Virgin Australia administrators agree to sell airline to Bain Capital
theguardian.com
theguardian.com
However, Virgin Australia already has on the order of 6 billion in debt and virtually no assets (pretty much their entire fleet is leased). It'll be interesting to see how Bain plan to extract their pound of flesh here, when pretty much the only feasible strategy is to build a viable competitor to Qantas.
Maybe there’s a nice pile of customer data that’s worth a bob or two to the right buyer.
(https://en.wikipedia.org/wiki/List_of_busiest_passenger_air_...)
And like said supervillains, this caricature is largely a fiction.
In an analysis of "European companies around their buyout event in the period 2000 - 2008," private equity was found to "select companies which are less financially distressed than comparable companies prior to the transaction and that the distress risks increase after the buyout" [1]. Critically, however, "the distress risk in private equity-backed companies does not exceed the distress risk in comparable companies three years after the buyout," and, "despite this risk increase, private equity-backed companies do not suffer from higher bankruptcy rates than the control group."
More broadly, an analysis of "17,171 worldwide leveraged buyout transactions that include every transaction with a financial sponsor in the CapitalIQ database announced between 1/1/1970 and 6/30/2007" found bankruptcy rates around 6% [2]. This isn't exceptionally high.
Large deals get press. They also have a habit of involving overextension. As a result, the average private equity story is about things going spectacularly wrong at scale.
[1] https://madoc.bib.uni-mannheim.de/31366/1/dp11076.pdf
[2] https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.23.1.121 Table 2
I’m glad that you’ve at least put a disclosure that you work in private equity in your HN bio, though. Kudos for that.
In this case, it does. Bain was prominent in that time. In a vacuum of data, something is better than nothing.
Post-crisis private equity is more sober than 2000-2007. It was only about a year ago that we reached leverage ratios approaching those of the last decade's peak [1]. On a cash flow basis, most of this decade was subdued compared with that period [2].
> you work in private equity
I work on the venture capital end of the private equity spectrum. Not comparable to whole-company leveraged buyouts of Bain's style.
There are valid criticisms of private equity. It weaponizes the tax deductibility of interest, which I don't think funds should be able to use. Its fee structures are opaque. And its largest deals tend to be destructive. But heightened frequency of bankruptcy is not sustained by any data I've come across.
[1] https://www.reuters.com/article/leverage-climbs/leverage-lev...
[2] https://www.intuition.com/have-private-equity-valuations-rea...
• 1988: Bain put $10 million down to buy Stage Stores, and in the mid-’90s took it public, collecting $184 million from stock offerings. Stage filed for bankruptcy in 2000.
• 1992: Bain bought American Pad & Paper, investing $5 million, and collected $107 million from dividends. The business filed for bankruptcy in 2000.
• 1993: Bain invested $25 million when buying GS Industries, and received $58 million from dividends. GS filed for bankruptcy in 2001.
• 1994: Bain put $27 million down to buy medical equipment maker Dade Behring. Dade borrowed $230 million to buy some of its shares. Dade went bankrupt in 2002.
• 1997: Bain invested $41 million when buying Details, and collected at least $70 million from stock offerings. The company filed for bankruptcy in 2003.
Not mounting a general defense of leveraged buyouts. Just against the point that private equity, or Bain for that matter, tends to guide companies into bankruptcy.
It looks like Bain did about 68 deals in the 1990s [1]. About five of them went bankrupt, a 7% frequency. Even if we double that to 10, it's about a 15% frequency. That's high! But it doesn't suggest a norm.
By and large, private equity-backed companies don't end up in bankruptcy. That doesn't mean everything is perfect. But the facts don't sustain this line of attack.
Of course it's not deterministic. If 100% (or even 15%) went bankrupt, no one would finance them. It's impossible to get to this point.
Every deal is a snowflake, but the reductive caricature of Bain and "private equity leveraged buyouts" is: "(1)buy a company. (2) get your money back quickly by borrowing on behalf of the company (3) profit on your free option.
