Private equity is buying everything from vet offices to tech conglomerates | Hacker News Reader

Private equity is buying everything from vet offices to tech conglomerates

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537 pointsBrajeshwar349 comments

I have a pet theory: there are managerially-minded university graduates who value prestige more than power or pay. In the post-War era, they became beige-suited company men. In my generation, they went corporate finance. Today, they work for private equity.

Banking was great. Everyone–from liberal arts to engineering majors–could putz around for years in a pre-defined and prestigious path with moderately above-market pay and the potential to become rich. (Most don't.) It was also a field that could absorb a lot of grunt work, because most of what these folks did was format PowerPoints and populate Excel templates.

After the GFC, bulge-bracket finance became less prestigious right when technology lowered the industry's hunger for grunts. Silicon Valley took up some slack, but at least until the pandemic hiring boom, there was a modicum of technical gating factors.

The entire time, corporate and industrial America needed administration. But working at a chemical plant in Baton Rouge isn't sexy. You know what is sexy? Working for KKR.

So KKR's partners buy the plant, hire the college grad, give them a few weeks' training and "deploy" them to Baton Rouge. That will be their "project" for years. There are perks: they get to fly in from a city, for instance. But overall, the partners can acquire this labor cheaper than their portolio companies. (Ask anyone who isn't a partner at a private equity firm what they do, and it's on a spectrum between administrative assistance and middle management in a random business.) It's what consulting did in another era, re-branded for what young people willing to take less pay and power predict their peers and parents find prestigious (and what they consider safe).

There’s a book called “Excellent Sheep” that explores this idea as well. It’s been a while since I read it but roughly the premise was that all these “prestigious” organisations (they focused more on McKinsey et al) are another, maybe final, stage on a long ladder of structured excellence. AP/Extracurricular -> Ivy League College -> Consulting (or PE/IB) -> MBA -> ?

The path is well defined and optimises for essentially racehorses. The path is defined at each step, you bring the sweat and hours. Hope to make it through the filter to the next level.

The book ends with the question of what to do after the last rung of the ladder? How do deal with the existential crisis? To be on the ladder is to adopt an external value system. How to find yourself now? Liberate yourself from the golden handcuffs?

Interesting read

The professor who wrote that book, interestingly, ended up being denied tenure and was subsequently unable to get another academic job despite years of trying. Here's a recent podcast with him: https://www.persuasion.community/p/deresiewicz

It may not be the best thing in the world to be an "excellent sheep," but perhaps it's better than being a lone ram.

If you reject the shepherd, you have to be prepared for the brutal life of a mountain goat.

He was denied tenure before writing the book. So I guess if you refuse the shepherd dog, be prepared to face wild dog predation.

Even if you were a mountain goat, where would you go? Other people already own all the mountains.

A friend of mine is VP (not partner), and he seems to spend most of his time on deals. Market research, building financial models for a potential LBO, or for the sale of a portfolio company.

From what I understand, the on-the-ground management work after acquisition is outsourced to specialized executives with whom the firm has a relationship. They can bring expertise in a specific industry, and the deal structure pays them with large performance incentives.

> he seems to spend most of his time on deals

Transactional staff are typically a minority of PE branded employees. There is a stable of executives to pick from. But underneath them, operational staff (who may also be drawn from transactional) who aren’t in on the upside typically come via the fund. They will work in a fund office, have fund swag, but work on operational reporting, portfolio surveillance, refinancing and cap structure management, et cetera.

I had just such an engineering manager once confide to me that it was, for him, a comfy deal at his PE owned company. (n=1)

PE fund managers and associates aren't on the ground managing factories. Very, very far from it.

> fund managers and associates aren't on the ground managing factories

Not on the ground. But providing that service from away. Most commonly, the CFO’s “staff” will be associates. They build the same models and doll up the same decks. Same for communicating portfolio health to LPs. That’s a reporting function.

Yes, they are called "Insecure overachievers". They are the bread and butter of investment banks, management consulting firms, big law firms, etc.

They are also the reason that partnerships still thrive. A couple of years ago I was talking with this (big law) partner at a dinner, and we came in on the topic around partnership - and he just said it straight: The competition / rat race towards partnership is 100% skewed to the firms advantage. They get dozens of highly motivated, highly competent professionals competing against each others to prove their worth. They'll be on call 24/7/365 to show that they're worthy of partnership. Even if they become partners, most won't be rainmakers - and many would have made the same amount of money if they struck out on their own, opening a small boutique firm.

Prestige is a powerful motivator.

> Prestige is a powerful motivator.

I know this to be true because I've seen so many people given BS titles instead of raises and be happy about it as if they got something of real value.

But I don't understand it at all. Apparently, I lack the "prestige" gene.

My favorite title bump is “Head of X”.

Because rarely the person is ever the actual head.

It also is not a formal executive title like manager, director, officer, VP etc.

In finance, VP is not a “formal” executive title, it is just what they give to 24 to 26 year olds.

In retail/hospitality/many other customer facing positions, manager is also just someone who gets paid a salary in exchange for being on call and working 60+ hour weeks while shortstaffed.

Declaring someone "head of X" is hedging your bet. If X goes well, then you had the foresight and leadership to expand X. If X fails, then you have a scapegoat picked out.

It's not really prestige, so much as it is the perception of security. Many people are driven by fear and thus motivated by security. You can uncover this exceptionally well with enneagram personality tests. A nice new title would give a person that values it the belief that they are less expendable.

that and stack ranking. "dominant male" is hardwired.

Some people have enough money to meet their needs, and value prestige higher.

Others may overvalue prestige.

Or maybe there are hidden benefits to it that are hard to buy (social status).

Well, you can ask yourself what is "real value". In fact, more likely than not, it's just some imaginary stuff you ascribe value to, just like "prestige".

Real value is something that can pay your bills :)

Sometimes prestige does it, too, e.g. when you're hired to a better position on a next job, due to your prestigious title, a part in a famous project, etc.

I refer to it as being "immune to prestige"

I see this sort of prestige marker as useful for future job searches.

Absolutely. It's part of credentials, like a diploma. Not that it's truly needed but it expands options and can help get much better pay. Even if it does not guarantee that and some people can achieve even better financial success without it, still.

It's important though if you don't want to stay at the current company forever. With the right title it's much easier to get a well paying job. Otherwise you'll have to convince future employers why you didn't have that title despite your qualifications and work.

I call this "resume engineering". Some years ago, I decided to pass on a very impressive position at one of the then-hottest tech unicorns. I kinda liked the people, thought the tech was cool, but didn't see any way for the company to succeed.

As I thought, that company died, firing 100s of folks before the end.

It's been a few years, but a former colleague who took that job, managed to land an impressive title at my previous employer, above my level at the time... I have since left that company (unrelated), moved to a startup, and couldn't be happier.

My opinion is that titles don't matter. At all.

Compensation does matter, but you have to also value your happiness and factor that as well.

titles certainly matter and some fields have very specific definitions as to roles and levels of responsibility. medical workers come to mind.

I have never once had a potential employer express any sort of interest in job titles. They want to know what you did in your job, how much responsibility you had, that sort of thing, and they know that job titles don't tell you that.

That sounds like the "elite overproduction" which is commonly held to be one of the two factors increasing likelihood of a revolution (the other being popular immiseration).

https://www.theatlantic.com/ideas/archive/2023/06/us-societa...

As much as I like the idea of PE scum putting their own necks into the guillotines, though, I'm skeptical of whether this theory really works.

I think that’s a symptom not the disease. Society tends to have a lag between needs changing and the adjustment happening.

Pre-revolutionary France didn’t have too many petit nobles because they were dumb — those folks were a legacy of a bygone era. Today technology is rendering while swaths of products, business and industry irrelevant.

Populist movements at their core are driven by fear. What are they afraid of? They know that what do they and where they live is redundant. We won’t see change until there’s a calamity.

I didn’t know that’s what we are called, but now that I see it in words, it sounds very accurate. There is a class issue, me being middle class second generation at play. With no guarantees of financial security from home but expectations of such, there is an insecure element at play. The overachievers is a bit optimistic, though. I’ve been in almost all the domains you mentioned and I would call it overtriers. I would not think overall statistically people would be making more, and if it is the same, then why is the model a bad proposition? My experience is, with partnerships, if you are not on a fast moving track in your first 5 years, then it’s time to move on. Industry is a nice place to be and there is a depth you get when directly employed that you don’t when you distance your objectives from that of your direct interactions.

> many would have made the same amount of money if they struck out on their own, opening a small boutique firm

Surely this it the same in tech. Most employees of FAANG companies could do something in a small company but the big company is just more prestigious and less risky. Every small business is like this now, doctors offices, restaurants, stores are all chains.

Big companies also pay in RSUs which immediately convert to real money.

Most of the time, startup equity is funny money. Especially for the rank and file.

Tech is winner takes all. It's very hard to make FAANG salary level income with a couple of clients.

> Most employees of FAANG companies could do something in a small company but the big company is just more prestigious and less risky

It's the opposite.

At a FAANG they won't have to be on-call 24x7x365 and will get great salary and publicly tradable stock but at a small startup they will have to be on call 24x7x365 for "ESOPS" that is so skewed in the favour of the startup and the founders and VCs that they get the double whammy of slaving at much lower salary where they have the ESOP bone in front of them dangling from a thin thread.

I mean it can't get more ridiculous than this that you have to pay and then pay taxes for something you can't do jackshit with it, and if you get fired you have the "opportunity" to pay a company that just fired you and pay taxes again on something that's not even paper money and that too within few weeks to few months.

FWIW, there's a study that looked at patent filings and paper publications for inventors in small vs. large companies.

It seems that as a whole, when people choose the Big-X route, they tend to make fewer inventions and publish fewer papers and their inventions and papers get cited less.

So, in theory, by going to work in Big-Tech, you're choosing greater comfort and prestige, while reducing your overall impact on the world, while the startup route holds much more expected impact, but a much higher likelihood of reduced financial comfort.

