it?
How about doing what America used to do? Provide seed funding for a new fire truck company in trade for condictions. Can we agree to do that? Fund 3 companies to make fire trucks, fast-track whatever certification and approvals they need. Create the companies we need, risking (and in fact expecting to lose) a bunch of the capital used for this.
The OP explicitly answers this: go back to pre-80s antitrust policy. Companies can be bought and sold but not if it creates concentrations of economic power that allow them to dictate prices to vendors or customers.
And they want to do it again and enforce anti trust laws? I don't see any contradiction here. Break up faang and keep a close eye on all these acquisitions the ai companies are doing and why they need to own package management and code editors and etc.
Yes, breaking up things wasn't bad, it was the completely lax failure to continue this action and to regulate corporations that got us rafts of stupid ass legislation culminating in citizens united. "Too big to fail" companies are just government entities that are not regulated properly.
> It did not work though. Bell and Standard Oil are notable examples. What else?
That's pretty unfair. IIRC, Standard Oil was on of the companies that was the impetus for antitrust law (and broken up by it), and AT&T was broken up (famously) in the 80s.
Basically, your "argument" is a troll or a deep and basic misunderstanding. Especially in the case of Standard Oil. You're basically saying the law doesn't work because it didn't work before it existed (Standard Oil became dominant in the 1870s or 1880s and the Sherman Antitrust act was passed in 1890).
1. If you are proposing something even stricter than previous antitrust rules, great. But getting back to antitrust itself is actionable is step 1.
2. You don’t have to prevent every case before it happens so much as just stochastically go after the worst ones to make it less economical for people to go take on debt to have huge swaths of consolidation. Letting the market work, after pricing in that egregious monopolies will be broken up, is kinda great and better than minutely scrutinizing every tiny deal for long-term consequences.
> Should Microsoft and Amazon have been able to buy Anthropic and OpenAI 5 years ago?
Antitrust enforcement can be done retroactively as well, if it appears that a large company abuses its financial firepower to undercut competitors or a marketshare gets too dominant.
It was absolutely actionable and implemented as policy for decades, what are you even talking about? Your phrasing pretends this isn’t exactly how antitrust enforcement worked before the much more recent approach began.
You're alluding to some second order effects which are real but also able to be dealt with, and have been.
Montgomery Ward thought it was "too big to fail" and too powerful to regulate.
So, what happened?
If the US government wants to, and it has in the past, it just takes your business at gunpoint.
4 soldiers walked into the ultra-conservative owners office and made him leave. Two of them picked up his arms and legs, took him outside, and deposited him on the sidewalk.
> a major U.S. CEO being physically evicted from his own company by armed troops became one of the most famous news photos of the home-front war
If the acquirer has too big or dominant position already in the specific sector no. They should not be able to sweep the board of all companies doing single thing.
If the acquirer attempts to acquire a startup (regardless of investor) for anti trust reasons, or there are anti trust concerns, the M&A activity is disallowed by regulators. A recent example is Figma and Adobe.
What definition of success are we using that having over $7 billion in net income after expenses in 2025, and nearly $2 billion so far this year, is "doing very poorly"?
It really is sad that any disagreement with “pe is bad” means i am concerned trolling. Ever consider the guidelines are actually vague which is why usa keeps failing in attempts to enforce?
Don’t confuse the nature of the feedback you’re receiving here. Your comments in this thread are so obstinate and so far from this forum’s standards of good faith argument that community members can’t help but perceive you as a troll.
Nobody likes this state of affairs so we are asking you to stop strawmanning and start steelmanning the posts you are responding to.
You are clearly not dumb, so stop responding to the dumbest possible and easiest to dismiss interpretation of other people’s comments and instead go deeper
> Ever consider the guidelines are actually vague which is why usa keeps failing in attempts to enforce?
Your cause and effect is wrong.
The US doesn't fail to attempt to enforce, the gov representatives often get paid to not enforce by said corporations who have been allowed to put money into their campaign for election/reelection.
I am not an anti trust enforcer or scholar, so I'm going to defer to experts in the field: Lina Khan, Matt Stoller, etc. That is the point of experts in a domain.
Quite clearly the word "consolidation" is referring not to acquisitions, but to M&A activity that achieves a certain level of, you know, consolidation.
Generally you don't hold a market dominant position in any sector that anti-trust regulators care about at 15 employees?
Frankly this stuff is impossible to talk about in the abstract. The details of every individual case matters. If you're actually curious (instead of just playing a shell game), you can go look up the types of analysis that FTC does to evaluate market dominance and whether a given transaction will excessively consolidate a market.
I simply don't understand why leveraged buy-out(LBO) is allowed in the first place. It is like paying for the company with the money from the company you are buying.
Private parties are allowed to make bad business decisions: Lenders can give loans that might not pay back. Businesses can take on a lot of debt and cash out the owners if allowed under the terms of the loan. A PE buyout isn’t even necessary to do this. The owners could load the company up with debt and pay themselves a lot of money if they negotiated the right loan terms. One of the suppliers I used for a while did exactly this, enriching the owner and then collapsing.
One correction is that it’s not like paying for the company with money from the company you’re buying, because that obviously wouldn’t benefit the sellers. The money comes from a lender and they get terms to take the business if the loan terms aren’t meant. The lenders are the effective new largest owners of the company with the PE firm being a smaller owner but the expected primary operator.
As a business owner, if you want cash today because you are done with a business. You could go to a bank and get a loan to pay dividends. This is a bad deal for the bank as you have no incentive to operate the business after you cash out the loan. A private equity firm comes in and operates the business on the model that they still keep some of the profits after the loan value.
The crappy side comes in as a customer, the PE firm can do this to an arbitrary number of firms in the area and raise prices on each/cut services. PE firms can trivially build out monopolies. Many of these monopolies will be invisible as they leave the existing branding etc. in place.
That in itself is reasonable. However governments choose to encourage it with tax systems that mean you pay less tax by increasing debt. This is the main thing that breaks capital structure irrelevance: https://moneyterms.co.uk/capital-structure-irrelevance/
> As a business owner, if you want cash today because you are done with a business. You could go to a bank and get a loan to pay dividends.
If you are a business owner you could borrow yourself using the business as security.
LBOs are much worse than that. It's like buying a rental property where the mortgage is owed by the a shell corporation that owns the property. The shell corporation, not the purchaser, owes the debt.
It's like taking out a mortgage on a house, but letting the house owe the debt.
When you put it like that, you make it sound reasonable! The house being collateral for the debt seems in a blurry way to be "the house owes the debt".
That's not especially different from the typical LLC/SPE holding structure where individual properties in a large real estate portfolio are not held directly, but rather by a single-purpose entity that holds each property and then is owned by a larger but distinct entity. You don't want an issue in a single company/property to be able to take down your entire holding company. If someone will lend you money without cross-collateralization, why wouldn't you prefer that?
If PE firm A wants to buy company C using an LBO, it could do so by having C borrow money and then A purchase C, or by creating an entity B that borrows money and then purchases C. Whether B or C owns the debt doesn't change anything meaningful for A, and it's pretty clear that you're allowed to form company B (and really hard to imagine how you'd make that illegal without effects that would be worse than current).
Yes, those exist in industrialized countries as a result of public policy decisions. We do not have 3 or 0% mortgages because that’s what the market naturally bears or produces: we have it because mortgage debt is backstopped by the state.
It’s possible to “understand” mortgages by understanding that conditions for stable home markets don’t arise by themselves—we collectively make them possible because the outcome is desired—then wonder WTF because what social function is creating conditions for private equity getting us.
In residential real estate, I think stems in large part from a desire to help people who don’t come from money to own personal real estate (which is one of the best ways to go from $0 or negative net worth to positive six figure net worth).
Not only is that politically attractive, I think it’s more good than bad as public policy.
Turning back to PE/LBOs:
Having limited liability entities (companies) also serves good public purposes. Having companies being able to borrow money also does. Having companies being able to own other companies also does. I think that’s the only three ingredients you need for the PE model to operate and I don’t think that the public is helped by barring any of those three things.
It is analogous to a mortgage, you put down X% and the house itself secures the loan, along with PMI if your equity is below 20%. The assets of the business secure the loans in the same way a house secures a mortgage.
It is not analogous because if you sell your house and the sale money is not enough to cover your mortgage you are still on the hook for what's left of the principal.
A leveraged buyout is exclusively on the purchased company's books, so if the company goes to zero the PE parent company is not on the hook for a single penny.
That varies by state. Twelve states are fully non-recourse states (lenders can’t go after borrowers beyond the loan security); in other states they may be able to, but borrowers who default on their mortgage may not be particularly asset-rich targets in the first place.
If the company wasn’t able to borrow money for itself, a wrapper company could which would still have very closely the same effect as being an asset-poor borrower.
What I don't understand is how the cost of banks repossessing these companies in case of default don't make the math unviable. Unless the company have a lot of fairly stable semi-liquid assets (like real estate) banks should be charging fairly high interest on these loans which would make most of these business unprofitable.
Which would increase the rate of defaults (if they are authorized in the first place) and in turn increase interest even further. I guess the PE is always maxxing out the leverage on every deal at _just_ the projected break-even point for loan repayment? But that leaves no room for error or changing market conditions which also increase the rate of defaults and so on.
Non-bank entities being in play is likely part of the problem. If you can sell the bad debt to some other entity say a fund that got investment from pension you win. For fund managers these things can look great on paper and that is everything that matters. Even if things do not workout they can on paper extend and pretend or take payment-in-kind. Meaning well you are short on interest payments so you just tack it on the principal.
And everyone gets their management fees until people start asking their money back...
Ah so it is related to that whole private debt markets, the loans these PE companies take are not with banks. It is related to that whole thing with Trump opening those kind of loan investments to ordinary americans and pension funds.
Most fun thing is that even if bank can't led to these sort of companies they can lend to companies that lend to them... So added fun. And well this has been going on for long time and cracks have started properly showing up more recently.
Check the other comment, apparently these loans don't come from banks, but rather from private debt markets. And most likely they don't know these loans aren't viable.
Yes, it's using bankruptcy and limited liability to extract value from companies that may well be completely solvent and functional with little/no downside or risk to PE.
Yes, this is the crucial distinction. (I wish that articles criticizing PE were framed in terms of LBOs + bankruptcy-law instead, because that's the root of the policy problem.) Corporations can go bankrupt without risk to the human beings who are owners/investors in the corporation.
Note that from the lender's perspective, the risk is the same and in a perfect-information universe could be mitigated by charging higher interest. The problem for society is the externality that the business's services get worse.
> so if the company goes to zero the PE parent company is not on the hook for a single penny.
Sounds like a problem for whoever is providing the financing. Not really my concern unless you're saying there's some systemic problem it causes like with mortgage securitization during 2007. The lender will charge a high interest rate if what you're saying is true.
It’s the shareholders of the purchased company that provide the financing, in the form of debt in the company’s books. Then they exit, and the company lays off people to service the debt, and you and I as taxpayers cover unemployment and other social harms.
It’s literally a way to extract revenue from our broader social institutions by spreading the pain across so many people that individuals don’t complain (or, in some cases, don’t even understand how it harms them).
It's the concern for the community who pays in higher prices, and the employees in their job stability.
Has everyone forgotten the social contract? We do not exist as communities to make a small number of people richer. If the trade doesn't work for all involved, we change the rules.