This caricature is not that far from the truth, as caricatures go, and it's a pretty good guideline to speculations about what they plan to do with Virgin Blue. My guess is that a covid-related bailout or stimulus will provide the capital.
Again, situations differ, but generally these deals don't capitalize a company... lenders do. What they bring to the table is risk tolerance and a mercenary attitude... much of it related to the free option they are exercising.
There's also the thought that they should be making their profits from the 85% that succeed, as opposed to not taking a loss on 15% which fail. But question then becomes who's actually losing out on these 15%? ie who's actually paying for the risk, since it seems like a "heads I win, tails you lose" arrangement if losses on 15% aren't being repaid by profits from 85%
Many businesses - Dell, Marketo, Informatica, have been bought by PE when they wanted to restructure or change their operating models. But, those companies are not dead or gone.
There is nuance here, and the data suggests that bankruptcy is not the end state of every PE buyout.
The strategy is about "how to buy a company for free, without downside liabilities." This, results in bankruptcy sometimes... significantly less than 15% of the time, I imagine.
What I am predicting is that Bain will leverage this asset to borrow, and use this money to pay themselves back whatever they put in. At this point they have no money in the deal... a free option.
This is just what a leveraged buyout is, and Bain does leveraged buyouts... one way or another.
Who is lending them this money? I understand when they take a company public, the literal public is giving them money, but otherwise, who typically just gives them money on such good terms that they can recoup their investment and then some..
Isn't someone just getting the PE's risk shifted onto them when they do that?
The simple answer is "because they're generally good for it." No one would invest if these companies immediately went bankrupt.
First.. lenders generally get a premium if it's a risky deal. Low risk rates are exceptionally low. There's always some demand for higher yield bonds. Supply and demand are generally unresponsive to eachother. In the current market,
Second, think "bondholders" moreso than lenders. The people who structure the deal are the initial financiers, including the PE firm. They just borrow/invest enough to ensure solvency in the first few years. Long term, bonds trade. They trade at market rates.
Also note that all these bankruptcies happened during the dotcom bust, regardless of when Bain got involved. At that point, demand for risky bonds is terrible. Business is hard, and a highly leveraged company is at risk. Highly leveraged companies tend to stay highly leveraged, so even if Bain did this to them 15 year prior... it's hard to survive bad times.
People who understand business from a purely SV/tech perspective forget that software is not normal. Outside of software, large companies usually owe money. They don't have billions of dollars lying around like FB or Google.
I'm OK with "because lenders make money on them" as a generality. ...As long as we are honest about what an LBO is. It is an arbitrage, of sorts.
The deals are, by definition and in practice, structured to give the acquiring PE a free option. Their risk lasts only as long as they have skin in the game, usually a short period. Since they structure the deal, they structure it in a way that eliminates (as much as they can) short term risks.
The old fashioned way of doing this is took a few years. (a) Raise enough debt and run extreme short-term management strategies. (b) make interest payments religiously. (c) Use this history of payments to raise enough money to pay yourself out fully. (d) sell the now indebted company, run it, or whatever. Any dollar you make is profit on a zero dollar investment.
It's a risk arbitrage, more specifically. In a liquid market, this arbitrage wouldn't exist, but if it did it would look like this: (1)Buy shares in Tesla. Put it in a LLC (2) Borrow money under LLC, interest only (3) Pay this money to yourself. (4) Sell shares as necessary to pay interest (5) pay yourself when you deserve a treat (6) If you run out of shares and no one is willing to lend you more money... the game is now finished.
https://businesstech.co.za/news/business/407279/edgars-credi...
• 2005: Bain buys Dunkin' Donuts for $2.4B. In the ensuing 15 years, the number of stores has doubled from 6,500 to 13,000. https://www.nytimes.com/2005/12/13/business/parent-of-dunkin...
When you buy distressed companies, you are going to have a lot of failures - you can't save them all. You are also going to have enough successes to justify those failures, otherwise you won't have any LPs for your next fund.