There's a part of me that thinks that nations that encourage hoarding talent would be less successful than those that encourage innovation, and therefore, I wonder if we need some sort of innovation grant (i.e.: for every successful patent application/company registration/etc. that is NOT fraudulent, the submitter gets 24 months of financial support at the median income level, so they can chase that dream)

> "Even if they become partners, most won't be rainmakers - and many would have made the same amount of money if they struck out on their own, opening a small boutique firm."

And the other dirty secret is: you'll still be on call 24/7/365, sleep on the couch in your office, and not know your family, even after you make partner.

The rat race/grind doesn't stop in Big Law. You grind to be considered for partner, and you think maybe once you get there you get to boss around a bunch of associates and take a breather. But no, that's not how it works.

You'll be paid 7-figures (maybe, if you're a book partner and not a work partner) but you'll still be just as miserable and overworked as your past associate self.

Having seen the industry up close I now advise people to run as far away as you can in the opposite direction if you're ever tempted by a big law legal career. It is nearly-exclusively the home of absolutely broken people who'll be remembered for keeling over in the break room after pulling the tenth all-nighter in a row.

too complex. world is simple.

boom-bust cycles enable capital to buy everything in the bust period. every thing.

legal entities keep shifting to join news tax avoidance tricks. it's not a static game.

> boom-bust cycles enable capital to buy everything in the bust period.

Out of curiosity, what happens to the busted capital in this toy model?

The capital in monetary terms is destroyed, it's then either bought out by surviving capital and concentrated in actual terms, or destroyed. In either case, the relative concentration of capital increases.

Often it gets bought and consolidated into a bigger entity. In the 80s and 90s it would be shipped to Mexico, Costa Rica or (in later years) China where it was put to use operated by a much cheaper workforce.

The banality of evil.

Prestige depends on the audience. People in Silicon Valley found startups because it's cool, even when their interests are better served at "boring" big companies.

This is spot on, but its missing a few important aspects:

Banking used to be a boring, low paying profession. PE was basically non-existent. The whole of banking and Private Equity fire machine has been fed by 2 factors that were absent ~50 years ago:

1) ultralow interest rates for extended periods of time 2) de-risking of hubris via bailouts (most recent case: SVB). 3) Regulation creep. If you look at the industries where PEs are investing heavily, its not where competition is fiercest, but instead they look for captive markets, particularly those with licensing requirements (Like healthcare). Its easier to buy into a company when competition is not likely to show up organically next door.

If you take that secret sauce off the dish, you can't quite cook the stuff that we have going on today.

There’s an intense expectation placed on these folks. If dad was a rockstar banker dude, junior is expected to be on a path of similar prestige.

Banking used to be populated with lots of jobs that require compliance and attention to rules, but not necessarily intelligence. Success was defined as being one of the 200 VPs at a regional bank and chilling at the club.

It is an interesting theory, but it is not how it works.

Private Equity partners become board members of the squired companies, some time CEOs, but they don't manage day to day activities of the squired companies.

You can check a company like Francisco Partners which one of the biggest PE firms now. They have another company called Francisco Partners Consulting which helps with the management. The partners are too specialized to become middle managers in the squired companies.

Nobody argued the partners are managing. They’re the ones pulling the arbitrage.

_________ was great. Everyone–from liberal arts to engineering majors–could putz around for years in a pre-defined and prestigious path with moderately above-market pay and the potential to become rich. (Most don't.) It was also a field that could absorb a lot of grunt work, because most of what these folks did was _________ templates.

AdLibs is fun. How about: Developing and React.

A friend of mine is a Vet at a place recently sold to a PE firm. If your wait times are crazy long, if you can't get through on a phone, if you realize your vet's office has parted ways with the great vet you used to see -- that's the PE firm counting beans and destroying the service for customers in an effort to squeeze every dollar out of the system.

As a specific obviously bad example -- Vet services in California are kinda seasonal. More visits in summer than winter, due to more time outdoors, etc. A PE firm looked at visits on a weekly basis and saw a downward trend in the winter and decided to re-set staffing based on that. Now that summer has arrived they are severely short staffed, have parted ways with great vets, and now wait times are horrific.

Thanks PE!

My wife is a vet for a corporate owned hospital and our circle of friends are naturally very vet centric. They run the gamut from PE vets, corp vets, and private owners. We know GPS, specialists, dogs and cats only, large animal, exotics. What you are describing is not PE specific.

Staffing issues, primarily technicians, have hit everyone across the board. It’s a combination of wages, training, quality of life. Moreover, COVID caused a dramatic demand in vet services but protocols decreased the amount of patients seen. Only now is there starting to be some relief on that. Maybe PE reacted in a way that was not the wisest in your friend’s opinion, but everyone scrambled and few succeeded.

I dated a vet tech several years before COVID and it sounded like a horrendous job. $20/hr was considered good pay, you're constantly bending over, pickup up things (sometimes things that definitively do not to get picked up), and you're literally dealing with some of the shittiest parts of animal care.

Better than doing the same work with heavier patients in nursing homes for $12/hr.

The level of mental trauma endured by vets I doubt is matched by elderly care nurses.

My wife worked in aged care. There are plenty of nasty or racist old people in aged care that make their job awful

My dad spent his last 3 years in a nursing home. When he passed, the nurses cried. I was surprised, I thought they were just doing a job and didn't actually care.

I was wrong, and was very grateful to them.

He was probably one of the really nice people they took care of, unlike the nasty old men that constantly sexually harassed and assaulted them, so he made their day a lot brighter and was one of the reasons they stayed with the job.

You've spent a fair bit of time in a number of nursing homes?

It definitely is, source - my sister managed an elderly care facility during the pandemic

I would say they are definitely in the same range that any difference is negligible.

Working in either shatters the soul in record breaking speed. The terrible things you have to witness. Humanity at its rawest and at times lowest. Both groups, no matter how many times you have to deal with the certain situations they do, you never get used to it (which is kind of important, as soon as you do get used to it, you've lost what makes you such a good nurse/vet - empathy).

One of my first jobs was in a nursing home, and lemme tell you it's a pretty shit job. Not because of the specific working conditions, or because it's not fulfilling in many ways, but because you have to deal with a lot of gross filthy stuff and a significant fraction of your patients have dementia and are terrified, violent, or both. Being a vet tech is no picnic either but on balance I'd rather deal with animals than people.

Stupid you're getting downvoted. Veterinarians have some of the highest suicide rates. They go into the field wanting to help animals but instead end up dealing with the worst in human owners.

And what makes you think that?

I don't think elderly care nurses need to euthanise their patients just because the family can no longer afford the treatment.

There's a TED talk on just how shitty being a veterinarian is. https://www.ted.com/talks/melanie_bowden_dvm_what_being_a_ve...

And vets don't have to sit there day after day watching a husband or wife sit lovingly next to their partner who can't remember them, or worse hurls abuse at them, or can't speak, etc. Or a dying person that their family can't be bothered visiting, etc.

They can both be immensely horrible and also immensely rewarding jobs, it's not a competition.

How high are elderly care nurses on the suicide statistics?

You keep using the word nurse. We're not talking about nurses, but the aides that do all the dirty work - bathing patients, changing diapers, etc.

Is it a competition?

I would add that vet techs in many states (most maybe?) are licensed and require training in associate degree programs. Most these days have bachelor's and I've even known someone with a master's who volunteered in ecological research projects in her spare time. So yeah, with $20/hour imagine having a college degree and making $42k/year.

Veterinary care up and down, including for veterinarians, is a field that is really not as lucrative as other fields that require a similar level of education.

That may be at the hourly wage level, but from office manager to above, including specialists, they are making money.

Much more so in states where regulation is strict for said jobs

Why wouldn't your friend just open up a practice and compete with this dysfunctional company?

Some vets just want to practice veterinary medicine instead of running a business.

Start to finish, a vet clinic buildout is going to run you $1M+, and any lender is going to want a personal guarantee that uses your home and other personal assets as collateral if they’re lending to a new business owner.

You could certainly find investors, but then you’ll have people wanting an ROI.

I could come up with more reasons, but those two are probably the main ones.

My grandfather opened and ran two veterinary clinics in the 1970s. He sold both of them in the 1980s, one of them is still around. The other one closed after the buyer, another veterinarian, killed himself after the building and land were eminent domained for a freeway expansion and he felt he wasn’t paid enough for the land by the government.

Maybe because now that the retail vet is destroyed and rich people need vets who are not pathologically inconvenient and terrible, there is a brisk market for retained private vets.

This is a trend I’ve noticed that goes along with “enshittification” wherein the normal thing (let’s take grocery stores as an example) become either so downmarket-oriented (e.g., Dollar General) or aggravating (e.g., self-checkout lanes, poor inventory management, objectionable customer service) that they abandon the middle market and become intolerable.

At that point the upper part of the market diverges, and something like personal shoppers becomes the norm for anyone who can afford it.

On one hand, people in the middle class get squeezed by salary, and on the other hand they get squeezed because they hate Dollar General and they can’t afford a butler to shop for them.

Real nice system we have here.

Dollar General didn’t move down market, they moved up. Still plenty of regular grocery stores around, at least here.

And who abandons the middle part of the market? The providers? The customers?

Not really making sense here but I get it if you’re just venting or whatever.

I didn't mean that dollar stores had moved down market; I meant that dollar stores moved in, split the low end of the market out of the old "regular grocery store" and now the medium grocery buyer is left with the choice of dollar store groceries or some kind of grocery delivery service/meal kit/personal chef.

If this doesn't make sense, maybe it's a metaphor. Does it seem like the normal way of doing things from 20 years ago has now been replaced with an absolute garbage version, and a version you can't afford?

It makes sense to me, and it's a phenomenon I've noticed myself. Now that I think about it, though, I can't come up with any good examples off the top of my head where the middle of the market has truly been abandoned.

In tech, Apple comfortably occupies the premium end of the market, and other companies tried to move in (think Microsoft with the Surface) but with fairly limited success. With cars, the move has been to bigger, more luxurious vehicles, but you still have lower end models at various levels of trim. I have noticed it with, say, dentists, where sole traders and small businesses have essentially been replaced by franchises. Same for chemists.