I (and leaders at my PE-owned company) cannot say enough bad things about private equity. How anyone who managed to make money in their life decides PE is a good investment blows my mind.
We are now on our 5th PE firm in 10 years, and just completed a "PE lifecycle" of buy -> merge -> sell -> part out -> merge.
None of these PE firms bring anything to the table. Even the hundreds of billions AUM giants. They have zero interest in tangibly improving the company, and lots of interest in cheap window dressings meant to fool other PE firms. Not that they could do much else, because it's mostly business grads with minimal real world exposure, and hunger to be rich above all else.
The most critical thing to understand is that they pay themselves "advisory and oversight fees" for the incredibly difficult work of increasing sales targets 300%. These fees can eat 10% of our revenue, and is one click above theft. Trust me, they will lay-off 75% of the company before even considering cutting back their personal take. Never mind the fees they take from investors too. They bill both sides.
Also, if they kill some of the companies they acquire, it's the investors loss. It is not their loss. They still collect all their fees just the same.
There is a total misalignment between investors and PE firms, where PE firms just want to maximize their looting while investors think they are actually trying to improve the acquired companies. If the invesotrs do see gains, it's mostly because the firm successfully conned another firm into overpaying.
Run from investing in PE, run as fast as you can. Recently they changed the law to allow regular people to have PE in their retirement. They are running out of useful idiots, and want access to the general public. DO NOT FALL FOR IT
Looting is a rather apt word. What really breaks me is the fact that these are the people who are making it. Destructive people who extract every last cent of value from everything in sight are winning. Society actively rewards this. Constructive people who are actively trying to add value to the world face many more risks and difficulties.
Not all PE problems are existential; they will be outcompeted.
What keeps a newly graduated Veterinarian from opening her own clinic and undercutting the PE competition? With no massive loans on her books, she can profitably offer lower prices than PE can. She may even drive the local PE clinic out of business.
Assuming you had $$$ for some supplies but couldn't afford to lease a commercial building, you could provide small mammal services from your vehicle, driving to people's homes to give vaccinations and well care.
Being mobile would also allow you to serve a larger market than a fixed clinic; you could serve a couple small towns on Monday, a couple others on Tuesday, and server a larger metro on the weekends.
Once you're consistently profiting $$$$/day you'll be able to start saving for the equipment you'll need for a commercial lease somewhere because you have both the cash, cash flow, a loyal customer base, and critically, a good sense of where a good location would be to serve them from.
Yet there is no evidence of this happening in any industry or area where PE has become the dominant player. Why not? What you’re saying is nice economic theory but it’s clearly not happening.
Except every newly-graduated veterinarian does have a massive loan on their books, in the form of student loans. And even if she didn't, where does the startup capital for her clinic come from? Whether in human or animal medicine, starting your own practice--especially as a new grad--is usually the course of action with the highest-risk-to-lowest-pay ratio.
One thing I don't see is the other side of this story: the sellers.
I don't get why sellers are selling to PE. Can these services not "IPO"? Why do these companies need to sell?
When PE takes over medical practices, my understanding is there just isn't enough capital available for a dentist to "cash out". The options are either they find another dentist to buy it, the close the practice, or they sell the private equity...
How is local doctor's office going to IPO? An IPO is just selling to the public instead of a private buyer. Not to mention the amount of paperwork and ongoing reporting requirements of actually IPOing.
Talking to a single buyer is easier than arranging an IPO and I would imagine the diligence far less onerous.
Out of the gate you need $27.5m in cash flow with $2.2m in profit. I doubt there are many single practice dentists doing that kind of volume.
You can’t just IPO because you want out of the business. There’s lots of reporting and regulatory requirements to ensure you aren’t screwing investors.
I think it's totally appropriate to hold it against them if they knowingly sell out to scumbags. Society used to look down on selling out. We wrote songs about it. But in 2026 it is glorified.
> I don't get why sellers are selling to PE. Can these services not "IPO"? Why do these companies need to sell?
Shifting private ownership to a publicly traded company is an awful lot of paperwork (especially for accounting) and upfront costs, you need to time it properly, you need to find banks willing to cooperate.
In contrast, selling a private company to a PE is a pretty much straightforward transaction.
Interesting seeing a quote from Sen. Josh Hawley that I agree with...
Quote (from article)
“This didn’t just happen to you accidentally. This is a business decision, isn’t it? You keep these backlogs like this. […] Another word for this would be a heist. This sounds to me like private equity came in; bought up all of these small companies; combined them; shut down their production; rolled up a huge backlog; massive profits; stiffed these guys; and now you’re making out like bandits.”
>> a structure where 50 to 90 percent of the purchase price is financed by debt, and that debt is loaded onto the balance sheet of the acquired company, not the firm making the acquisition.
This just seems wrong. The buyer takes out a loan, how does that become the responsibility of the company they purchased? I thought loans used to buy a business treated the business as collateral, like a home mortgage. What lender would participate in this? and why?
> The buyer takes out a loan, how does that become the responsibility of the company they purchased?
Because the company they purchased is now a part of them.
As for why a lender would agree to it, it's because these transactions are not as simplistic or universally disastrous as they are usually described. A lender will obviously only make that loan if it has a reasonable expectation of being paid back, and most of them are. They may get additional collateral like parent/affiliate guarantees and the loans will have covenants relating to financial performance etc.
If you go after an entire market, they'll close ranks. If you go after specific business groups (such as REV), they'll probably be easier to divide and rule.
PE profits sound like other companies opportunities. Unless there are barriers to entry not covered in this article, I would think other companies could move in, deliver a fire truck faster and at a lower cost, and at least take a portion of the market that is able to switch.
The people behind these funds are playing Monopoly IRL, and this in particular makes me very angry.
The UK high street has been a notable victim. Gradually, over the past couple of decades, company after company has been snapped up by PE. Not just shops, but restaurants too. Suddenly you realise that the 5 or 6 high street chains that were competing are now owned by the same fund. Quality collapses, prices rise, not just at one chain but everywhere. People stop going, the chain collapses, another empty unit, the fund moves on. It's easy to point at Amazon and internet shopping as having degraded the British high street, but there are several other factors, and PE is a big one.
You're only thinking from a consumer perspective. When it comes time to sell a business, original owner wants to retire or what not, most small businesses have a hard time finding a buyer. This forces the owner to continue working beyond their time or face destitution. Having a market where PE can snap up a small business is a god-send for these owners. It meets a market need.
As a consumer, there are many non PE owned restaurants and pubs you can frequent. While you might not be able to change the game, you can absolutely vote with your wallet. The small guys will thank you.
Same for Amazon vs going direct to the manufacturers, which is more often than not, China.
> Same for Amazon vs going direct to the manufacturers, which is more often than not, China.
That comes with a bunch of problems. Taxes, import duties and import refusals are the biggest one. With Amazon, at least as long as it's sold or fulfilled by Amazon, no matter what, you are going to get the product in a reasonable time frame (1-3 days IME).
Shipping... depends. If you're in bad luck, the seller doesn't ship Fedex or DHL, but Yanwen or another one of the usual bunch of "aggregators" that bundle weeks worth of shipment to forward it to the US or Europe and unbundle the shipments there.
Assuming your product shows up at your doorstep, legally, you are now the importer and fully responsible for anything related to that specific product - say, an electrical appliance that sets your house on fire. You can't hold anyone accountable but yourself.
And finally, if there's defects, you only have to deal with Amazon. Free shipment back, done. With anything straight out of China, you are now responsible for shipments.
The theme I keep seeing in all of these problems about our economy is unfair access to debt. PE firms get a loan that you can't and then buy out your company? Giant megacorp get a loan for more than your companies value and make an offer you can't refuse. Billionaires live off loans instead of income and avoid paying income taxes.
So many of our issues can be traced back to unfair access to debt. Too much cash in the system chasing returns. We need harder money.
An interesting aspect of this story is that America has an idiosyncratic approach toward firefighting vehicles that demands very large bespoke vehicles from a limited set of vendors [0] that are primarily used to bring a set of first responders to medical emergencies. [1] This philosophy carries on to other aspects of fire fighting like the very famous wooden ladders of San Francisco. [1]
Cost insensitive customers with bizarre business requirements, what could go wrong?
Setting aside the obviously LLM-generated headings (if not text), this is a serious problem. PE has purchased fire inspection companies in my city such that every company that needs these must contract with the same PE overlord no matter which of the previous 15 companies they used to work with.
The new PE overlord will do things like send you a bill for inspection after you inquire about their pricing ("Well, our guy was in the area so he took a look!") while billing you for gas from their home location.
This is disgusting on so many levels—no competition here at all, just oppression by those with a lot of money.
PEs own a LOT more than whats on the article. All kinds of home repair (HVAC, Plumbing, electric), child care, dental offices and many others. They buy the local companies, keep the same name (so folks think it is the owner/local company with awesome yelp reviews), enshittify, jack up prices and extract as much as possible with smooth talking sales people.
I really like the model, privatising it can be far better as a private firm employee & equipment's will work better also if execution is correct, it can be cheaper and more productive.
How would you phrase this though? Plenty of PE firms have the funds to buy your local veterinary clinic or auto body shop with cash; the leverage comes later, when they direct the business that they own to get a loan. How can you make it illegal for the business to get a loan?
The daughter company would presumable be allowed to purchase goods and services. What prevents those goods and services from being supplied (at a hefty markup) by another company under PE control?
ZIRP created a level of absurd wealth such that the ultra wealthy can buy large swathes of things that they never could before, and they’re doing it. And societal norms and laws can’t keep up with it to protect us from them.
Now they are buying fire stations, dentist offices, ski resorts, whatever the fuck they can think of and then raise the prices. Something needs to be done to stop this.
The premise is that PE firms invest in companies, load them up with debt, and maximize profit. And it's especially nefarious in industries where people have "no choice but to pay"
> The result is a backlog that reads like a financial opportunity in earnings calls and a crisis in every fire station in the country. As of 2025, REV Group’s backlog stands at $4.5 billion. Wait times for a custom fire truck run to four years. Prices have doubled in a decade: a pumper truck now costs around $1 million; a ladder truck runs over $2 million. Profit margins in the industry have tripled — from the historic 4-to-5 percent range to over 13 percent.
The article goes on to talk about how a backlog is actually genius. Here's a quote from a senator:
> “This didn’t just happen to you accidentally. This is a business decision, isn’t it? You keep these backlogs like this. […] Another word for this would be a heist. This sounds to me like private equity came in; bought up all of these small companies; combined them; shut down their production; rolled up a huge backlog; massive profits; stiffed these guys; and now you’re making out like bandits.”
So you make money by ... not delivering? I'm missing something.
> The fire truck industry is the most publicly documented case, but the underlying playbook — acquire, consolidate, reduce supply, extract margin — appears across essential sectors with alarming consistency.
Sure, anyone can reduce supply and increase prices if they're a large enough supplier. But companies don't produce up to the point where marginal price is equal to marginal cost out of the goodness of their heart. It's the profit maximizing level. This is economics 101. The article doesn't even try to explain beyond hand waving. No one cares about profit margin, they care about maximizing profit, and you don't do that by creating backlogs. So something is off here and the author is either too incompetent to ask basic questions or just wants to write another PE bad article
Let’s compare two hypothetical companies. They are equal in every way except one has a $4.5b backlog and one has a $0 backlog. Which company would you rather own?
The way to get to a backlog is by not having made sales you could have made in prior years. So they shouldn't be equal in every way - the one with $0 backlog should have more cash, and that is probably preferable unless your business has diseconomies of scale.