There are also very different kinds of private equity, with the bain-like 'activist investors' the most notorious for their practices. So while many might not be so bad, there are also others that are just known for their semi-legal exploitative practices.
They basically turned the club from the number one team in England to something to milk dry and allowing rivals to overtake. They were extremely lucky in the early years post-LBO because Alex Ferguson was in charge, one of the greatest all-time managers, who could somehow extract title-winning performances from a threadbare squad even going up against rivals who were suddenly pumped full of oil money. They installed a investment banker goon as the CEO, who doesn't understand football, who helped broker the LBO in the first place and is gradually running the club into the ground.
[1] https://www.investopedia.com/ask/answers/052715/why-manchest...
[2] https://www.reuters.com/article/us-manchesterunited-ipo/anal...
Bain's deals are covered in the second paper. (Bain is one of those "financials sponsors".)
With respect to your second link [1], "at least five companies eventually [filing] for bankruptcy after being acquired by the private equity firm" is troubling. But it looks like Bain made 68 deals in that period [2]. A 7.4% bankruptcy rate is higher than the industry average, so criticism is warranted. But it's far from the norm.
[1] https://www.washingtonpost.com/business/economy/romneys-bain...
I agree, but I‘ve never understood who the creditors are in this scenario. Why would you lend to a company when you know the VCs are going to trash it?
Virgin is the second and only competitor to Australia’s main carrier QANTAS, and sole carrier for some routes.
The government will not let them fade away. Big money and concessions will be forthcoming.
It's a different scenario to when Ansett went under, as back then the problem was isolated to Ansett, and the industry was still fundamentally strong (due in part to the entrance of Virgin, which at that stage was an up-and-coming low-cost carrier with solid backing from Branson and other early investors).
The AU government wasn't willing to bail VA out of insolvency, but now that a private buyer has come in to restructure it, it will be able to get the same benefits as Qantas.
Note that many of the things good for the domestic company are bad for the country overall. However non employees are not individually harmed as much as employees are individually helped. Thus most voters won't oppose the bad regulations.
When Ansett Airlines went into administration in 2001, Arthur Andersen was appointed administrator, and Korda and Mentha were the partners put in charge of the business.
Then Arthur Andersen was forced to shut down as a result of its part in the Enron collapse, so Korda and Mentha started their own firm to handle the ongoing Ansett work.
https://www.smh.com.au/business/when-ansetts-balloon-went-up...
People and companies need to balance their individual short term self-interest with their reputation and long-term interest.
Like individuals, some companies can act like assholes, but when the system works well, people will stop associating with those ones.
Of course, cronyism, monopoly effects and other issues mean the system doesn't always work well, but that's a somewhat separate matter.
You compared the level of selfishness of corporations to individuals. I wonder if other people here would agree with that.
My original intent was to confirm that corporations are indeed made up of people, who have motivations.
Most people here would deny that corporations should be considered people.
Most people understand the legal basis for that when it's explained. And most people understand that corporations are run by people and are built to benefit (some) people.
But its brand, network and operating infrastructure have substantial value, so they'll get a much better return if they can get it operational and profitable again.
But even if you're right it only enhances my point; there's little "scrap" value in VA; it's either an operating airline or nothing.
https://www.forbes.com/sites/willhorton1/2020/04/25/is-virgi...
John Borghetti and his team made a lot of stupid decisions during their decade at the helm. This really was the cherry on the top.
"And the drama of this rhetorical high-wire act was ratcheted up even further when Romney chose his running mate, Rep. Paul Ryan of Wisconsin – like himself, a self-righteously anal, thin-lipped, Whitest Kids U Know penny pincher who’d be honored to tell Oliver Twist there’s no more soup left. By selecting Ryan, Romney, the hard-charging, chameleonic champion of a disgraced-yet-defiant Wall Street, officially succeeded in moving the battle lines in the 2012 presidential race."
The rhetoric and the journalism are hard to separate in this article.