To me the driving factor is that not everyone can compete on price, and competing for the luxury segment of the market is a fairly obvious alternative strategy. It also goes hand-in-hand with other factors like sustainability, where it might be impossible to make your product cheaply because you source local or recycled materials, or you make a product that is designed to last longer, so your customers don't return to buy your product as frequently.

I'd say the last 7-8 years I've noticed a move to luxury products in most markets just as a general trend. I call it the affordable luxury phenomenon. But I think a lot of it has been driven by cheap credit, and luxury goods makers reaching down into the middle market (the aspirational market) as much as the middle market being abandoned.

No, it does not feel like that to me as far as grocery stores are concerned. (My experience is in large Texas cities.)

Do you not just have some store like Tom Thumb, Randall’s, Albertsons, Krogers, Sprouts, or H‑E‑B near you? I know there are places that don’t have good access to regular grocery stores, wondering if that’s the case for you or for some reason you see these as either too junky or too high end?

For sure there are more self checkout lanes, but it’s usually not too hard to find a regular staffed lane if that’s what you want.

> aggravating (e.g., self-checkout lanes...

self-checkout lanes are not viewed as a bad thing by many. Given the option of a self checkout or staffed checked, I'd choose self checkout. The negative aspect of self-checkout is that it's usually paired with the store being understaffed, instead of redirecting the freed up staff to other roles.

Where am I supposed to put all the groceries? They have to stay on the scale, but the scale is very small.

they make these things called bags. but hey stranger, i appreciate you and everyone like you - i can't remember the last time i waited in a checkout line because i'm in and out of self checkout in like 2 minutes even at peak hours. it's amazing. i've also noticed that even the parking lot is less crowded at stores with self checkout. i'm sure someone has simulated this extensively because i can see it with my own eyes.

yet another job where i can, in fact, actually do it better myself. i'm just as fast on the self checkout machines as the cashiers are on their point of sale systems. the buffered queue also helps tremendously, instead of the line lottery of checkout lines. again - simulated and optimized.

the other people that do self checkout are also basically young-ish, single/alone, and would rather be anywhere than the fucking grocery store checkout line. separating people who are interested in getting the fuck out of there with food from the people who are slow, clumsy, and deliberately take a long time to make sure all their tiny little nitpicks are addressed by a captive employee audience is the best thing to happen to groceries in the 30+ years i've been wasting my life 15 minutes at a time at stores.

> they make these things called bags

I think the point here is that if you're the sort of person who does a weekly shop for a family, you can't possibly fit all of your bags on the scale, even at the largest self-checkout kiosks.

FWIW, I think your self-checkout experience is probably uncommon. I find that the barcode scanners at self-checkout machines are often poorly-calibrated, dirty, or just generally a pain in the ass. I say this as someone who spent five years doing tech support on point-of-sale equipment, where my job was quite literally to help people use their finicky barcode scanners.

These are the checkout scales at my local supermarkets - I do a huge shop once a week for the entire family and I never struggled to fit everything on it:

https://ninanco.com/wp-content/uploads/2019/06/4a-blurred-11...

This would solve the problem I noted. I have never seen such a glorious scale. More of this in my neighborhood, pretty please.

BUT

Worth mentioning that this unit is twice as long overall than the units where I shop, which are set up two deep. I think with a scale this large, you’re halving the number of lanes you can support.

Here In Switzerland self checkouts don‘t have scales, you just scan everything and pay.

In my local Aldi the scales are enormous - you can definitely fit a full trolley full of groceries on the scales. A local Tescos has two kinds - one set of self checkouts with small scales for people with baskets only, and one with huge scales for people with trolleys. They look like this, you can fit everything on it: https://ninanco.com/wp-content/uploads/2019/06/4a-blurred-11...

In other words - this is a solved problem.

For every self-checkout kiosk I have ever used, they do not have to stay on the scale. If you wanted to, you could remove each and every item and put it in the cart once it has appeared on the list of items.

This is not a stupid question. I would only guess that start up capital is not available and the market is not big enough for another practice. And all that before considering licensing.

Most professions have a gulf between the wealth of business owners and workers. You can’t start a business working hand to mouth.

How to start a business without any money:

https://www.amazon.com/How-start-business-statistical-bankru...

Get an advance from a publisher to write a book on how to start a business without any money?

Starting a business requires a certain sort of personality and interest. Most people don't fit that mold, and most of those people are fully aware of that.

And take on all the overhead of running a company, when they already have a maybe 1:1 ratio of patient contact hours to unbillable admin?

And anyway, even the doctors of veterinary work aren't rolling in money. Private practices sell to investors because they have the mountains of cash that the sole proprietor does not. Its just the devils bargain people strike all the time.

Money. It takes hundreds of thousands to do so, you gotta borrow that. Then it takes 10 or 20 years to pay that back. Then to get your retirement paid for you sell it to a private equity company.

Then the private equity fires your former employees. They borrow money to create their own clinic. They sell in their 60s to a private equity company.

Probably because they don't want to get steamrolled by a much wealthier competitor's marketing/lobbying machine, given all the permits and certifications needed. Franchises are hard to compete with in consumer markets. I used to have a great relationship with a vet who did house calls, but most of her clients were horse owners, which is a very different market than the typical household pet demographic. I doubt she could have got by without that specialty.

That sounds bad for the customer, but how does that play out for the owners? Does this sort of behavior end up working out better for them financially? If so, despite how bad it sounds, it does seem like they end up with more efficient economics (assuming it's sustainable). If not, then surely the PE firms will suffer too right?

Some thoughts on how this would playout:

* Reduced staff costs.

* Reduced potential peak. If you're at capacity during peak it might be worth the extra staff costs to capture the revenue.

* Reduced staffing flexibility. Things like vacations, parental leave, etc become tighter.

* Reduced customer satisfaction. I've stopped going to places when they lose my favorite staff member, and places a lot less consequential than a vet. This might translate to loss customers in the mid term, but you might not notice until their next vet visit in ~12 months. This might translate to bad yelp reviews.

* Presumably most of those vets let go are going to continue to be vets. It's a high skill job that pays well and people get into it for passion. That means your competition just gained access to a resource. Or maybe those vets become your new competition.

If you read the article, it spends a lot of time speaking to how the equity firms separate themselves from downsides.

So start a Vet outfit and take their customers away.

The article talks to that and how business now advertise in caps "NOT PRIVATE EQUITY OWNED."

Surely that's an easy antitrust win to point out, it's gotta be causing significant consumer harm to be labelled so boldly as a selling point!

Good luck getting around what extremely well paid lobbyist will do. This country sadly has been corrupted by money.

Is "family owned" a sign of an easy anti-trust win? Because plenty of "cuddly" concepts basically irrelevant to the consumer are used in advertising.

I have firsthand experience of how PE ruins startups. We were a small startup and unfortunately our founder decided to go with a PE firm rather than a VC firm for a round of funding. The latter were upfront about job cuts but the PE firm did not say anything until them took over. The founder got a good paycheck but we were left holding the bag.

There was a bloodbath and they ruined the culture, the product and the morale. I never realized the meaning of a "cutthroat" culture until that time. It was personally the most stressful period of my employment.

From then on, the moment that I see PE mentioned anywhere, I know its time to run.

Was it at least a good deal for the founder?

I feel your pain about what happened. I've seen comparable things a few times first hand. My learning was: just leave once the change starts, only stay if you're getting something out of it. It's not my company, I'm only in charge of my life, I'll find something better soon.

I think I would not recommend to run once PE is mentioned, it can also change for the better, but it can be a red flag to look more closely.

> Was it at least a good deal for the founder?

This doesn't make it any better for the, you know, entire rest of the company.

It's important to remember that this startup industry relies on selling dreams to idealistic young grads who will usually end up under the bus while the higher-ups walk away with the profit, if there is any. And a lot of us here are complicit, because we rely on cheap labor and false promises to get the next company off the ground.

Once you see your first exit where the CEO walks away with $10+ million and every single other employee's stock (even the first few engineers) was made worthless in backroom dealings, you get jaded about the way this entire business operates.

It's strictly business. You keep your CV up to date and move on.

Nah, I'm tired of this. It's not simply business, some of us actually give a damn and care.

PE fucks up everything most of the time, hurts the majority, and I hope I never encounter it again in my working career.

For me a job is a job, my emotional attachment is limited. It can be awesome, but how the company changes is not in my power, if I don't own an substantial amount of equity.

Usually if a company fails, it happens in slow-motion. As an employee you can often spot that years before it makes the news. Just move on before it makes the news.

Thanks! It was a really sweet deal for the founder as he left as far as I know and I suspect for their direct reports as well.

Its been a while but it still brings out some bitterness. I did leave after an year but the damage had been done by then.

> My learning was: just leave once the change starts

As a customer, rather than an employee, that's what I learned too. If a PE firm buys a company that I do business with, the best thing for me to do is to stop doing business with them.

Same thing happened at a company I worked at, they also constantly tell you how they are investing in the future of the company and will not be doing all of the culture destroying things that they are definitely going to do. So if you are in this position and they say it will be different, don't believe them.

It's not always like this.

A PE bought a majority stake in the company I work for which for 40 years was a family owned company.

They said they were financial partners only, non-operational and they bought because they liked how we were.

It's been years since and things have only gotten better as far as I am concerned. I mean they were pretty great originally when the family owned it and I had no complaints, but the culture and engagement and such has only gotten better, and the company is growing faster and becoming even more profitable than ever before as well.

that is the Warren Buffet model.. who can complain? not everything goes that way.. congrats on the successful transition

Just from what I hear it seems like most go bad. Though I have to assume it's also a case of people are more inclined to complain when things go poorly.

I mean why would people write comments about how such a thing went smoothly and well. People do now and again but not usually spontaneously.

Part of why I felt I should share my own experience. Hard to know what % of PE acquisitions the workers end up liking vs. hating, but I bet it's not as many bad cases as it seems from media or online comments.

I believe they prefer the term "sharp-elbowed", but either way, you can imagine why so many were not interested in having Mitt Romney as a national leader.

It's not all black and white, at least from my experience

A similar thing to what you described happened at a software company where I used to work at, culture destroyed, many people let go. I will name and shame the PE firm - it was Hg Capital

However currently, I've been at a company for a few years who is owned by Morgan Stanley Capital Partners, and it's a completely different story. The culture is great and hasn't changed at all

It REALLY matters what kind of PE you’re talking about.