Not sure. On one hand, a huge backlog means they're not meeting their demand. Operations may not be in order. Everything else is the same so sales and everything else is equal so I guess money is just deferred? Also huge backlog encourages competition and if you can't deliver, you're going to lose.
But such a big backlog suggests that they're underpricing. So it may be as simple as increasing price and ramping up your production, even though it would likely mean higher marginal costs.
Overall no one wants a backlog. It's not good business
Have you ever heard the phrase ceteris paribus? It means all other things being equal. It's a phrase economists use to discuss things in the ideal, sort of like, "imagine a spherical cow in a vacuum" but for economics.
The point of the exercise is not to suppose what other things could have been different to allow these two hypothetical companies to end up in the described state. The point is to actually freeze everything else, do not allow it to vary, and look at the backlog in isolation. Obviously such a situation would never actually arise. Even if things were trending in that direction, the two companies would very quickly diverge from ceteris paribus.
Obviously having a backlog is better than no backlog because unless you make a new sale tomorrow, you have a problem. You will have idle capital and labor resources. Which company do you think has easier access to credit?
Private equity is very much interested in the margins. That is one of the key differences between private and public companies. Public companies are under pressure to grow at all costs. PE would probably be satisfied to make half the profit and double the margin, especially if it also happens to position the company for a more favorable sale. Would you rather buy a business that's at 5 or 10% margin?
The depth of the backlog also happens to be a pretty decent proxy for how much competition there is the market. A deep backlog means there isn't another firm around to fill that demand. That makes your company look better.
Let's go a little left/up the funnel. Imagine two startups, all things equal, their sales funnel goes wide > qualified > sale. They consistently convert 5% of qualified leads into sales. Do you want to be the company that has zero qualified leads, or $4.5b of qualified leads?
The buyer (who PE sells to) is "thinking about" collecting on the backlog.
Obviously, the backlog is "fake".
EDIT:
The backlog is fake or worthless in the sense, that dollars worth of reputation (a.k.a. Brand) were given away to get pennies worth of backlog. Customer satisfaction is real, even in a business valuation sense.
1. No one forced these people to sell. Is the idea that you can’t sell to an entity with more money? If you block that good luck with the world economy.
2. If above is ok is the idea that the new owner is inherently worse because they have more money, whereas as the smaller would be OK then where are the new entrants?
3. Going to the article it is clear enough. These industries just are not lucrative to begin with. PE buys them and raises prices, but this only works because people complain instead of starting rival business.
4. Somehow leaving money on the table in the form of a backlog is bad? Why don’t others start a business and take those orders? Why don't they? Not profitable or worth the hassle.
Well there you go.
Separately, American manufacturing just seems very uncompetitive.
People aren't starting competitor businesses because the hassle has become astronomically expensive, also largely due to rent seekers[0]. You need a space, but real estate is absurdly inflated. You need trained employees, but education is absurdly inflated and also poorer quality for the baseline. You need to pay a living wage and give healthcare benefits to attract labor, but cost of living and healthcare are skyrocketing.
Ultimately the influence of rent seekers has grown and the category of people who can take risks by starting a business was the first to collapse, leaving only the wealthy who don't care and the people who can't risk their own survival.
> but this only works because people complain instead of starting rival business.
This reads like fiction. When they corner the market it's of course trivial to just jump in and take that share. No way they will try to be disruptive to you or sue you to hell and back and of course the bank will loan you the pile of money to start a new company since there is no giant corporation to compete with who can squeeze you out in an instance.
Your comment is the one that seems like fiction. You are saying PE is unbeatable? Per the article there is a backlog of orders. What is stopping one of the previous owners from creating another company and taking them?
Sue for what exactly? Of course they will be disruptive, that is what competing means.
Usually from a loan or they bought someone out before the PE consolidation in that market really ramped up.
This is the insidious part: small markets that grow organically over about 10-20 years are specifically what PE investors look for because they are cash heavy but don’t have desire to expand.
So the owner gets 3M cash out for property worth 4M. PE bundles similar businesses (boba tea shops are a popular one) and then uses the net cash to get a loan to expand.
They expand, cut corners then cash out on the net profit and then sell the skeleton in the pink sheets or go bankrupt.
I’ve had to deal with investors and finance for almost 15 years now. My company was bought by a PE backed company and I knew fund owners
PE has a bad reputation, maybe for LBOs, maybe for buying up doctors' offices and retirement homes, and hospitals and making them objectively worse in terms of patient care.
My family doctor underwent that along with several of her local peers and got out from under it and started her own practice. I'm obviously not her only patient, so yes, heightening stress on caregivers by demanding more work to drive profits higher is justifiable of a bad reputation.
Leaving things like medical care, food, water, shelter at the mercy of for-profit dynamics leaves the possibility open that those services stop being provided because it is unprofitable at the expense of the population.
America is deciding it likes profit over its population.
If you own a business and wish to retire, your options are pretty much to sell, pass it on to someone, or dismantle it. I don't know how this is even a question really. Where in the article or the comment section is anyone saying they shouldn't be selling?
1. In the 90s, I had a struggling one-man Mac ISV, and would do gig programming on the side. I did a lot of work for boutique investment banks, and also for a "consulting" firm that did about 75% of their business with the finance industry. The owner of that firm praised me, but didn't like that if my business took off, he'd lose me.
"What would it take to get your commitment to this firm?"
50%
"Where will you get the money to buy half my company?"
A loan from the firm?
When the dust cleared, the business loaned me the money to buy in, and I paid it back with 50% of my profit sharing payouts. This is not some weird financial alchemy, a lot of partnerships are run this way.
———
2. My Duathlon racing buddy was a mold-maker, very specialized and good at his trade. He worked for an elderly entrepreneur who had built his mold business up over decades. Said entrepreneur sent his own kids to university to become "professionals."
What to do about succession when he was ready to retire? My buddy literally photocopied my own arrangement, bought 50% so the business would have a successor it could count on, and bought the remainder when the founder retired. He is now a comfortably wealthy automotive sector entrepreneur.
———
The huge LBOs in the news always seem like space-age deals, but little LBOs for succession purposes are remarkably common.
Your comment is entirely conjecture. Even if we assume it is correct, no young person is creating similar businesses? If so that’s the root cause, not PE, since the alternatives would be all of these businesses shut down anywhere per your reasoning, backlog increase and the remaining businesses increase prices anyway.
This is a comment section. Much of it is conjecture. You are making (implicit) conjectures that there are no systemic causes of these sales to PE so you can place blame on the sellers instead of the looters and pillagers themselves.
If you just keep gutting companies with leveraged buyouts, you're not taking on any real risk.
If you're buying up firms that deliver "essential services", you're likely engaging a monopoly. Again, low risk, high reward. A direct violation of the rules of how investments should work. Regulate the monopoly and this goes away.
Because a sale for cash is a basic legal contract that predates modern society by millenia, whereas a LBO that PE uses to purchase companies is a weak spot in American Capitalism created at the intersection of:
1.Shareholder primacy. Under Delaware corporate law (which governs most large U.S. public companies), once a board decides to sell, directors have a fiduciary duty to maximize the price shareholders receive. A premium cash offer from a PE firm is hard to refuse without legal exposure.
2.Interest deductibility. The tax code lets companies deduct interest payments but not dividends, which makes debt-heavy capital structures more tax-efficient. LBOs exploit a feature of tax law that exists for many reasons unrelated to private equity.
3.Freedom of contract and limited liability. Sponsors can put a thin equity check into a holding company, have that company borrow on the target's assets, and walk away if it fails, because limited liability is the foundation of corporate law generally.
It's the same around the world. 99% of the time if something has gone to shit, it's because it was bought by private equity and milked for every last penny.
The irony is that PEs exist largely because of pension funds. So to sum it up (not so nicely) we are transferring value from our current standard of living to pay for retirement checks for our old folks.
Pensions fund a significant part of PE and they do so because they need around a 7% return in order to look solvent. If they do not have the higher PE returns, they basically go out if cash in 10 years and everyone would scream bloody murder. But with the higher returns from PE they have 40-50 year runways and people can pretend everything is fine.
So PE firms exist to extract value from basically all high quality goods and services to show a high ROI to prop up pensions. They extract wealth by buying up companies and gutting the “extra” things in them - for luxury goods, it’s quality, customer service and warranties (like my venta humidifier or reformation dresses), for services it’s stripping the underlying excess risk management and quality control. One can argue that PEs make the business more efficient but in my opinion they just turn worker or consumer related benefits into profits (stakeholder and business benefits). It’s a transfer of value from worker and consumer to business and asset holders at a massive scale.
But sadly it’s not some evil dudes at the top doing this transfer, the market force behind it is because we promised old people way too aggressive paychecks when they retired. Pensions need to invest massive amounts of money into higher rates of return and PEs just happened to be the medium that is the most successful. Sure the people running the PE firm extract a ton of value drying up all luxury quality and robust services from the daily lives of working families, but their take home is a tiny fraction of the wealth they extract (but yes they take home a massive amount of wealth for an individual). Instead the wealth extracted shows up on a 1400$/m for some old person probably living in a retirement home somewhere.
So if you wanna fix or ban PE, solve pensions.
> The irony is that PEs exist largely because of pension funds.
The irony goes way deeper than that.
A large part of PE clients are university endowment funds.
Harvard for instance has close to $60B in its endowment fund, 40% of which is invested in PE. At this point, Harvard is more an investment fund, with a university as side business.
I don't believe that's ironic. Harvard and other "elite institutions" are the places with massive endowments, not state colleges or anything. Frankly the more I think about it the more it's nothing particularly interesting, just a fractal representation of the privilege of wealth as far as you want to drill down.
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.
I wonder if this creates opportunity for spinning up competitors to these PE owned companies. If they are underinvesting in their products in order to extract value eventually their offerings will not be competitive.
This reads as apologia, blame-shifting, "I was just following orders".
People have to eat. They need water. They need a roof over their head. Nobody has to buy out all the veterinarians in an area at rates they can't say no to, have them sign non-competes and them jack up all the prices by 300% because, hey, you now own all of them. Nobody has to buy up all the trailer parks, which are normally peopple's last stop before being homeless, and then jack up the ground rent because, hey, where else are they going to go? Nobody has to buy up utilities, spend big on capex because legally you can pass on that charge and effectively double people's electricity bills.
Hannah Arendt coined the term "banality of evil" [1] decades ago and, in all honesty, I think it applies to the predatory nature of PE. It also goes for working for Palantir and a bunch of other companies. "I need to pay my student loans", "I'm just doing data science", "I'm just writing AI software that identifies when somebody is home" and on it goes.
PE serves no useful function in society. It's pure rent-seeking and incredibly predatory in many cases. ~15 years ago, there was a story about Goldman Sachs invented a derivative on the price of wheat and then essentially conspired to jack up the price of wheat [2]. This wasn't just manipulating a ticker on a Bloomberg terminal. It had real-world consequences. People starved and died because of this decision.
Yet I'm sure there were people who argued "I'm just doing legally allowed financial engineering here".
[1]: https://aeon.co/ideas/what-did-hannah-arendt-really-mean-by-...
[2]: https://theecologist.org/2011/sep/13/how-goldman-sachs-start...
Had pension fund just invest in VOO, PE won't need to exist.