Bought by a growth equity fund? Probably fine. Bought as part of a roll up? Probably screwed.

PE is like tech: similar tools, but very different firms.

A previous firm I worked at was bought as part of a roll-up (market segment consolidation). If you're the firm that they're rolling all their acquisitions into, that's great & exciting. If you're one of the roll-ees, not so much.

They bought us not for our technology but our customer base. They intended to convert them all to their other firm's product. Little did they know that a lot of our customers had left the other firm for us because we treated them better.. So what happened is in addition to the back office staff & sales staff being laid off, they laid off the developers & testers too (they kept a few managers for a year for continuity). I realized this when the folks they sent to town refused to go to lunch with us in an rather awkward moment.

That is funny as the exact thing happened in my startup as well (we were one of the roll-ees) We got some suits sent by the PE after the funding round.They politely said that they had other plans when we invited them for lunch.

Morgan Stanley Capital Partners: The middle-market private equity platform that cares.

I will name and shame the PE firm - it was Hg Capital.

Always appreciated and very helpful. Nothing in this comments suggest that it deserves any downvotes.

A major difference is that VCs (good ones at least) specialize in startups in a given sector and have some understanding of the sector, the product, the market landscape, the culture, etc. They also operate in that sector long term which means they really want to maintain a decent reputation among founders, employees, and even customers. VCs really don't want to get their name associated with "OMG run away!" since it could adversely affect their deal flow in the future.

PE usually doesn't have any special connection to your sector or community. They just buy stuff and try to run it according to bog standard MBA rules.

> PE usually doesn't have any special connection to your sector or community.

I know you said usually, but it really does depend. Thoma Bravo would be an example of one that is tech sector focused. Not that I like TB, just saying that doesn't always apply.

PE acquired us and was a great partner. Allowed us to do larger M&A deals than we otherwise could have. Supportive but mostly stayed out of the way. Never suggested any cuts or anything that would impact culture. Ultimately led to us being acquired by a strategic a few years later in what I think was a good outcome for everyone.

These are all just anecdotes. My experience doesn't override yours, but I'd be careful drawing broad conclusions.

I think sometimes PE gets a bad rap because they can be a "buyer of last resort" for companies that are already struggling.

My firm supports 100's of PE acquisitions every year and I can tell you that your experience is far more the norm than what the parent comment has suggested.

The idea that PE comes in and sets eight figures of their own money on fire and ruins a business, shooting themselves in the foot makes no sense, yet every other story online is about them doing exactly that.

Of course there are LBO scams going on (more historically rather than currently) but these billion dollar firms don't come in and lose a ton of their own money along with money of their outside investors on a regular basis.

They come in, reduce costs as much as possible, keep revenue coming in as long as they can while having huge dividends to said PE until they get so far into debt they are not sustainable. They'll swap to service providers that they either own or get a cut from and pay themselves.

Then their purchased company gets bankrupted, sells their assets to cover their debts (including said PE's 'debts' of services provided.)

They probably make 200-300% of their initial investment back by paying for the initial purchase with debt that is tacked onto the purchased organization and simply drain them dry. PE doesn't make a ton of money by being dumb, they make a ton of money using any and all tactics necessary to make big stacks in short time. Obviously not all PEs operate like this and there are likely many loopholes and strategies.

They bankrupt it by basically pumping it full of debt while taking money out and dumping it once it's out of money - zero liability with a LLC right?

Who’s the one offering them the debt in the first place? You’d think if it were so easy people would wise up to it and stop offering debt to PE owned firms.

> zero liability with a LLC right?

You assume lenders are fools. They aren't. They'll ask for a cosign of an asset holder other than the LLC.

PE firms are brutal to journalists because journalism doesn't make any money anymore (which is tragic). Journalists as such hate them

Isn’t LBO the norm in industry? Where they charge from the acquired company and the acquired company takes on a huge loan?

> Isn’t LBO the norm in industry?

No, it's one of many PE strategies. Almost all private equity firms utilize leverage in some form, but it's not universal and certainly not as extreme in all cases as the LBO shops.

LBO != debt ("huge loan")

LBO is how the PE firm finances the acquisition. Think of almost exactly like a mortgage. The bank ( = investment bank) doesn't want to maintain/manage the house ( = company) so they help fund the acquiring cost. Typically it's 50/50 (50% the PE firm uses its own fund and 50% it uses a loan from an investment bank "mortgage).

Post close, they might utilize a credit facility (usually a bank loan) where they can put debt on the company's books for specific initiatives (add-on acquisitions, hiring, etc.). There are some huge advantages to this because they usually can get loans at way better rates than a company could get if they went to a bank and got an SBA loan, venture debt, etc.

Not anymore, and almost never at small scale. It was massively abused in the 1970s to early 1990s but it's generally associated with the 1980s and specifically the book Barbarians at the Gate (which is an awesome read).

Today I would guess it's most associated with the Toys R Us and Sears failures, but surprisingly no one tends to talk about the Best Buy LBO for some reason...

To be fair, I think there are also some PE firms that simply aren't that good at their job.

This is very, very true. There is a huge proliferation of PE firms now too and many who are very unsophisticated, especially when dealing with smaller, family run businesses.

Yeah, I buy that. Especially in the age of ZIRP.

> The idea that PE comes in and sets eight figures of their own money on fire and ruins a business, shooting themselves in the foot makes no sense, yet every other story online is about them doing exactly that.

On How I Built This, they frequently talk to companies that were bought out by PE. Some had negative experiences, but the majority were positive.

PE wouldn't be around for long if they always shot themselves in the foot and made terrible business decisions. They have a bad rap for taking over failing companies (or companies that are just well past their prime) and extracting as much value as they can out of them, but acquiring a startup is generally different I'd think.

> yet every other story online is about them doing exactly that.

That's because this strategy is only normally utilized by the biggest PE firms (Apollo, KKR, etc.) who acquire large businesses (Toys R Us, Instant Brands, etc.) and those sell headlines. Net on net returns, it's much harder to turn a $1B biz into a $2B, versus a $10M business into a $20M business. So the large funds typically do a ton of creative financing to achieve returns and hence how they essentially bankrupt the companies. Sub $1B acquisitions usually this strategy doesn't make much sense.

What's also funny is the general certainty that the CEOs of Microsoft, Google, Apple, and every other large company are eager to destroy the company for short term profits.

A startup going from being VC backed to PE is one that is greatly reducing its expectations of the future value of current work.

I can see how it would feel like the PE firm is ruining the business to a current employee. Projects that you worked on, saw a lot of money poured in to, that you personally still believe in; get shut down and you think "why would these idiots buy that just to shut it down? Must be finance shenanigans involving write offs and shell companies" when really they valued those projects at $0 or less when they bought the company.

Growth equity blurs the line between traditional PE, on one hand, which spans buying and responsibly operating good companies to LBOs, which require cuts, and venture capital, on the other hand, which is more hands off but also more brutal if you don't look like you're flying moonwards. This ambiguity as to what "private equity" is might be clouding the data.

That's true. I equate Growth PE with "minority interest, positive profitability", VC as "minority interest, growth at all costs" and PE is simply "majority acquisition, typically profitable".

Not that I don't believe you, but my personal experience dealing with outfits (as a customer) that have been acquired by PE firms is that they have ruined the thing they acquired approximately 100% of the time.

"My work helps people, don't listen to the ocean of negative examples about my industry."

If PE ruined more businesses than it helped then people wouldn’t be doing PE (either the finance guys or the companies).

So technically there should be more wins than not. At least on paper. How that looks for lower level employees may be different but often PE is there for a reason.

Eh, you'd expect that trend to take something like decades to fully percolate and result in behavioral change, if ever.

You could apply your first sentence pretty directly to MLMs, for instance.

You can turn a low-profit “boutique” business that pays the salary of 100 people, into a high-margin marque for an acquiring larger-sized corp where every one of those employees get thrown out on their asses because they’re redundant post-consolidation.

If you built the boutique business to get a payday, maybe you’d consider that a win. The market certainly would.

If you built the boutique business because the megaco had a monopoly and was stagnating and awful and you believed in a vision where you can do better — then the PE firm just forced you to take an L by selling to that same megaco and hollowing out your business to just become another head of its behemoth.

If you built the boutique business to work with your favorite people in a non-hellish work environment and ensure they all get to live comfortably — you’ve probably developed cirrhosis from all the regret you’re drinking away.

Brutal

If PE ruined 5 companies for every success but that one success paid back 10x, someone would do it.

Maybe PE firms are ok and mine was an extreme example but I got burned pretty badly. If I do have to work on a place backed by a PE firm for some reason, I would start out as a contractor and then see how it plays out before committing to be a full time employee.

do you tell this often? i could swear I've read this exact comment before (pe acquired, great partner, enabled m&a, ultimately acquired by a strategic)

My memory is far from perfect, but I don't think that was me.

It's pretty much exactly how a growth-focused PE is supposed to work so one would hope it has actually happened that way at least a few times.

This is modus operandi of many PE firms so you'll find hundreds upon hundreds of people with the same story.

It's like wondering why every farmer has a similar story when a locust swarm comes.

PE can bankrupt a company and still make a profit. https://www.theatlantic.com/ideas/archive/2023/05/private-eq...

YMMV. Really depends on which PE firm it is. The large cap ones are notorious for what you are describing.

The PE clients I work with are very growth orientated and understand that culture is important for growth, so I don't believe you can paint the whole space with one brushstroke.

I am inadvertently part of a PE cleanup, being a PM hired by a guy PE brought in.

I am of the opinion if PE destroyed this company’s culture and strip/sell it off, it’s certainly deserves it and will be better for everyone involved.

This place worked for decades as a cost center. It never made money, routinely losing $10-$40 million a year. Multimillion dollar deals were negotiated and made with handshakes, biting is in the ass. The engineers spent their time making shit, over engineered products with no regards to the little customers we had. Our suite of products have no interoperability. Just last week i again repeated why to a couple of “top engineers” why having single sign on across Our products makes a good customer experience.