I wrote about this not long ago: https://theloop.ecpr.eu/its-not-finance-its-your-pensions/ "It's not finance, it's your pensions"
(it's a blog summary of a much longer, and rather esoteric, academic article)
Why don't pensions just invest in index funds generally? High required rate of returns or?
There are multiple reason:
1. If you assume that P.E is uncorrelated/has a low correlation to the stock market (subject of many years of diatribes), then you decrease volatility of your portfolio by adding it.
2. Because a pension fund has a lot of years until they need start to paying out, then it is natural for it to attempt to harvest the illiquidity risk premium.
3. The "high rate of required rate of return problem" is really a defined benefit problem. A DC plan can (and probably should) just be in mostly straight indices unless it's so big it can negotiate a good fee with asset managers for other classes.
They do (and will generally track the index themselves), but PE offers a higher risk/return profile and diversification.
Yes, underfunded relative to future payout promises, so higher rates of return required to remain solvent.
Interesting perspective. I had never considered that before.
Pension funds still exist?
There's $32trn of them: https://fred.stlouisfed.org/series/BOGZ1FL594090005Q
Who do you think is buying .. everything? They're holding substantial fractions of both the whole stockmarket and national debt.
The pension plans for many government employees still exist. CalPERS (California Public Employees' Retirement System), Illinois Teachers Pension, etc.
It's the corporate businesses that have gotten rid of pensions in favor of 401k plans.
Many government employees have pensions. Most of the ones I know are also ... skeptical of the future solvency of those funds by the time they retire.
> we are transferring value from our current standard of living to pay for retirement checks
Isn’t this just what happens when you have an inverted pyramid (older population is larger than the younger population)?
> One can argue that PEs make the business more efficient
I’ve never seen it (I agree with you). To improve something they’d have to understand the business and do a bunch of work. Mostly they show up at quarterly meetings and want spreadsheets that measure some number that will go up (regardless if that number means anything).
> if you wanna fix or ban PE, solve pensions
How does one solve pensions?
> How does one solve pensions?
I was thinking that Covid and widespread antivaxxer mentality would have.
But no. This will be the latest ladder-pull by the boomers and silents to extract the last bit of wealth from all the younger generations. And this will impoverish gen-x and all younger generations even more so than we already are.
lol we know that the vaccine did not stop the spread and didn’t even prevent contraction. I was double vaxxed but they did have some things correct that we were in fact lied to about.
It lowered the chances, and in case of getting sick it also massively lowered the chances of getting the worst side-effects, exactly like any other vaccine does.
It's a shame that even highly educated populations do not understand a basic fact of immunology.
Everyday I am infinitely grateful I have the ability to understand nuance, and the mental firepower to be able to comprehend data coming from sources rather than tiktoks, twitter, and hyper-partisan news orgs.
No one ever said the vaccine would prevent transmission. What they said was that it !could! prevent transmission. But no one would know before studies were done. What they did say is that it would lower mortality rates. Which it did in fact do. But the factors of transmission and spread were dice rolls. And everyone with first hand knowledge knew that from day one.
But, you are in fact correct, you were lied to. But not by anyone with knowledge of the vaccines, but by the grifters you hold up has being "a beacon of truth". The grifters who read "Vaccine has a chance it could slow or stop transmission" and turn around and say "They are promising it will stop transmission!" just so they can tear it down later as "another victory for TRUTH!".
Exactly. IN cases of national or world-level event, governments and government related bodies (WHO) will do whatever they can as not to cause a widespread panic. And if that means lying, they will absolutely do that.
And because the capitalists run the show in a lot of countries, https://ruinmyweek.com/wp-content/uploads/2020/07/live-laugh... is a good image that explains why lots of things kept going on as usual.
A world-level 6 week pause would have burned covid and a whole lot of other diseases out. But no. Poor capitalists need their 3rd yacht, 13th vacation home, etc etc etc.
As for me, my SO worked in health care. And Covid is a SARS. We have decades of effects and response. The shit's airborne. WHO knew that. CDC knew that. But they lied and lied and lied.
We take our healthcare in our own hands. I'll critically listen to the "experts" and deal with med doctors for prescription drugs. And Im definitely interested in my own manufacture of pharms https://fourthievesvinegar.org/ . But yeah, the wider and general the message, the more propaganda it likely is.
And we also have a good stock of PPE now, including a few tyvek suits. And everclear is 95% alcohol and $30 here for a handle. Best sanitizer you can easily acquire and food safe to boot.
EDIT as comment to WarmWash:
No. The WHO and CDC lied about Covid being an airborne infection. They refused and refused, up to then redefining what an "airborne infection" is.
https://www.bmj.com/content/385/bmj.q985
Covid is a SARS. Airborne. SARS requires BSL3 to handle properly. https://en.wikipedia.org/wiki/Biosafety_level#Biosafety_leve... "Biosafety level 3 is appropriate for work involving microbes which can cause serious and potentially lethal disease via the inhalation route."
I dont need international experts to tell me a stream of bullshit, when I can look at the type of disease and go "wellll fuck, airborne. time to wear masks outside the home and no parties or events. and go to store when its not busy."
Was Covid as bad as SARS? No. But is SARS response something that can be compared to what we should have did for Covid? Hell yeah.
A 30-year treasury offers 5% and A-grade corporate bonds offer 6.5%. You don't need to exploit essential services for the other 50bps.
[0]: https://fixedincome.fidelity.com/ftgw/fi/FIYieldTable?popupM...
Because treasury rates are rising, it now actually puts even more pressure on PE firms to burn furniture.
.. now. Five years ago that was more like 2%.
The S&P grew at ~15% annualized post GFC, and PE acquisitions of housing and essential services hasn't stopped.
Huh, that somehow reminds me of Crassus from Rome [1]
> The first ever Roman fire brigade was created by Crassus. Fires were almost a daily occurrence in Rome, and Crassus took advantage of the fact that Rome had no fire department, by creating his own brigade—500 men strong—which rushed to burning buildings at the first cry of alarm. Upon arriving at the scene, however, the firefighters did nothing while Crassus offered to buy the burning building from the distressed property owner, at a miserable price. If the owner agreed to sell the property, his men would put out the fire; if the owner refused, then they would simply let the structure burn to the ground. After buying many properties this way, he rebuilt them, and often leased the properties to their original owners or new tenants.
[1] https://en.wikipedia.org/wiki/Marcus_Licinius_Crassus
Nice establishment you got here—be a shame if something happened to it.
I wonder if the incidence of fires increased during this time.
>Upon arriving at the scene, however, the firefighters did nothing while Crassus offered to buy the burning building from the distressed property owner, at a miserable price.
sigma
Article doesn't really dig into the angle I personally find most horrifying, strip-mining social capital.
In my area PE is gobbling up mom-and-pop apartment complexes, plumbing companies, restaurants, and generally making customers and employees alike pretty miserable.
Hard-working founders should be able to cash out, but there has to be a better system than this one. Succession, maybe. Not that we should push an unmysterious destiny on our children, but maybe more ought to consider pulling one?
> Hard-working founders should be able to cash out, but there has to be a better system than this one. Succession, maybe.
The large PE buyouts that came from the ridiculous ZIRP period could deliver better financial stability than handing the business down.
I know two families with businesses that attracted huge PE offers in the past few years. One of them took the buyout and the family members slowly left their jobs at the company because they effectively been early retired by their buyout.
Now the kids are looking at new businesses to buy and start for themselves with this new financial freedom that has come to the family. One of their considerations is starting another business in or around their old line of work that was sold off. They have to wait until the contractual non-compete expires, but if the PE owners are really making both the employees and customers miserable then it becomes a golden opportunity for experienced operators to come in and run a good business in the vacuum. Even many of the old employees have expressed a desire to join.
The bad PE phenomenon buyout is annoying, but businesses that become miserable for the customers and employees are not stable long-term businesses. When they decline because competitors show up to do a better job and retain better talent, it becomes a transfer of money from the lenders to the old owners and an annoying churn in the local business scene. As we see more of these failures, the willingness of banks to lend for these buyouts will go down.
I think part of the problem with the succession idea is that a lot of people in these positions worked these hard jobs to try and give their kids a better life. They encouraged their kids to go to school for their passions and now those kids are in careers far removed from what their parents did.
Instead of succession, I wonder if there is a way to make it easier for these people to sell their company when its time to retire to someone who is looking to start the next step of their career. A lot of software engineers joke about becoming farmers, but if they could instead make an easy transition into a small business by buying a small business, we could prevent PE from raiding things.
The vast majority of people can’t just go out and buy a machine shop or laundromat and then start running the business. It’s a risky asset, not like a house where you put down 20% and any bank will loan you the rest. I’d love to own a small franchise restaurant or something in my town but they cost millions that I don’t have.
And that’s before you even make it to the question of “can the person that manages to buy it actually live off of it as a lifestyle business?”
This scene from Ubik has been coming back to my mind very often recently:
The door refused to open. It said, “Five cents, please.”
He searched his pockets. No more coins; nothing. “I’ll pay you tomorrow,” he told the door. Again he tried the knob. Again it remained locked tight. “What I pay you,” he informed it, “is in the nature of a gratuity; I don’t have to pay you.”
“I think otherwise,” the door said. “Look in the purchase contract you signed when you bought this conapt.”
In his desk drawer he found the contract; since signing it he had found it necessary to refer to the document many times. Sure enough; payment to his door for opening and shutting constituted a mandatory fee. Not a tip.
“You discover I’m right,” the door said. It sounded smug.
From the drawer beside the sink Joe Chip got a stainless steel knife; with it he began systematically to unscrew the bolt assembly of his apt’s money-gulping door.
“I’ll sue you,” the door said as the first screw fell out.
Joe Chip said, “I’ve never been sued by a door. But I guess I can live through it.
- Philip K. Dick, Ubik
That's amazing! The "machines as woodland fairies" conceit imagines them as natural creatures, but nature has no laws
"In developing countries, everything is possible and nothing works. In developed countries, everything works and nothing is possible."
> Hard-working founders should be able to cash out
Why? Operating a successful business should be remunerative on its own, or else it's not successful. Owners who don't want to do it anymore can let it become worker owned. If they don't want it, it can dissolve. What else do you need? The very concept that the end of a successful business is a big payday for its creator is itself the poison here. There is no end just another workday, success is ongoing not final. This is natural and correct.
When my parents started farming they had about a half dozen large loans for the base farm, land, equipment, buildings and an operating loan to purchase seeds and other inputs in the spring.
When they retired they didn't have any money in the bank besides the proceeds from their final harvest, but all their loans were paid off. That's where the profits went -- paying off the loans.
The farm was their retirement savings. They sold it off for high six figures, and that's what funded their frugal but comfortable retirement.
The neighbor's son bought the farm; I hope he's pretty much paid off the loan he took out to buy it.
But that's how it is supposed to be. You "just" need to have a system that incentives banks and small entrepreneurs to take on that risk, and makes it not a good investment for PE.
I generally agree, but this point of view shifts the blame from one big, evil, soulless PE firm to thousands of small shops owners that just wants to "retire comfortably". It's not easy to sell because one can easily sees oneself as that small owner, but not as a big evil PE.
It's the same with gentrified zones: yes there are some dark patterns going on as well, but mainly is previous, smaller owners that want to make big bucks by selling to someone with money from outside rather than someone local like themselves for less money.
I think you're right to zoom in on that point.
My guess is owner-operator selflessness is a key ingredient in a lot of beloved small businesses. I don't know for certain that the winning personality for getting a business off the ground on all the bad days is the same one that raises rates proportionally with their success.
So it becomes all-or-nothing. It's my friends and neighbors when I'm working, when I sell-out it's purely business. No in-between.
I agree. It's a major problem that people who are usually, not always, already very well off decide to do a final "fuck you I got mine" and sell their business to a company they damn well know is going to strip it for all it's worth.
End consolidation. Go back to pre-1980s antitrust policy. Encourage competition and bust the trusts.
Statutory antitrust regulation would be fantastic. Instead of litigation, the regulators, corporations, and shareholders know when a business must split or divest. The firm files a plan, it gets approved, everyone wins except monopolists.
Progressive business taxes. At a certain income level, natural pressure starts mounting to split.
Sounds like communism /s
Its called "free market capitalism". I have been in favour of it for decades: https://pietersz.co.uk/2009/11/fix-capitalism
I am somewhat more inclined to some socialist policies now though.
free market capitalism will always end like this though. the end goal of capitalism is the consolidation of all things into a megacorporation or oligarchy that controls everything, creates nothing, and earns infinite money
Why is this downvoted? To me, it seems like a self-evident conclusion. Even the supporters of the current system would probably agree with it. When you have a system that encourages endless growth at absolutely all costs, while placing no limits at the amount of power a single entity can hold, what other outcome can there be but the biggest players absorbing everything into themselves and using their influence over people and governments to guarantee their dominance?
These mega-strong players always kill themselves and collapse. We can see this on the global geopolitical scale (which fundamentally acts as a true free market), where all the empires have always fallen.
The stressing part is when they are at their peak, so people would like to use regulation to short-cut right to the collapse part.
The only example we have a true free market victor that hasn't collapsed is humans, who have totally and completely dominated all other life on Earth, but man, it's certainly not looking good for us right now.
But does that collapse happen because of some universal axiom about controlling humans, or were those empires merely limited by what was possible in their era? This is the first time in history we have so much military power, ways to exert influence that's truly world-spanning, the most sophisticated technology and the most thorough surveillance ever - all at the same time. Whatever barrier there might be, who's to say that today's megacorporations won't be able to push past it?
We haven't had a free market in the United States in awhile. It's public-private partnered market fixing. Which is good for the consumer, many times, though not all the time.
Is there a difference in terms of outcomes? In the final form of a complete 'free market' without a government, the biggest entity would simply replicate the same levers of power that a government has through private militias, issuing scrip, having their own private courts and so on. But, since the US has a powerful government, it's much cheaper, simpler and more stable for them to just buy out as much of it as possible and use the same power through a proxy. Admittedly, the US government is not completely controlled by them, so it could still get much worse.
Without debating your point, I don't think it contradicts the GP's.
(I agree, but generally commenting about downvotes isn't something we do here from what I've seen)
I didn't comment just to complain about them, though, but to tell people who leave them to elaborate on why.
In my experience, most self-proclaimed "capitalists" either lap up the scholastic propaganda that capitalism is the 'bestest' economic system in the world, or are a real capitalist and don't have to give one fuck about what others say.
And most of these types NEVER read past, say, page 20 of https://www.gutenberg.org/files/38194/38194-h/38194-h.htm , Adam Smiths treatise on capitalism. Here's a few failures that Smith wrote back in his initial treatise in 1776. I think so far, we're failing every one of these, and basically speedrunning all the terrible warnings Smith wrote about as accomplishments.
Gross inequality was even mentioned there as something to significantly avoid. Book I, Ch. X, Part II; ~p. 50
Principal-agent problems in joint-stock companies. Managers of other people's money "cannot be expected to watch over it with the same anxious vigilance" as owners, leading to waste and negligence. Book V, Ch. I, Part III; ~p. 312-313
Mercantilist policy distortions. Protectionism, export bounties, and import restrictions enrich narrow merchant interests while reducing national wealth by intentionally misallocating capital. Book IV, Ch. II-V; ~p. 183-213
Underprovision of public goods. Markets fail to supply infrastructure (roads, bridges, canals, harbors) and institutions that benefit society broadly but yield no direct profit to private actors. Book V, Ch. I, Part III, Art. I; ~p. 303-305. https://www.independent.co.uk/news/world/americas/us-cities-...
Dehumanizing effects of extreme division of labor. Repetitive specialized labor "renders [the worker] as stupid and ignorant as it is possible for a human creature to become," impairing civic and moral capacities. Book V, Ch. I, Part III, Art. II; ~p. 324 . Even in the 1800's this got so bad that Karl Marx wrote about this in both of his critique of capitalism AND the communist manifesto.
Merchant collusion and monopoly power. Smith warns that "people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices". Book I, Ch. X, Part II; ~p. 54 . Hello, eggs, meat packers,oil products (gasoline), grocery chains, electronics (RAM), health care. Collusion after collusion, and almost no enforcement.
Im not communist, and probably not socialist. But its clear as day as to the failures of capitalism. And as a stopped clock is right 2x a day, capitalism does handle some problems better than any previous system. But we can do better. Lots better. But the entrenched power holds on to capitalism as fervent as a religion, and not dispassionate analysis.
I thought “socialism” was the current bogeyman
most americans don't know the difference
How will that work - for example Y Combinator classes. They cannot be acquired? What about acquihires? Cant stop that - employees have their own agency.
> How will that work - for example Y Combinator classes. They cannot be acquired?
For the record: national economic policy shouldn't revolve around Y Combinator classes and similar startups.
I'm totally fine if it turns out a sensible antitrust policy completely destroys the acquisition exit pathway for tech startups. I'm not saying one will, but I'm saying that's a cost I'm willing to pay.
YC startups could just become mature businesses. Nothing wrong with providing a good service, earning a good profit, and employees maturing into stable careers.
> I'm totally fine if it turns out a sensible antitrust policy completely destroys the acquisition exit pathway for tech startups.
And it should also prevent the acquihire.
I think the really important question is HOW this will happen. If you mean for the state to buy them at fair market value, nobody will object to that, not even if it closes the door to private equity.
But that's not what you're talking about, is it?
How about doing what America used to do? Provide seed funding for a new fire truck company in trade for condictions. Can we agree to do that? Fund 3 companies to make fire trucks, fast-track whatever certification and approvals they need. Create the companies we need, risking (and in fact expecting to lose) a bunch of the capital used for this.
YComb was just an example, though. Should companies be able to be bought and sold at all? My opinion is yes. Agree or disagree?
The OP explicitly answers this: go back to pre-80s antitrust policy. Companies can be bought and sold but not if it creates concentrations of economic power that allow them to dictate prices to vendors or customers.
This is vague and not actionable. Should Microsoft and Amazon have been able to buy Anthropic and OpenAI 5 years ago?
People always give these vague guidelines (and even the guidelines in the 80s were) and wonder why they are easily circumvented.
This is actually how anti-trust works - if you decide a company gets too big you Ma Bell it and break it up, its very actionable, just hard.
People keep bringing up Bell as if the situation now is not just as bad.
And they want to do it again and enforce anti trust laws? I don't see any contradiction here. Break up faang and keep a close eye on all these acquisitions the ai companies are doing and why they need to own package management and code editors and etc.
Yes, breaking up things wasn't bad, it was the completely lax failure to continue this action and to regulate corporations that got us rafts of stupid ass legislation culminating in citizens united. "Too big to fail" companies are just government entities that are not regulated properly.
The situation now is just as bad, if not worse, which is why people keep bringing up the case of something being done about the monopolies.
How is going back to a policy that used to work "vague and unactionable"? It literally had been actionable.
It did not work though. Bell and Standard Oil are notable examples. What else?
> It did not work though. Bell and Standard Oil are notable examples. What else?
That's pretty unfair. IIRC, Standard Oil was on of the companies that was the impetus for antitrust law (and broken up by it), and AT&T was broken up (famously) in the 80s.
Basically, your "argument" is a troll or a deep and basic misunderstanding. Especially in the case of Standard Oil. You're basically saying the law doesn't work because it didn't work before it existed (Standard Oil became dominant in the 1870s or 1880s and the Sherman Antitrust act was passed in 1890).
They were LITERALLY BROKEN UP due to anti-trust policies. You are a troll. There's nothing left to say. Bye.
How are you allowed to continue to post every 2 seconds? dang
> Companies can be bought and sold but not if it creates concentrations of economic power that allow them to dictate prices to vendors or customers.
The policy in question (as stated) should have prevented Ma Bell and Standard Oil from getting to the point of being broken up.
1. If you are proposing something even stricter than previous antitrust rules, great. But getting back to antitrust itself is actionable is step 1.
2. You don’t have to prevent every case before it happens so much as just stochastically go after the worst ones to make it less economical for people to go take on debt to have huge swaths of consolidation. Letting the market work, after pricing in that egregious monopolies will be broken up, is kinda great and better than minutely scrutinizing every tiny deal for long-term consequences.
Microsoft and Amazon should have been restricted, due to their monopoly power, long before 5 years ago.
I've read enough of the pre-Borkian (ie, pre-1980s) history of antitrust law to know this was very actionable.
They were not easily circumvented in that it required decades of funding and activism to nerf the Sherman Antitrust Act and its successors.
> Should Microsoft and Amazon have been able to buy Anthropic and OpenAI 5 years ago?
Antitrust enforcement can be done retroactively as well, if it appears that a large company abuses its financial firepower to undercut competitors or a marketshare gets too dominant.
> This is vague and not actionable. Should Microsoft and Amazon have been able to buy Anthropic and OpenAI 5 years ago?
No, because if we had proper anti-trust they already would have both been broken up years ago.
There's nothing ambiguous about it at all. We had it as our public policy for generations and then bought-off politicians stopped enforcing it.
The information is captured the same way as most policy - via statute and precedent, and guidelines for enforcement agencies.
None of this is confusing, or even hard, except insofar as it's hard to fight against well funded opponents.
It was absolutely actionable and implemented as policy for decades, what are you even talking about? Your phrasing pretends this isn’t exactly how antitrust enforcement worked before the much more recent approach began.
It really was not. Go look at the success rate of enforcement.
You're alluding to some second order effects which are real but also able to be dealt with, and have been.
Montgomery Ward thought it was "too big to fail" and too powerful to regulate.
So, what happened?
If the US government wants to, and it has in the past, it just takes your business at gunpoint.
4 soldiers walked into the ultra-conservative owners office and made him leave. Two of them picked up his arms and legs, took him outside, and deposited him on the sidewalk.
> a major U.S. CEO being physically evicted from his own company by armed troops became one of the most famous news photos of the home-front war
But "corporations are people" and those types of markets have closed since 1865 in the united states.
Why do you present this as a binary to agree/disagree with?
Simply because that is the maximally reduced case and it inevitably will result in the same situation.
If the acquirer has too big or dominant position already in the specific sector no. They should not be able to sweep the board of all companies doing single thing.
If the acquirer attempts to acquire a startup (regardless of investor) for anti trust reasons, or there are anti trust concerns, the M&A activity is disallowed by regulators. A recent example is Figma and Adobe.
https://hn.algolia.com/?dateRange=all&page=0&prefix=true&que...
Seems vague. What is an anti trust reason? Figma and Adobe id a great example. Both are doing very poorly.
What definition of success are we using that having over $7 billion in net income after expenses in 2025, and nearly $2 billion so far this year, is "doing very poorly"?
2025 numbers: https://www.sec.gov/Archives/edgar/data/796343/0000796343250...