PE is a tech boogeyman here on HN and Reddit. But now I wholeheartedly believe that’s Sometimes PE needs to come in and shut things down.

Despite the directions the interviewer tried steering this conversation into, this is a really interesting interview.

But when it comes to the private equity roll-ups, I think everyone is missing the forest for the trees. If you are a doctor looking to retire and sell your business there is no one else right now who would buy it. The same goes for every category of "mom and pop" business in the US. Even if you could find someone experienced enough and interested in running it - that person could not afford the business.

So there is kind of a double problem happening right now. One is simply demographic - experienced business owners are retiring at a much faster rate than they are being replaced. Secondly, there is the capitalization problem. A doctor knows what his practice is worth and wants every cent he can get out of it - but the next generation of doctor is not going to be able to compete with debt financing what a PE cash-buyer can get.

In addition, there is a problem specific to medical practices - you can't just hand them over to your kid! (unless they also happened to pursue the exact same medical training you did). And in addition to this medical schools (as I have been told) are really underprepared new doctors for running a business.

Keep in mind owner-operators already get a huge income and tax incentive over PE firms. It's kind of a perfect storm that makes medical clinics such a special target vs plumbers or landscapers or whatever.

If you want clinics to stay independent and keep retiring doctors happy, we are going to have to carve out special programs or tax breaks for young doctors to buy up these businesses with debt. And keep in mind, these would be essentially subsidies for millionaires.

sorry, thirty years ago I could have subscribed to "and keep retiring doctors happy" but now, no way Jose

why the change, out of curiosity?

"there is no one else right now who would buy it."

You are missing a qualifier: "at the current market price."

If you prevent or disincentivize PE from buying these types of businesses, the price would drop to the level of its new adjusted demand.

Sure! But that cuts into the "keeping retiring doctors happy" piece. If your practice is worth $15 million but you only get 50c on the dollar because there is no buyer pool, you might be pretty grumpy.

To the broader picture though, this is a double edged sword if you want more private family practices. Less doctors are going to go through the work and cost of starting their own business if they have to take a haircut on its net worth at retirement.

If you remove the premium offered by people who just want to scrap the business for parts, and no prospective owners can afford it at your target price, is the business actually worth that much as a going concern?

It sounds to me like your hypothetical doctor might actually be upset that they can't get $2 on the dollar by selling to an unscrupulous party. You could view the PE premium as a way for the good doctor to benefit twice from all the tax benefits that they accrued over the years as incentives to keep their business around.

Then your practice isn’t worth $15-million.

I’m married to a physician in private practice, who owns their practice.

From the beginning, we’ve always been aware that when she retires in 15-25 years, we have literally no idea what if anything the sale of her practice might bring.

It could be essentially nothing (aka, the used value of the equipment, and it’s shocking how quickly even very expensive medical equipment depreciates on the used market).

It could be sustainability more, but that’d be a nice bonus, not something we can count on, or that any physician should count on for their retirement planning.

No retiring physician is owed anything for the “value” of their practice. And while on a personal level a PE buyout would be a nice bonus at the end of my spouse’s career, not getting it wouldn’t have affected either her decision to go into private practice, or her ability to.

Far and away the biggest factor preventing more privately owned physician practices is the fact that hospital-owned practices are often reimbursed around double for the same procedure as independent practices. This has shifted somewhat with the shift from “pay for service” to “value based care” models, but both put independent physician-owner practices at a tremendous disadvantage to large hospital systems.

And it’s a damn shame because private physician owned practices are a much more efficient way to care for patients.

> No retiring physician is owed anything for the “value” of their practice.

Not saying you are wrong, but this makes private practice different than any other small business. Pretty universally most businesses are evaluated by their capex. (If the medical industry is unique it's because there is no business to evaluate without a practitioner)

But 100% to everything else you said. Private practices are clearly superior in every regard except rent-seeking.

I think they meant more that you don't get some magic pass for years of service, kind of thing. If you have built up a paying customer base, odds are high that you can leverage that to another owner, no? No need for PE to get involved. Unless you are trying to maximize every penny you can get on that sale alone.

It’s more complicated than that.

TL;DR: To a larger degree than most businesses, the physician is the value in a medical practice.

Let’s say you’re a dermatologist in Lincoln, Nebraska. You want to live there because of family reasons or whatever. You build a great thriving practice. You’re clearing $1m in profit annually.

(A high, but doable number for a dermatologist with a good private practice)

Now it’s time to retire.

First of all, you can’t sell a patient. Patients go where they want to. You also can’t sell medical records. Because laws. Nor really would you want to.

All you can do is sell patient habits, and tangible assets.

But of course the biggest asset is the physician themselves. And they don’t come with the practice when they retire.

Now sure. There are ways of driving non-directly-physician-derived lines of revenue in a practice. Maybe you have a nurse that does aesthetics. Maybe you sell skin creams or whatever. But generally, those lines of revenue are still broadly dependent on the physician.

So what you need is a physician who wants to move to Lincoln, Nebraska at the same time you want to retire, and buy your practice.

But even if another dermatologist did want to practice in Lincoln at the right time, why should they pay a bunch of money to you for your practice? They could just start up next door.

Sure, they’d have to buy some equipment and hire and train staff, but there’s a good chance they’d have to do some of that even buying your practice.

And truth be told, they know you’re retiring anyway, so why not just wait it out?

Plus, medical specialists are in short supply. Especially those who want to move to Lincoln at that very moment. (I’m being hard on Lincoln. I went there once and it was nice. I just don’t imagine it’s a destination most highly qualified medical specialists dream of moving to.)

So probably the actual value of your practice is “the number that makes it less of a hassle to buy you out than for another specialist to start up their own practice.” Assuming there is a specialist who wants to move to where you’re selling.

And remember, if such a person already exists, they already own the most valuable asset of your practice: a qualified medical specialist.

So in a traditional medical practice sale scenario, your valuation almost certainly isn’t going to be a multiple of your revenue or profit like a more traditional business.

And the location can be a real challenge too. I know classmates of my spouse who turned down salary offers in the $800k range in the rural Midwest (with the potential to earn much more in the future through partnership/ownership) in order to make less than half that in the cities they wanted to live in.

Even if your practice is in a desirable location, most of these issues still apply. It’s just much more likely you’ll find someone to buy your practice for some value and not have to shut it down and sell it for parts.

This is painting physicians as more unique than they are. Carpenters, artists in general, electricians, plumbers, etc. are all in roughly the same boat. A lot of trust built into a reputation that someone built.

Now, sure, the modern world doesn't built up on reputations as much. But the general idea is the same. Such that, yeah, you may find you have nothing that you can sell without you in it, if that is what you built. I'm not clear how PE somehow changes this. They are literally preying on customers/clients that are not savvy enough to know that what they actually valued left?

No, I would actually agree that those can be very similar situations from a “selling your business” standpoint, with the difference that while some of their professions have been particularly scarce for a few years, medical specialties have been scarce in many parts of the country for decades, and the pathway to become a medical specialist is highly capacity constrained, while the pathway to becoming a tradesperson is typically more demand (for people wanting to go into the profession) constrained.

I agree with that. I also think, for better and worse, a lot of us that moved around to find a place to live don't value the "reputation" side of things. I hate how hard it is to find services local. So much easier to just hit up Home Depot and such. Medical is, sadly, "what does my insurance/job support?"

> If your practice is worth $15 million

What on Earth makes a single-doctor practice worth $15 million when that doctor leaves? Or even $5 million, or even $1 million?

The patient list? It's a zero-sum game! Are these patients just going to stop getting medical treatment when their doctor retires? Or are they just... Going to go to the next clinic over?

There's something rotten here, and it's not PE buying practices. It's that the practice is worth much beyond the value of the particular physician working in it! If you're wondering why medical costs are ballooning in this country, shit like this is one of the contributors!

> What on Earth makes a single-doctor practice worth $15 million when that doctor leaves? Or even $5 million, or even $1 million?

He just pulled a random number. But to answer your question for $1M - equipment for one thing...? The business likely has a fair amount of debt on the equipment.

They can get grumpy. Who cares? They can live with $7.5 million. I hope they will be able to recover from this crushing blow.

Agreed.

Had a family member receive an LOI at 10x EBITDA so they decided to sell (not sure where they closed).

They mentioned that if a doctor would have purchased the practice, it would be 1x or 2x at best.

Related: they would have been interested to scale up, but didn't know how and were afraid of the complexity of trying to manage a 3rd location.

Another thing to keep in mind is that it was a completely different regulatory environment when most of these private practices started. 50 years ago you could run a cash business with yourself, a receptionist, and a nurse. Incumbent practices could keep up with the times and add billing staff, but you would have to be insane to start a new practice today.

I'm all for healthcare reforms, but it's a pity that we didn't pursue a simple voucher or cash-based system over our insanely complex system.

Right.

Seems like there’s opportunity to be the backend operating system to scale these practices.

That’s what PE is supposed to be anyway, but they don’t run it like an owner-operator would.

The human body is an insanely complex system, hence the resulting complex system to discern fraud and waste. Really only a doctor or very educated person can evaluate another doctor’s determination.

> A doctor knows what his practice is worth and wants every cent he can get out of it - but the next generation of doctor is not going to be able to compete with debt financing what a PE cash-buyer can get.

In my opinion, the physician in this example is a monster. Profit maximization is a choice, not some kind of moral imperative. Am I supposed to have any respect for somebody selling out their employees and patients to vampires so they can retire to a beach or whatever?

The solution I'd want to see for situations like this is to find a way to sell to the people who have a continuing interest in how the business is run: employees and customers. The "exit" that does right by all interested parties would be something like having a newly formed employee coop gradually buy out the founder's ownership stake. To make a tech analogy, you don't have to sell your 0-day to foreign government just because they pay more than the bug bounty program! You don't have to sell out your community to vampires because they're the highest bidders! This is a choice that somebody is making.

Well, keep in mind that from the perspective of the rest of the healthcare industry, private practices are kind of dinosaurs at this point. They don't play well in our modern system, and the last 50 years of healthcare legislation has done everything short of outright banning them.

New doctors are not trained or expected to run businesses. Getting money from medicare or insurance is a nightmare. Patients want access to more services than ever before. The entire idea of a private practice is anathema to modern ideas of healthcare oversight and access equity. Even getting private malpractice insurance is almost impossible now.

There is a reason almost nobody is starting private practices anymore. So to give the doctors a bit of credit this is a chance to slip quietly into the night.

This explains quite a lot about why health care has been noticeably getting worse over the last several years -- for everybody.

In my part of the US, you can't even find a doctor that is taking new patients at all, private practice or otherwise. Talking with some doctors, it's clear that being a doctor these days is a very undesirable job. I know I wouldn't want to do it.

> Am I supposed to have any respect for somebody selling out their employees and patients to vampires so they can retire to a beach

Nobody else will buy it. The alternatives are shutting down the practice or forcing oneself to keep working. Particularly in medicine, the latter is dangerous.

> solution I'd want to see for situations like this is to find a way to sell to the people who have a continuing interest in how the business is run

Sounds like a buy-out strategy! Seriously. Berkshire Hathaway could negotiate good deal terms by making this promise.

> Nobody else will buy it. The alternatives are shutting down the practice or forcing oneself to keep working. Particularly in medicine, the latter is dangerous.

Can't you just hire a "CEO" who will take over all management responsibilities?

> Can't you just hire a "CEO" who will take over all management responsibilities

You, the retiring doctor, hire a manager whose job it is to hire another doctor? Do you not see why this works at scale but for one practice?

> In my opinion, the physician in this example is a monster. Profit maximization is a choice, not some kind of moral imperative.

They've had a career of treating patients. I think they've satisfied the moral imperative already. And selling to PE doesn't necessarily equate to "profit maximization". It could just mean "decent sale". As the OP said, often there simply isn't anyone available to buy it out at the timeline it needs to be bought out.

> The solution I'd want to see for situations like this is to find a way to sell to the people who have a continuing interest in how the business is run: employees and customers. The "exit" that does right by all interested parties would be something like having a newly formed employee coop gradually buy out the founder's ownership stake.

I don't doubt that this can work (it has for other businesses!). However, a given doctor wants to retire soon. Can you point him to a concrete plan to set this up? As in a firm that will have said plan ready, does all the legal work, and manages the terms with the existing employees/customers? The doctor already has his hands full treating patients and running the business.

If you cannot point him to such a resource, then do you see why he'd just sell to PE?

> They've had a career of treating patients. I think they've satisfied the moral imperative already.

No offense (really), but speaking from professional experience, I think this is naive and contributing to a lot of reasons why healthcare costs have started to spiral out of control. There are moral doctors, and immoral ones, and everything in between.

I'm not really sure why healthcare provision as an economic transaction is necessarily more moral than any other economic transaction that brings net benefit to the receiver of the service.

If there was such a cost to the physician overall, in terms of altruistic cost-benefit balances, they'd have trouble finding people wanting to go to medical school. I think the labor markets (in terms of medical school supply and demand) speak to the nature of that balance.

I don't want to demonize doctors (my family and myself fall into these categories) but I think it's dangerous to idolize them at the same time.

Also from experience, I think it's Baumol's cost disease really starting to show. Wages/practice costs for doctors have increased because everything around them is more expensive.

A family doctor in my hometown used to be able to afford a house in the nicest neighbourhood on their earnings. They didn't have to talk about money, and when they sold their practice they were happy to make sure it went into the right hands and sold it for a reasonable amount of money.

These days a family doctor can get a 2 bed condo or a townhouse near their practice, or they can have a long commute with something larger. After paying for office expenses, childcare (which also suffers from Baumol's cost disease) and their more expensive education, there's far less for retirement. You really have to maximize what you get out of your practice when you sell it.

I know there's a long history of it being "a calling" and expecting sacrifice. That's still expected, and yet the same rewards aren't there as in the past. Nobody in the past looked like a greedy asshole because they didn't have to ask for more money or really worry about anything. It was set up your practice and live your life on autopilot.

I want to demonize doctors.

The system and incentives the US voters have set up says "we want you to sell to the vampires, and will give you a huge financial bonus if you do".

Maybe if voters didn't want such system, they might vote different people into power, or vote to change the system.

POSIWID. https://en.wikipedia.org/wiki/The_purpose_of_a_system_is_wha...

"In addition, there is a problem specific to medical practices - you can't just hand them over to your kid!"

- Doctors partner with the person that will take over their practice for years before retiring. PE is destroying this system and the latest crop of doctors will lose out on mentorship and the opportunity to run a practice. Everything will become big corporate offices and everyone will suffer

> Doctors partner with the person that will take over their practice for years before retiring. PE is destroying this system and the latest crop of doctors will lose out on mentorship and the opportunity to run a practice. Everything will become big corporate offices and everyone will suffer

Of all the doctors I personally know, only one was interested in working in such a practice (let alone owning one). Where is the existing doctor going to find other doctors to partner with? Especially when they can get paid more to work elsewhere?

Doctors are an exception and specifically because of the regulatory issues.

If you look at other boring "mom and pop" businesses out there, like laundromats, gas stations, car washes, liquor stores, mailbox stores, etc...there's a tons of "acquisitions" entrepreneurs out there buying these things up like crazy and tons of influencers out there (codie sanchez, etc) telling them to do so.

I don't know where you get the idea that private medical practices are unsellable... It is very common for retiring doctors to sell their client base/practice to other doctors in the same field.

The partnership model exists for exactly this scenario and has thrived for centuries in every sector. If a doctor wants to retire they are obligated sell their share of the business to other partners, not outside entities. When a new partner is promoted they have to buy their way in. All of these problems are solved. If PE firms are getting involved it is due to either greed or mismanagement (or both), not some inherent flaw in the system.

It is systemic but it isn't really a flaw. It is the higher order effects of flooding the system with liquidity.

If you look at the richest people in America in 1985 and adjust their wealth for inflation no one even makes the top 100 in 2023.

If the richest person in America only has 5 billion in 2023 USD then systemically there is just not enough liquidity to think about the risk/reward of buying a vet.

We have basically diluted the price of all businesses and all assets. With the amount of liquidity in the system you can either have it pool and do nothing or buy business you would never have previously.

This is the price we pay for avoiding what probably would have been two depressions from the financial crisis and covid.

Everything in economics is a trade off. It is very hard to say if we would be better off or not. If we had spent the last 15 years of life dealing with two depressions who knows what society looks like now. It is a very different answer if you are 20 or 45 too I imagine.

> there is no one else right now who would buy it

Their are firms that let you sell to your employees via an ESOP. One I know of (though a friend) is https://www.awcfund.com/

> Even if you could find someone experienced enough and interested in running it - that person could not afford the business.

I mean, this must be a huge factor. Ignoring doctor's offices for a moment--even regular mom-n-pop small businesses. Few actual humans can afford one, so PE gobbles them all up. I'd love to own a small local business. Know why I don't buy one? I just can't afford any, it's that simple! Same reason fewer and fewer people can buy houses: They simply can't afford them. So PE swoops in and buys housing, too.

This seems to be one of the many ill effects of America being set up so there are fewer and fewer rich people, and those fewer own more and more of the pie. If wealth were distributed more evenly, maybe more Average Joes would be able to buy and run their own businesses. But our society doesn't encourage this broad base of wealth. It instead encourages a shrinking elite owning everything.

Part of what you're touching on is a general problem with rent-seeking, regulatory costs to entry, and monopolization in general, in the US at least. With physicians, this is kind of a consequence of a system their professional organizations have shaped: they kind of brought this ("this" being lack of buyers) on themselves to some extent by restricting supply.

But even outside of that, if you ignore that part of it, there's monopolization costs coming from other directions. Many physicians are getting squeezed by decreases in their options, as hospitals and clinics merge, which creates efficiencies that make it hard for small clinics to compete with, which in turn leads to fewer administrative options should a physician choose to try somsething else. My sense is it's even worse than that, because even if you still have a few large hospital systems to choose from, the administrators are being incentivized in the same ways across the chains, so it's one flavor of hyperprofitized healthcare corporation versus another flavor of hyperprofitized healthcare corporation. Basically, it's hard for small clinics to compete even if someone wants to, because healthcare has become a cuthroat profit-driven market, with lots of big money and plenty of opportunities for those in power to take advantage of advantages.

I guess what I'm saying is it's not just the debt for the young physician: it's a very risky thing to do, period, being a small clinic versus an oligopoly of large chains. "A doctor knows what his practice is worth and wants every cent he can get out of it" is one possibility, but another is that that seller is in a position of survivorship bias, and can't find buyers because they don't see it as a rational decision even outside of the debt question.

The reason why you don't see this with landscapers or plumbers or whatever is because those markets have far more competition, and they're not overregulated (at least to the same extent). Healthcare as a market is characterized by obstacles to competition everywhere: if you ignore the rationale for those obstacles, and just look at it for what it is, you're left with an infrastructure that's constituted largely of barriers and costs to entry and participation. Basically, the market has become too expensive even for practitioners to participate fully in, so the only thing left are financial heavyweights.

> That’s a great point, and I’m always adamant about pushing back slightly on the story of Toys“R”Us. Toys“R”Us was profitable the last year before it declared bankruptcy. The challenge was that it had so much debt that it was servicing that rather than being able to expand its operations, and it had advantages that Amazon didn’t have in terms of physical stores.

Push back more strongly. My partner at the time had been working at a Toys'R'Us store for many years. She said right up to the last day store traffic was as strong as ever - think last minute shopping for your kid's friend's birthday party, buying toys for your own kid's birthday etc. They had significant traffic and sales throughout the year, not just holiday season. Buying a bicycle for our kid? You're going to want to do that in person. You're a mediocre parent that wants to placate your "annoying" kid? take them to Toys'R'Us and let them shop for something. People really underestimate how well TRU was thriving as a brick-and-mortar store.

Also, contrary to what the article says about not figuring out online shopping and logistics, she said associates spent a majority of their time pulling online orders for same-day in-store pickup, and that business was steadily increasing.