2026 Q1 numbers: https://mlq.ai/stocks/ADBE/q1-2026-earnings/
Their joint market cap
Everything is vague to you. All you're doing is concern trolling for monopolists
It really is sad that any disagreement with “pe is bad” means i am concerned trolling. Ever consider the guidelines are actually vague which is why usa keeps failing in attempts to enforce?
Don’t confuse the nature of the feedback you’re receiving here. Your comments in this thread are so obstinate and so far from this forum’s standards of good faith argument that community members can’t help but perceive you as a troll.
Nobody likes this state of affairs so we are asking you to stop strawmanning and start steelmanning the posts you are responding to.
You are clearly not dumb, so stop responding to the dumbest possible and easiest to dismiss interpretation of other people’s comments and instead go deeper
> Ever consider the guidelines are actually vague which is why usa keeps failing in attempts to enforce?
Your cause and effect is wrong.
The US doesn't fail to attempt to enforce, the gov representatives often get paid to not enforce by said corporations who have been allowed to put money into their campaign for election/reelection.
It's not vague. You can go look it up.
I am not an anti trust enforcer or scholar, so I'm going to defer to experts in the field: Lina Khan, Matt Stoller, etc. That is the point of experts in a domain.
Given the vagueness it is no surprise nothing happens.
> Given the vagueness it is no surprise nothing happens.
Lots of success during the last admin for those paying attention.
https://www.ftc.gov/news-events/news/press-releases/2025/01/...
https://www.economicliberties.us/press-release/lina-khans-tr...
https://www.economicliberties.us/our-work/factsheet-the-ftc-...
Most of these are not blocking merges or sales. What is your point? We are talking about the original comment which advocates ending consolidations.
Quite clearly the word "consolidation" is referring not to acquisitions, but to M&A activity that achieves a certain level of, you know, consolidation.
I think 5-15 person employee businesses do not concern trust busters.
Whats the connection between the number of employees and anti trust? Also, there are plenty of YC companies with far more than 15 employees.
Generally you don't hold a market dominant position in any sector that anti-trust regulators care about at 15 employees?
Frankly this stuff is impossible to talk about in the abstract. The details of every individual case matters. If you're actually curious (instead of just playing a shell game), you can go look up the types of analysis that FTC does to evaluate market dominance and whether a given transaction will excessively consolidate a market.
I simply don't understand why leveraged buy-out(LBO) is allowed in the first place. It is like paying for the company with the money from the company you are buying.
Private parties are allowed to make bad business decisions: Lenders can give loans that might not pay back. Businesses can take on a lot of debt and cash out the owners if allowed under the terms of the loan. A PE buyout isn’t even necessary to do this. The owners could load the company up with debt and pay themselves a lot of money if they negotiated the right loan terms. One of the suppliers I used for a while did exactly this, enriching the owner and then collapsing.
One correction is that it’s not like paying for the company with money from the company you’re buying, because that obviously wouldn’t benefit the sellers. The money comes from a lender and they get terms to take the business if the loan terms aren’t meant. The lenders are the effective new largest owners of the company with the PE firm being a smaller owner but the expected primary operator.
It provides liquidity to business owners.
As a business owner, if you want cash today because you are done with a business. You could go to a bank and get a loan to pay dividends. This is a bad deal for the bank as you have no incentive to operate the business after you cash out the loan. A private equity firm comes in and operates the business on the model that they still keep some of the profits after the loan value.
The crappy side comes in as a customer, the PE firm can do this to an arbitrary number of firms in the area and raise prices on each/cut services. PE firms can trivially build out monopolies. Many of these monopolies will be invisible as they leave the existing branding etc. in place.
That in itself is reasonable. However governments choose to encourage it with tax systems that mean you pay less tax by increasing debt. This is the main thing that breaks capital structure irrelevance: https://moneyterms.co.uk/capital-structure-irrelevance/
> As a business owner, if you want cash today because you are done with a business. You could go to a bank and get a loan to pay dividends.
If you are a business owner you could borrow yourself using the business as security.
You understand mortgages, though, right?
Even 3% or 0% down mortgages?
LBO's are like buying a rental property where the mortgage is approved based on expected future rental income from the property.
That's why the parent is saying "It is like paying for the company with the money from the company you are buying.".
LBOs are much worse than that. It's like buying a rental property where the mortgage is owed by the a shell corporation that owns the property. The shell corporation, not the purchaser, owes the debt.
It's like taking out a mortgage on a house, but letting the house owe the debt.
>It's like taking out a mortgage on a house, but letting the house owe the debt.
Isn't that a non-recourse loan, which in some states is the default for the initial loan to acquire the housel
When you put it like that, you make it sound reasonable! The house being collateral for the debt seems in a blurry way to be "the house owes the debt".
Exactly. That is largely how commercial lending is underwritten: by ensuring the DSCR (debt service coverage ratio) is over 1.0.
Sure that is commercial lending.* And the acquirer owes the debt. But that's not how LBOs work. In an LBO the target owes the debt.
*Coverage of 1:1 is an accident waiting to happen, but otherwise sure.
That's not especially different from the typical LLC/SPE holding structure where individual properties in a large real estate portfolio are not held directly, but rather by a single-purpose entity that holds each property and then is owned by a larger but distinct entity. You don't want an issue in a single company/property to be able to take down your entire holding company. If someone will lend you money without cross-collateralization, why wouldn't you prefer that?
If PE firm A wants to buy company C using an LBO, it could do so by having C borrow money and then A purchase C, or by creating an entity B that borrows money and then purchases C. Whether B or C owns the debt doesn't change anything meaningful for A, and it's pretty clear that you're allowed to form company B (and really hard to imagine how you'd make that illegal without effects that would be worse than current).
Yes, those exist in industrialized countries as a result of public policy decisions. We do not have 3 or 0% mortgages because that’s what the market naturally bears or produces: we have it because mortgage debt is backstopped by the state.
It’s possible to “understand” mortgages by understanding that conditions for stable home markets don’t arise by themselves—we collectively make them possible because the outcome is desired—then wonder WTF because what social function is creating conditions for private equity getting us.
In residential real estate, I think stems in large part from a desire to help people who don’t come from money to own personal real estate (which is one of the best ways to go from $0 or negative net worth to positive six figure net worth).
Not only is that politically attractive, I think it’s more good than bad as public policy.
Turning back to PE/LBOs:
Having limited liability entities (companies) also serves good public purposes. Having companies being able to borrow money also does. Having companies being able to own other companies also does. I think that’s the only three ingredients you need for the PE model to operate and I don’t think that the public is helped by barring any of those three things.
It is analogous to a mortgage, you put down X% and the house itself secures the loan, along with PMI if your equity is below 20%. The assets of the business secure the loans in the same way a house secures a mortgage.
It is not analogous because if you sell your house and the sale money is not enough to cover your mortgage you are still on the hook for what's left of the principal. A leveraged buyout is exclusively on the purchased company's books, so if the company goes to zero the PE parent company is not on the hook for a single penny.
That varies by state. Twelve states are fully non-recourse states (lenders can’t go after borrowers beyond the loan security); in other states they may be able to, but borrowers who default on their mortgage may not be particularly asset-rich targets in the first place.
If the company wasn’t able to borrow money for itself, a wrapper company could which would still have very closely the same effect as being an asset-poor borrower.
What I don't understand is how the cost of banks repossessing these companies in case of default don't make the math unviable. Unless the company have a lot of fairly stable semi-liquid assets (like real estate) banks should be charging fairly high interest on these loans which would make most of these business unprofitable.
Which would increase the rate of defaults (if they are authorized in the first place) and in turn increase interest even further. I guess the PE is always maxxing out the leverage on every deal at _just_ the projected break-even point for loan repayment? But that leaves no room for error or changing market conditions which also increase the rate of defaults and so on.
Non-bank entities being in play is likely part of the problem. If you can sell the bad debt to some other entity say a fund that got investment from pension you win. For fund managers these things can look great on paper and that is everything that matters. Even if things do not workout they can on paper extend and pretend or take payment-in-kind. Meaning well you are short on interest payments so you just tack it on the principal.
And everyone gets their management fees until people start asking their money back...
Ah so it is related to that whole private debt markets, the loans these PE companies take are not with banks. It is related to that whole thing with Trump opening those kind of loan investments to ordinary americans and pension funds.
Great another financial crisis.
Most fun thing is that even if bank can't led to these sort of companies they can lend to companies that lend to them... So added fun. And well this has been going on for long time and cracks have started properly showing up more recently.
Does "the bank" know that it is unviable?
Check the other comment, apparently these loans don't come from banks, but rather from private debt markets. And most likely they don't know these loans aren't viable.
Yes, it's using bankruptcy and limited liability to extract value from companies that may well be completely solvent and functional with little/no downside or risk to PE.
Pure parasitism.
bingo
Yes, this is the crucial distinction. (I wish that articles criticizing PE were framed in terms of LBOs + bankruptcy-law instead, because that's the root of the policy problem.) Corporations can go bankrupt without risk to the human beings who are owners/investors in the corporation.
Note that from the lender's perspective, the risk is the same and in a perfect-information universe could be mitigated by charging higher interest. The problem for society is the externality that the business's services get worse.
> so if the company goes to zero the PE parent company is not on the hook for a single penny.
Sounds like a problem for whoever is providing the financing. Not really my concern unless you're saying there's some systemic problem it causes like with mortgage securitization during 2007. The lender will charge a high interest rate if what you're saying is true.
It’s the shareholders of the purchased company that provide the financing, in the form of debt in the company’s books. Then they exit, and the company lays off people to service the debt, and you and I as taxpayers cover unemployment and other social harms.
It’s literally a way to extract revenue from our broader social institutions by spreading the pain across so many people that individuals don’t complain (or, in some cases, don’t even understand how it harms them).
It's the concern for the community who pays in higher prices, and the employees in their job stability.
Has everyone forgotten the social contract? We do not exist as communities to make a small number of people richer. If the trade doesn't work for all involved, we change the rules.
Not necessarily. In non-recourse states like California, the lender is stuck if the asset becomes worth less than the loan.
11 USA states have Non-Recourse mortgages where you also are "not on the hook for a single penny."
Run from investing in PE, run as fast as you can.
I (and leaders at my PE-owned company) cannot say enough bad things about private equity. How anyone who managed to make money in their life decides PE is a good investment blows my mind.
We are now on our 5th PE firm in 10 years, and just completed a "PE lifecycle" of buy -> merge -> sell -> part out -> merge.
None of these PE firms bring anything to the table. Even the hundreds of billions AUM giants. They have zero interest in tangibly improving the company, and lots of interest in cheap window dressings meant to fool other PE firms. Not that they could do much else, because it's mostly business grads with minimal real world exposure, and hunger to be rich above all else.
The most critical thing to understand is that they pay themselves "advisory and oversight fees" for the incredibly difficult work of increasing sales targets 300%. These fees can eat 10% of our revenue, and is one click above theft. Trust me, they will lay-off 75% of the company before even considering cutting back their personal take. Never mind the fees they take from investors too. They bill both sides.
Also, if they kill some of the companies they acquire, it's the investors loss. It is not their loss. They still collect all their fees just the same.
There is a total misalignment between investors and PE firms, where PE firms just want to maximize their looting while investors think they are actually trying to improve the acquired companies. If the invesotrs do see gains, it's mostly because the firm successfully conned another firm into overpaying.