Too much debt killed Toys'R'Us, not Amazon. I don't know if it was all acquisition debt, or if they loaded up afterwords to strip-mine value but either way it was the debt period.

> She said right up to the last day store traffic was as strong as ever... People really underestimate how well TRU was thriving as a brick-and-mortar store.

To be fair, that doesn't mean thriving at all. It's easy to have tons of customers but be making zero profit because all your revenue is eaten up by costs. It's common for stores to be busy up to the moment they go bankrupt -- because the problem is they're stuck where they can't raise prices (shoppers will evaporate) and they can't lower costs.

> contrary to what the article says about not figuring out online shopping and logistics, she said associates spent a majority of their time pulling online orders for same-day in-store pickup

That sounds like not figuring it out to me. Store employees pulling orders for in-store pickup is generally a losing proposition and has never been sustainable. Big warehouses handle online orders efficiently. Retail stores don't at all, generally speaking.

Private equity leveraged buyouts are an option for companies to change their fate. Typically, they're on a long path towards an slow death. With the buyout, current shareholders get a return, and the company is on a 3-7 year path towards a crisis bankruptcy.

It's good for the current shareholders, and it's good for the private equity company. It's not good for the business, but if the old owners and the new owners like the deal, who's really got standing to object? How do you force a business to continue to operate in spite of the business being unsustainable and ownership wanting out?

Employees don't like it, but the business is already on a path to death, so whatcha gonna do there? It's probably better for employees if Toys R Us closes stores every year for many years, instead of all of them at once, but those jobs are on borrowed time either way. I'd imagine vendors don't like it, because they're going to lose in bankruptcy, but after PE takes over your client, that's a good time to reevaluate their credit and put them on a shorter leash.

Plants get pruned and brought back to life. I think there is an argument to be made that PE could be caretakers and stewards that unlock the good trapped by rot, but that might take time, so instead they extract the value immediately but destroy the life in the process. If corporations are people, my friends, they deserve some human rights of their own.

The problem lies in where the money comes from the execute taking the company private. A big bank will issue the debt, then peddle the debt as AAA rated into all of America's 401k's via their friends at the brokerages. You think the banks are just sitting on those debts hoping to make it to maturity?

And it's never the PE firm that owes the debt, they're able to get paid back by the thing they buy, and that shell owes the debt. The losses are socialized among the public.

You think the banks are so stupid that they just let PE firms saddle them with a bunch of debt and walk away? Bank PE loans are almost always senior loans, meaning the loan has to be completely repaid before you can start distributing dividends.

If the banks have sold the debt, they don't care if it's paid or not, they're already paid.

2008 proved that banks are plenty stupid, especially if they think they can sell the bad debt to someone else before it explodes.

> A big bank will issue the debt, then peddle the debt as AAA rated into all of America's 401k's via their friends at the brokerages.

Do you have any links about this? I'd like to learn more about how this scheme works.

https://debtexplorer.whitecase.com/leveraged-finance-comment...!

I don't think that's going to walk you through all the steps, but it shows you there's a market for buyout bonds, aka, the bonds that pay the PE firms back so they saddle the buyout debt onto the companies themselves.

There's no shortage of 'funds' that buy this garbage. When a bond has a certain credit rating, it's going to get sucked up into the funds, and those funds aren't capitalized by Warren Buffett, they get cash from Joe and Jane Doe's 401k.

That's how it works.

Sorry, but you have no idea what you're talking about. There's no way debt from a leveraged buyout is going to be rated anywhere close to AAA. The leveraged buyouts of Twitter and Toy's R Us were funded by junk bonds.

https://www.bloomberg.com/news/articles/2022-10-31/twitter-s....

https://www.moodys.com/credit-ratings/Toys-R-US-Inc-Old-cred...

Don't worry, the banks figured out how to solve this problem decades ago, they're called CBOs: https://thebusinessprofessor.com/en_US/investments-trading-f...

Basically, you take a bunch of junk, package it up, and like magic, it's investment grade.

No, PE firms either use investor money or take loans against the business itself.

It's a high risk game, anybody investing knows exactly what's up.

> who's really got standing to object?

Other stakeholders, such as government regulators or the extra patients killed when PE takes over their hospitals and nursing homes [1].

[1] https://www.nber.org/papers/w28474

If the business is (seemingly) on the path to death and current owners are done with it, but employees still want to stay, then the obvious best outcome for the business is to be handed over to the employees. The downside is that there's less money in that for the shareholders and the PE fund, but let's not try to change the narrative to "PE buyouts are best for the business" when they clearly aren't. They are a way to squeeze out as much capital as possible from a company before tossing its carcass, nothing more.

This assumes that the current company has no valuation, or the current employees can fund a purchase. And it assume that the employees are more apt to run the company than PE

Yeah employees would probably never be able to match the money offered by PE, but is assuming the second part too much of a stretch?

You're probably right employee owned businesses are better for customers, but I'm worried there may be an unfortunate truth that PE is better for investors

Who has standing to object? How about the people that get ripped off.

It’s looting. They’re asset stripping.

They are literally doing this:

https://youtu.be/ZPtjyqgZAUk

It’s not a metaphor what is happening is actually the same as a common organized crime scheme. They are stealing from creditors.

Some highlights (lowlights?) of the interview:

> the model is that often businesses that service working-class people are attractive because poorer customers don’t have alternatives, so you can raise prices, you can cut quality care

> Private equity firms have donated something like $900 million since 1990 to federal candidates. They have a bench of employees that include former cabinet members, secretaries of state, treasury, defense, chairman of the FCC, SEC.

> it’s almost impossible for a private equity firm to be held legally responsible under common law veil-piercing arguments

> They executed a sale-leaseback, which means they sold the underlying assets of the nursing home chain and had the chain lease it back for a quick hit of money, but now they’ve got a long-term obligation. They executed what’s called a dividend recapitalization, so ManorCare had to borrow money to pay Carlyle and the other investors a profit.

Just bankrupted instant pots and pyrex too

https://edition.cnn.com/2023/06/13/business/instant-brands-b...

> Instant Brands was purchased by private equity firm Cornell Capital in 2017.

And although https://cornellcapllc.com/investments/ provides the shell companies they own, who knows what's under each of those shells, and under those shells.

https://news.ycombinator.com/item?id=36310733

It's a shame what's happened to my local HVAC contractor. It used to be a great local operation where a real person picked up when you called. But lately, after a private equity group took over, it's all automated calls and foreign call centers. The personal touch is gone and, sadly, their service quality has taken a noticeable hit. It's just not the same anymore.

I knew some local guys that basically made a living doing that - start an HVAC company, get it working good, sell it to a equity group, they destroy it pretty quickly, everyone quits, then one of the other original guys starts a new HVAC company, gets it working good, sells it ...

Oil and Gas field services does the same thing and only difference is they buy the company back and then flip it again.

A few years back I had to run door dash orders to pay the bills. I noticed then that distribution of labor removes a lot of the spirit and purpose behind the work.

No one at the call center is enjoying the satisfaction of a job well done, it is complete detached. I'm sure the laborers are pushed hard to high quotas and have zero time to follow up with customers.

I think we need to back to owning the entire system if we are going to have better services, better profits and satisfied employees.

Easy there comrade, you need to watch that talk about alienation of labor and ownership of the means of production. But it is interesting how a brief trip through the gig economy will start someone talking like Marx even if they (presumably) haven't read him.

I think that means we're doing as well socioeconomically as 1800s Prussia.

Like Marx or the Unabomber

The worst "foreign call center" experience I've had lately...

Hotel check-in. Walked in, lady at desk is read a novel, I ask "can I check in?", she directs me to a video-conference kiosk across the room, which is actively in-use by a high-maintenance customer who, in addition to changing her reservation details, can't understand a fairly light Indian accent. 15 minutes of waiting later, this other customer is still going around-and-around with the call center guy (who's being nothing but patient and trying his best with the system provided), the lady at the desk, rolls her eyes, harrumphs, and asks if I want to check-in with her instead.

Which hotel?

It was the Quality Inn in Kill Devil Hills, Outer Banks, NC. Typical mediocre beach hotel in that area.

I've turned down interviews with several companies after finding out they were PE managed. If you need the job take it, but otherwise find something with hope. After looking them up on crunchbase or the public filings, a decline on sight policy on PE owned companies has saved me a lot of time and, I think, career suffering.

Very curious how you conduct the research. I'm legitimately interested as at some point I almost accepted an offer from a company and one of my friends stopped me telling me that they're PE managed. Is there an easy systematic way of finding out without having to read public filings? How do you decide? Based on the ownership shares? Board members?

What's hard about reading filings that are literally public? The only barrier is english literacy, a solved problem. Crunchbase tells you any public funding rounds, and then if a PE group acquires more than something like 10% they have to make an SEC filing. (if I'm wrong about that threshold, the internet will correct me.)

I should disclose that early in my career I would do job interviews recreationally on my lunch hours just to get good at them, so it's not reasonable to just use what I say as a reference, and I've done serious reading and practice on negotiation theory and a bunch of other business topics, so essentially, I look at companies like an investor when I decide to work for them. Part of that is getting a sense of what their cap table probably looks like, because that drives the incentives in the product and organization. If you need a job, take what's available, but if you are serious, look at how startups necessarily survive as a function of their runway and board structure. Brad Feld's "Venture Deals" is a good reference, as is YC's startup school library (all free online) and then maybe Jeffery Pfeffer, then DeMesquita and Smith. Then understand how your own skills get them through the incentive structures described in those books. PE creates a set of incentives in an organization that are orthogonal to startup growth, they're just different types of companies. Once you know the board structure and the cap table, the survival of every company flows from the incentives that creates, imo.

I wasn't happy with the tone of that on a re-read. Last few sentences are good. Happy to contribute any additional details if helpful.

Thank you for the details, stranger! I appreciate it.

The problem is the vampiric, worker-hostile corporate ownership model. We need an ability to create and manage worker-owned co-ops more easily, maybe an "SAP for Co-ops". Not just to run them, but to collaborate on shared resources and infrastructure to federate smaller concerns as larger entities to the outside, be it a platform or a co-op network.