Run from investing in PE, run as fast as you can. Recently they changed the law to allow regular people to have PE in their retirement. They are running out of useful idiots, and want access to the general public. DO NOT FALL FOR IT
Looting is a rather apt word. What really breaks me is the fact that these are the people who are making it. Destructive people who extract every last cent of value from everything in sight are winning. Society actively rewards this. Constructive people who are actively trying to add value to the world face many more risks and difficulties.
so basically the principal - agent problem turned up to 11?
See also Matt Stoller on fire truck private equity:
https://www.thebignewsletter.com/p/did-a-private-equity-fire...
Not all PE problems are existential; they will be outcompeted.
What keeps a newly graduated Veterinarian from opening her own clinic and undercutting the PE competition? With no massive loans on her books, she can profitably offer lower prices than PE can. She may even drive the local PE clinic out of business.
How is a new graduate supposed to start a business without a loan?
Could a veterinary business not be bootstrapped?
Assuming you had $$$ for some supplies but couldn't afford to lease a commercial building, you could provide small mammal services from your vehicle, driving to people's homes to give vaccinations and well care.
Being mobile would also allow you to serve a larger market than a fixed clinic; you could serve a couple small towns on Monday, a couple others on Tuesday, and server a larger metro on the weekends.
Once you're consistently profiting $$$$/day you'll be able to start saving for the equipment you'll need for a commercial lease somewhere because you have both the cash, cash flow, a loyal customer base, and critically, a good sense of where a good location would be to serve them from.
who are these grads graduating without massive loans hanging over their heads?
"Lower your prices to compete with massive sources of capital" Great idea.
Yet there is no evidence of this happening in any industry or area where PE has become the dominant player. Why not? What you’re saying is nice economic theory but it’s clearly not happening.
> With no massive loans on her books,
Except every newly-graduated veterinarian does have a massive loan on their books, in the form of student loans. And even if she didn't, where does the startup capital for her clinic come from? Whether in human or animal medicine, starting your own practice--especially as a new grad--is usually the course of action with the highest-risk-to-lowest-pay ratio.
Link to the Musharbash article that spurred the congressional investigation (2025):
https://www.thebignewsletter.com/p/did-a-private-equity-fire...
Oh no!
Who would have guessed that turning social human constructions into businesses that 'have to make profits' could result in such deaths!?
What on earth could be next?
Defining margins again and again until these businesses suddenly actually are totally compliant and suddenly there are even more deaths?
Oh how will we ever solve this strange behaviour!?
/s^s
One thing I don't see is the other side of this story: the sellers.
I don't get why sellers are selling to PE. Can these services not "IPO"? Why do these companies need to sell?
When PE takes over medical practices, my understanding is there just isn't enough capital available for a dentist to "cash out". The options are either they find another dentist to buy it, the close the practice, or they sell the private equity...
Successful business owner has revenue of $2-20MM with their owner's "salary" being $200k-4MM which is very respectable.
Owner gets old or want to quit the business and a PE offer of 2-8x Revenue comes in.
Owner making $200k instantly cashes that $4MM check and walks away.
PE takes contracts, guts all the expenses and cuts staff in half, and purchase price is recovered in <2 years.
Suddenly there is only one HVAC or dentist company that can maintain licenses and insurance.
How is local doctor's office going to IPO? An IPO is just selling to the public instead of a private buyer. Not to mention the amount of paperwork and ongoing reporting requirements of actually IPOing.
Talking to a single buyer is easier than arranging an IPO and I would imagine the diligence far less onerous.
Out of the gate you need $27.5m in cash flow with $2.2m in profit. I doubt there are many single practice dentists doing that kind of volume.
You can’t just IPO because you want out of the business. There’s lots of reporting and regulatory requirements to ensure you aren’t screwing investors.
Going the IPO route is not an option for most of the companies being acquired (vets, plumbers, electricians, construction companies, etc.)
why would you think a public traded company behaves any better than a privately owned one?
I think it's totally appropriate to hold it against them if they knowingly sell out to scumbags. Society used to look down on selling out. We wrote songs about it. But in 2026 it is glorified.
> I don't get why sellers are selling to PE. Can these services not "IPO"? Why do these companies need to sell?
Shifting private ownership to a publicly traded company is an awful lot of paperwork (especially for accounting) and upfront costs, you need to time it properly, you need to find banks willing to cooperate.
In contrast, selling a private company to a PE is a pretty much straightforward transaction.
You don't understand! It's because it's not a truly free market. If it was truly free of regulation and government oversight it would be incredible.
Interesting seeing a quote from Sen. Josh Hawley that I agree with...
Quote (from article) “This didn’t just happen to you accidentally. This is a business decision, isn’t it? You keep these backlogs like this. […] Another word for this would be a heist. This sounds to me like private equity came in; bought up all of these small companies; combined them; shut down their production; rolled up a huge backlog; massive profits; stiffed these guys; and now you’re making out like bandits.”
>> a structure where 50 to 90 percent of the purchase price is financed by debt, and that debt is loaded onto the balance sheet of the acquired company, not the firm making the acquisition.
This just seems wrong. The buyer takes out a loan, how does that become the responsibility of the company they purchased? I thought loans used to buy a business treated the business as collateral, like a home mortgage. What lender would participate in this? and why?
> The buyer takes out a loan, how does that become the responsibility of the company they purchased?
Because the company they purchased is now a part of them.
As for why a lender would agree to it, it's because these transactions are not as simplistic or universally disastrous as they are usually described. A lender will obviously only make that loan if it has a reasonable expectation of being paid back, and most of them are. They may get additional collateral like parent/affiliate guarantees and the loans will have covenants relating to financial performance etc.
If you go after an entire market, they'll close ranks. If you go after specific business groups (such as REV), they'll probably be easier to divide and rule.
PE profits sound like other companies opportunities. Unless there are barriers to entry not covered in this article, I would think other companies could move in, deliver a fire truck faster and at a lower cost, and at least take a portion of the market that is able to switch.
The people behind these funds are playing Monopoly IRL, and this in particular makes me very angry.
The UK high street has been a notable victim. Gradually, over the past couple of decades, company after company has been snapped up by PE. Not just shops, but restaurants too. Suddenly you realise that the 5 or 6 high street chains that were competing are now owned by the same fund. Quality collapses, prices rise, not just at one chain but everywhere. People stop going, the chain collapses, another empty unit, the fund moves on. It's easy to point at Amazon and internet shopping as having degraded the British high street, but there are several other factors, and PE is a big one.
The combination of PE extraction and "property values = rent we want to change, even if the property is empty" has been economically catastrophic.
PE is often just legalised larceny.
You're only thinking from a consumer perspective. When it comes time to sell a business, original owner wants to retire or what not, most small businesses have a hard time finding a buyer. This forces the owner to continue working beyond their time or face destitution. Having a market where PE can snap up a small business is a god-send for these owners. It meets a market need.
You're well served if you want incredibly overpriced sweets at least.
As a consumer, there are many non PE owned restaurants and pubs you can frequent. While you might not be able to change the game, you can absolutely vote with your wallet. The small guys will thank you.
Same for Amazon vs going direct to the manufacturers, which is more often than not, China.
> Same for Amazon vs going direct to the manufacturers, which is more often than not, China.
That comes with a bunch of problems. Taxes, import duties and import refusals are the biggest one. With Amazon, at least as long as it's sold or fulfilled by Amazon, no matter what, you are going to get the product in a reasonable time frame (1-3 days IME).
Shipping... depends. If you're in bad luck, the seller doesn't ship Fedex or DHL, but Yanwen or another one of the usual bunch of "aggregators" that bundle weeks worth of shipment to forward it to the US or Europe and unbundle the shipments there.
Assuming your product shows up at your doorstep, legally, you are now the importer and fully responsible for anything related to that specific product - say, an electrical appliance that sets your house on fire. You can't hold anyone accountable but yourself.
And finally, if there's defects, you only have to deal with Amazon. Free shipment back, done. With anything straight out of China, you are now responsible for shipments.
Good article and discussion but I couldn’t find anything about the author? There’s no bylines or about page anywhere on the site.
Does anyone know about the source?
Because it's slop. It even starts the whole article with "It's not X, it's Y"
The theme I keep seeing in all of these problems about our economy is unfair access to debt. PE firms get a loan that you can't and then buy out your company? Giant megacorp get a loan for more than your companies value and make an offer you can't refuse. Billionaires live off loans instead of income and avoid paying income taxes. So many of our issues can be traced back to unfair access to debt. Too much cash in the system chasing returns. We need harder money.
If the waiting time for a fire truck is 4 years, can't fire departments import from abroad?
An interesting aspect of this story is that America has an idiosyncratic approach toward firefighting vehicles that demands very large bespoke vehicles from a limited set of vendors [0] that are primarily used to bring a set of first responders to medical emergencies. [1] This philosophy carries on to other aspects of fire fighting like the very famous wooden ladders of San Francisco. [1]
Cost insensitive customers with bizarre business requirements, what could go wrong?
0. https://www.slashgear.com/1890538/why-american-fire-trucks-b...
1. https://www.pulsara.com/blog/why-does-911-send-a-fire-truck-...
2. https://sf-fire.org/our-organization/division-support-servic...
Setting aside the obviously LLM-generated headings (if not text), this is a serious problem. PE has purchased fire inspection companies in my city such that every company that needs these must contract with the same PE overlord no matter which of the previous 15 companies they used to work with.
The new PE overlord will do things like send you a bill for inspection after you inquire about their pricing ("Well, our guy was in the area so he took a look!") while billing you for gas from their home location.
This is disgusting on so many levels—no competition here at all, just oppression by those with a lot of money.
PEs own a LOT more than whats on the article. All kinds of home repair (HVAC, Plumbing, electric), child care, dental offices and many others. They buy the local companies, keep the same name (so folks think it is the owner/local company with awesome yelp reviews), enshittify, jack up prices and extract as much as possible with smooth talking sales people.
I really like the model, privatising it can be far better as a private firm employee & equipment's will work better also if execution is correct, it can be cheaper and more productive.
Leveraged buyout should be illegal.
How would you phrase this though? Plenty of PE firms have the funds to buy your local veterinary clinic or auto body shop with cash; the leverage comes later, when they direct the business that they own to get a loan. How can you make it illegal for the business to get a loan?
> How can you make it illegal for the business to get a loan?
That would also be legal. But if you take the assets out of the daughter company you would go to prison for https://web.archive.org/web/20141030194421/http://www.sfo.go...
The daughter company would presumable be allowed to purchase goods and services. What prevents those goods and services from being supplied (at a hefty markup) by another company under PE control?
If it's done for the purpose of defrauding debtors of the daughter company, the law
I think they should be perfectly legal, but there probably shouldn't be tax advantages for it (carried interest rule, etc).
ZIRP created a level of absurd wealth such that the ultra wealthy can buy large swathes of things that they never could before, and they’re doing it. And societal norms and laws can’t keep up with it to protect us from them.
Now they are buying fire stations, dentist offices, ski resorts, whatever the fuck they can think of and then raise the prices. Something needs to be done to stop this.
The premise is that PE firms invest in companies, load them up with debt, and maximize profit. And it's especially nefarious in industries where people have "no choice but to pay"
> The result is a backlog that reads like a financial opportunity in earnings calls and a crisis in every fire station in the country. As of 2025, REV Group’s backlog stands at $4.5 billion. Wait times for a custom fire truck run to four years. Prices have doubled in a decade: a pumper truck now costs around $1 million; a ladder truck runs over $2 million. Profit margins in the industry have tripled — from the historic 4-to-5 percent range to over 13 percent.
The article goes on to talk about how a backlog is actually genius. Here's a quote from a senator:
> “This didn’t just happen to you accidentally. This is a business decision, isn’t it? You keep these backlogs like this. […] Another word for this would be a heist. This sounds to me like private equity came in; bought up all of these small companies; combined them; shut down their production; rolled up a huge backlog; massive profits; stiffed these guys; and now you’re making out like bandits.”
So you make money by ... not delivering? I'm missing something.
> The fire truck industry is the most publicly documented case, but the underlying playbook — acquire, consolidate, reduce supply, extract margin — appears across essential sectors with alarming consistency.
Sure, anyone can reduce supply and increase prices if they're a large enough supplier. But companies don't produce up to the point where marginal price is equal to marginal cost out of the goodness of their heart. It's the profit maximizing level. This is economics 101. The article doesn't even try to explain beyond hand waving. No one cares about profit margin, they care about maximizing profit, and you don't do that by creating backlogs. So something is off here and the author is either too incompetent to ask basic questions or just wants to write another PE bad article
Let’s compare two hypothetical companies. They are equal in every way except one has a $4.5b backlog and one has a $0 backlog. Which company would you rather own?
The way to get to a backlog is by not having made sales you could have made in prior years. So they shouldn't be equal in every way - the one with $0 backlog should have more cash, and that is probably preferable unless your business has diseconomies of scale.
Not sure. On one hand, a huge backlog means they're not meeting their demand. Operations may not be in order. Everything else is the same so sales and everything else is equal so I guess money is just deferred? Also huge backlog encourages competition and if you can't deliver, you're going to lose.
But such a big backlog suggests that they're underpricing. So it may be as simple as increasing price and ramping up your production, even though it would likely mean higher marginal costs.
Overall no one wants a backlog. It's not good business
Have you ever heard the phrase ceteris paribus? It means all other things being equal. It's a phrase economists use to discuss things in the ideal, sort of like, "imagine a spherical cow in a vacuum" but for economics.
The point of the exercise is not to suppose what other things could have been different to allow these two hypothetical companies to end up in the described state. The point is to actually freeze everything else, do not allow it to vary, and look at the backlog in isolation. Obviously such a situation would never actually arise. Even if things were trending in that direction, the two companies would very quickly diverge from ceteris paribus.
Obviously having a backlog is better than no backlog because unless you make a new sale tomorrow, you have a problem. You will have idle capital and labor resources. Which company do you think has easier access to credit?
Private equity is very much interested in the margins. That is one of the key differences between private and public companies. Public companies are under pressure to grow at all costs. PE would probably be satisfied to make half the profit and double the margin, especially if it also happens to position the company for a more favorable sale. Would you rather buy a business that's at 5 or 10% margin?
The depth of the backlog also happens to be a pretty decent proxy for how much competition there is the market. A deep backlog means there isn't another firm around to fill that demand. That makes your company look better.
Let's go a little left/up the funnel. Imagine two startups, all things equal, their sales funnel goes wide > qualified > sale. They consistently convert 5% of qualified leads into sales. Do you want to be the company that has zero qualified leads, or $4.5b of qualified leads?
Okay, now same question except one small change.
There's only one company: the one with the backlog. The other company either went bankrupt or was bought out and consolidated into the first company.
Learn how businesses are priced.
The buyer (who PE sells to) is "thinking about" collecting on the backlog.
Obviously, the backlog is "fake".
EDIT: The backlog is fake or worthless in the sense, that dollars worth of reputation (a.k.a. Brand) were given away to get pennies worth of backlog. Customer satisfaction is real, even in a business valuation sense.
There's no competition left to drive the marginal profit back down to a reasonable level.
Seems strange to me:
1. No one forced these people to sell. Is the idea that you can’t sell to an entity with more money? If you block that good luck with the world economy.
2. If above is ok is the idea that the new owner is inherently worse because they have more money, whereas as the smaller would be OK then where are the new entrants?
3. Going to the article it is clear enough. These industries just are not lucrative to begin with. PE buys them and raises prices, but this only works because people complain instead of starting rival business.
4. Somehow leaving money on the table in the form of a backlog is bad? Why don’t others start a business and take those orders? Why don't they? Not profitable or worth the hassle.
Well there you go.
Separately, American manufacturing just seems very uncompetitive.
People aren't starting competitor businesses because the hassle has become astronomically expensive, also largely due to rent seekers[0]. You need a space, but real estate is absurdly inflated. You need trained employees, but education is absurdly inflated and also poorer quality for the baseline. You need to pay a living wage and give healthcare benefits to attract labor, but cost of living and healthcare are skyrocketing.
Ultimately the influence of rent seekers has grown and the category of people who can take risks by starting a business was the first to collapse, leaving only the wealthy who don't care and the people who can't risk their own survival.
[0]https://en.wikipedia.org/wiki/Rent-seeking
> but this only works because people complain instead of starting rival business.
This reads like fiction. When they corner the market it's of course trivial to just jump in and take that share. No way they will try to be disruptive to you or sue you to hell and back and of course the bank will loan you the pile of money to start a new company since there is no giant corporation to compete with who can squeeze you out in an instance.
Your comment is the one that seems like fiction. You are saying PE is unbeatable? Per the article there is a backlog of orders. What is stopping one of the previous owners from creating another company and taking them?
Sue for what exactly? Of course they will be disruptive, that is what competing means.
> What is stopping one of the previous owners from creating another company and taking them?
... they sold the original business to retire??
> ... they sold the original business to retire??
Conjecture unsupported by article
Suggesting that the original seller could swoop back into the market is also conjecture unsupported by the article.
> What is stopping one of the previous owners from creating another company and taking them?
You will not find any investors.
The investors that want to invest in fire trucks already invested in the PE fund and will give them money over any new start
That’s the point
There’s no money elsewhere.
How did the original businesses start to begin with? Also where is this information coming from? It isn't in the article.
Usually from a loan or they bought someone out before the PE consolidation in that market really ramped up.
This is the insidious part: small markets that grow organically over about 10-20 years are specifically what PE investors look for because they are cash heavy but don’t have desire to expand.
So the owner gets 3M cash out for property worth 4M. PE bundles similar businesses (boba tea shops are a popular one) and then uses the net cash to get a loan to expand.
They expand, cut corners then cash out on the net profit and then sell the skeleton in the pink sheets or go bankrupt.
I’ve had to deal with investors and finance for almost 15 years now. My company was bought by a PE backed company and I knew fund owners
this is how the economy works
PE has a bad reputation, maybe for LBOs, maybe for buying up doctors' offices and retirement homes, and hospitals and making them objectively worse in terms of patient care.
My family doctor underwent that along with several of her local peers and got out from under it and started her own practice. I'm obviously not her only patient, so yes, heightening stress on caregivers by demanding more work to drive profits higher is justifiable of a bad reputation.
Leaving things like medical care, food, water, shelter at the mercy of for-profit dynamics leaves the possibility open that those services stop being provided because it is unprofitable at the expense of the population.
America is deciding it likes profit over its population.
If you own a business and wish to retire, your options are pretty much to sell, pass it on to someone, or dismantle it. I don't know how this is even a question really. Where in the article or the comment section is anyone saying they shouldn't be selling?
Two connected anecdotes:
1. In the 90s, I had a struggling one-man Mac ISV, and would do gig programming on the side. I did a lot of work for boutique investment banks, and also for a "consulting" firm that did about 75% of their business with the finance industry. The owner of that firm praised me, but didn't like that if my business took off, he'd lose me.
"What would it take to get your commitment to this firm?"
50%
"Where will you get the money to buy half my company?"
A loan from the firm?
When the dust cleared, the business loaned me the money to buy in, and I paid it back with 50% of my profit sharing payouts. This is not some weird financial alchemy, a lot of partnerships are run this way.
———
2. My Duathlon racing buddy was a mold-maker, very specialized and good at his trade. He worked for an elderly entrepreneur who had built his mold business up over decades. Said entrepreneur sent his own kids to university to become "professionals."
What to do about succession when he was ready to retire? My buddy literally photocopied my own arrangement, bought 50% so the business would have a successor it could count on, and bought the remainder when the founder retired. He is now a comfortably wealthy automotive sector entrepreneur.
———
The huge LBOs in the news always seem like space-age deals, but little LBOs for succession purposes are remarkably common.
Your comment is entirely conjecture. Even if we assume it is correct, no young person is creating similar businesses? If so that’s the root cause, not PE, since the alternatives would be all of these businesses shut down anywhere per your reasoning, backlog increase and the remaining businesses increase prices anyway.
This is a comment section. Much of it is conjecture. You are making (implicit) conjectures that there are no systemic causes of these sales to PE so you can place blame on the sellers instead of the looters and pillagers themselves.
Again, we have broken higher risk, higher reward.
If you just keep gutting companies with leveraged buyouts, you're not taking on any real risk.
If you're buying up firms that deliver "essential services", you're likely engaging a monopoly. Again, low risk, high reward. A direct violation of the rules of how investments should work. Regulate the monopoly and this goes away.
Do you think losing the equity portion of the investment means no risk? It's not fully debt financed.
And that debt financing bears an interest proportional to the riskiness of the asset's cashflows.
There are lots to hate about LBOs but they aren't entirely devoid of value
Why is there so much attention paid to the buyer (private equity) and no attention paid to the folks who sold the businesses to them?
> no attention paid to the folks who sold the businesses to them?
Why would the retiring dentist selling their practice be a trust or collusion problem?
Because their customers, who they built a trusting relationship with, get hosed when the owner wants to cash out.
That’s the whole math of it. That cash out comes from the future business increasing profit, which is over the longest term cutting service quality.
Start small biz > be successful > want to retire > find someone to buy biz
There’s a lot of pathways with a giant c corp, almost none for the local successful small biz.
I had a acquaintance sell three local trash companies to LRS which is exactly what happened.
The buyer generally runs the service in a much worse way, so it's their management which comes under attack.
What would that attention look like? "Long-time pillar of the community local pediatrician retires and sells their practice"?
How would you know this attention is getting paid or not unless you are consuming local news from the places this is happening?
"Long-time pillar of the community pediatrician unveils true self by selling practice to Devil"
Run a small business for 20 years, work yourself to the bone, and then contemplate a big check from a buyout offer.
Because the buyer is the one monopolizing industries and stripping them for parts
Because a sale for cash is a basic legal contract that predates modern society by millenia, whereas a LBO that PE uses to purchase companies is a weak spot in American Capitalism created at the intersection of:
1.Shareholder primacy. Under Delaware corporate law (which governs most large U.S. public companies), once a board decides to sell, directors have a fiduciary duty to maximize the price shareholders receive. A premium cash offer from a PE firm is hard to refuse without legal exposure.
2.Interest deductibility. The tax code lets companies deduct interest payments but not dividends, which makes debt-heavy capital structures more tax-efficient. LBOs exploit a feature of tax law that exists for many reasons unrelated to private equity.
3.Freedom of contract and limited liability. Sponsors can put a thin equity check into a holding company, have that company borrow on the target's assets, and walk away if it fails, because limited liability is the foundation of corporate law generally.
This subject deserves better than an AI slop article.
Who controls the spice...
It's the same around the world. 99% of the time if something has gone to shit, it's because it was bought by private equity and milked for every last penny.