For the collaboration part, Mondragon sounds exactly what you're looking for.

https://en.m.wikipedia.org/wiki/Mondragon_Corporation

As for creating the worker owned businesses, I would recommend requiring every business that receives tax breaks or government contracts of any kind be equally owned by the workers.

That is public money and it should be used for the people's businesses. Don't worry, private businesses are so efficient, they don't need government help! Bootstraps.

Another idea is turning every post office into a bank and they only issue loans to local worker co-ops?

PE is just a rebrand of Corporate Raiders. The fact that this worked is a testament to just how much of our media is directly controlled by Wall St.

I sold my house to PE. I work for a conglomerate that was captured by a vulture capitalist and immediately flipped to PE. I’ve been thinking a lot about PE.

I think PE is this decade’s banks bailout. Bank balance sheets were severely unhealthy in the face of fixed rate loans and skyrocketing inflation. Easy credit was eagerly extended to anyone crooked enough take on variable rates and capture real assets.

The LLCs that the smart firms financed for their small captures (like houses) are going bankrupt while the revenue they booked is already packaged into REITs and held by corporations as part of their supposed inflation hedges (or timebombs).

Meanwhile, the reckless PEs owning multiple corporations are either going to flip them to international bag holders, or drown under the operating costs of servicing 100% debt-financed equity themselves.

When catastrophe comes, and bagholders go under, rotten assets will revert to the banks… and taxpayers will bailout the banks to protect hundreds of PE-owned corporations and thousands of “innocent” corporations saddled with toxic REIT-backed instruments and each other’s default swaps.

All of which means, if you were priced out of a home in the last three years, it might have been your future tax paying self who outbid you… on behalf of the banks who will indirectly own that home.

Don't forget the amazing track record of BCG leading companies into bankruptcy. Yes BCG consulted for Toy's R Us. Maybe there is more too it...

There is a conspiracy theory BCG is tied to SHF to lead companies into bankruptcy with help of negative news narratives and help from MM to internalize buy orders and place sell orders on lit markets driving stock prices down.

No concrete evidence yet but who knows when all they get is a fine and it's business as usual.

BCG also consulted for:

Blockbuster

OfficeMax

Pizza Hut

KLM Air France

K-Mart

Neiman Marcus

Pier 1 Imports

Sears

Toys R Us

Circuit City

JC Penny

Radio Shack

Texaco

Chrysler

MF Global

Conseco Inc.

CIT Group

WorldCom

Washington Mutual

Lehman Brothers

GameStop - Fired avoided bankruptcy

PulteGroup - Fired and avoided bankruptcy.

Isn't there significant sample bias here though? I imagine companies in dire circumstances would be more likely to bring on consultants to help "right the ship"

Also this isn't exactly their complete client list. That's like saying "Con Edison provided power to these companies and they went bankrupt!"

Which of these brands do you think were healthy, prior to hiring consultants? Which of them had healthy future prospects, and did not deserve to have 'their stock prices driven down'?

I'm not saying that the consultants provided any value add, but if a priest gets hired to say last rights over a terminal patient, it's hard to accuse the priest of killing the patient.

PE is only good for PE and privileged shareholders.

I think they have a place, maybe in hell?

My dad used to work somewhere that got taken over by PE. He was immigrant so can’t really change jobs easily esp in that environment. Fuck those asswipes for making his work life a nightmare that eventually permeated into family life because he was always stressed out.

I literally tasted a PE takeover once.

Those of you in Britain might remember a burger chain called Ed's Easy Diner. They had a shop in Soho, served really good "American" burgers and shakes. So good I used to yearn for them after I left the country.

I came back after a few years, and found they had expanded. I excitedly took my family to eat at one of the new branches.

I took one bite of what appeared to be my old favorite, spat it out, and immediately reached for my phone. The burger was now made of gristle instead of meat, other ingredients were worse, and the shake was not too nice either.

Indeed, it had been bought out not long after my previous visit.

I would high recommend the book The New Tycoons: Inside the Trillion Dollar Private Equity Industry That Owns Everything. The book was released 3 years ago and people are now waking up the devastations caused by the private equity firms everywhere.

The fuel of private equity firms is yours and mine 401K. That's trillion of dollars of money floating around. PE firms gets tons of cash as debt which gets sold to 401K fund managers. So, in essence, PE firms get money from you and me to destruct the local businesses we depend on. The entire story of making businesses capital efficient is bullcrap. PE firms lives to make short term profits and move on. They are not into business for its philosophy, values and long term customer loyalty. They want to cut the cost, make it look profitable and sold it to sucker to cash out.

> When KKR buys Toys“R”Us or when Carlyle buys the nursing home chain ManorCare, the debt is held by the company that they bought

That right there is what should be made illegal. Somehow. There's probably all sorts of technicalities wherein KKR didn't buy it directly, but as the majority of the board of TRU, authorized the self-purchase or something like that. But you shouldn't be able to force a company to essentially buy itself, pay you a lot of fees to do so, then fuck off while it drowns in the debt you forced on it.

If you have authority over something, you are also responsible for it. Both the good and the bad.

Old, old school solution: Nobody is stupid enough to buy the mountain of debt (junk bonds, whatever) - debt which will only be paid off if everything goes exactly perfect for many years to come.

Perhaps the SEC and DoJ should be considering fraud charges against the ratings agencies, investment banks, brokers, etc. who (in effect) represented that debt as worth ~100 cents on the dollar?

PE doesn't go through rating agencies. Their deals are by and large unrated and the debt for the most part is not traded on the secondary market because of that. That's why they can pull off so much shady shit.

It should incur some tax in that you took out debt with one entity, then another entity paid off your debt and it on its own. The PE has been paid the amount of the loan by the company they just bought as some kind of return

Well, they aren’t really forcing the company to do anything. The original owners agree to the sale which is financed by debt that is secured by the business.

The other non-owner stakeholders (employees, customers) may not enjoy this new deal but that is the reality with any new owner of a business.

Of course, it is crappy when this results in negative experiences for them but at the end of the day, employees are free to work elsewhere and customers are free to buy elsewhere.

That last sentence is mostly meant as a warning to the new owners: screw up the business too badly and you won’t have clients or employees.

So you're saying that technically, it isn't what it looks like it is. That technically, TRU is buying itself. That technically KKR isn't actually the new owner.

Technically, it's still predatory.

The business isn’t “buying itself” any more than a house does when you purchase it. The debt is just placed against the assets (real assets and cash flow). The business has owners. It doesn’t “own itself”.

I don’t think it is predatory at all. A leveraged buyout is a pretty fundamental and common strategy across all business types and sizes.

Don’t hate the strategy of buying a business with debt, hate the players that execute it like assholes.

It's literally the legality of the strategy that enables the players to behave like assholes in this particular incredibly destructive way. The use of debt financing needs to be made illegal or have stronger constraints, for the health of the country in general.

When I buy a house, the house serves as collateral on the mortgage, but ultimately I'm responsible for the loan. So I'm liable for the loan amount and am legally obligated to pay.

A leveraged buyout is similar except the "house" is responsible for the mortgage and will suffer reputational damage if it fails to pay. But no person or collection of people are obligated to pay (ignoring the collateral).

One of the benefits of corporations is that the limitations is liabilities allow them to take risks that would be prohibitive for individuals. Originally corporate charters required direct intervention by the government chief executive or legislature. Corporations were limited to tasks that served a public benefit as that government wanted to incentivize.

Leveraged buyouts where the buyer doesn't intend to continue the business long term or true to drain value from the company instead of focusing on it's main business seem like an abuse of the trust the public has invested in these companies when it gave them a corporate charters.

Of course, nowadays you can get a corporation with little to no documentation at low cost, so maybe the government doesn't actually give a shit what they do...

> Don’t hate the strategy of buying a business with debt, hate the players that execute it like assholes.

The purpose of a system is what it does. Players take whatever they can get away with, in this case a good old mafia bust-out, but laundered legal. In the shadowy world of PE, there’s even less transparency and accountability than the usual near-zero amount. I mean, you could just wait for the mob justice of a fully fledged revolution to do its magic but I think most of us would prefer toothful regulation.

It's interesting reading all of the stories of PE firms destroy businesses.

I've had those experiences, but I've also had the opposite experience. I used to work for a regional internet service provider/cable/phone company that was owned by PE. They poured a ton of resources into the business, improved our processes and standardized things so that we could expand to more regions.

Then they sold us for a nice chunk of money (for themselves, but employees got better pay and benefits under the new company). The new parent used our practices as the model to use across the whole business.

It was a good deal.

For a PE buyout to be truly successful, the current owners need to be vastly less informed and/or have access to fewer resources than the fund does. It's a function of both sides of the transaction.

When a PE doesn't think they could get a truly good deal, they are incentivized to flip quickly, potentially at the cost of the long term health of the business.

What this seems to imply is that many "middling" deals are the ones that are going to go sour - ones that worked fine before but where the PE could not figure out how to get it to grow faster. In those cases, the rational choice for a profit-maximizing PE is to use whatever tactics at their disposable to exploit it to the last cent and move on to the next project, as opposed to leaving the business alone.

More money has been going into PE, and businesses consolidate more. Good targets are harder to find, and more incompetent PE managers are coming to the market. What I feel this predicts is that the average experience with PE should decline over time.

I am curious if there is a database of all the companies that are being run by a PE firm to bring transparency around the track record of PE firms.

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.

[1] https://madoc.bib.uni-mannheim.de/31366/1/dp11076.pdf

[2] https://pubs.aeaweb.org/doi/pdfplus

This is a good question! I briefly thought of the same thing after the dentist’s office I’d been using for more than a decade began having utterly terrible service. By accident (an employee sent me an email from their corporate email) I found out they had been taken over by a PE owned dental outsourcing company.

That explained why overnight their office staff became a rotating assortment of people who had no idea how to run insurance or handle any problems and the visits lost all quality.

I would love to have a resource where I could see what entity actually owns a business or company. Not many people realize that even brands like Volvo and Arc'teryx that used to mean something are now owned by companies that if anything are known for the exact opposite qualities.

I’ve pushed back on previous discussions on here about PE because of lack of detail about wrong doings, however this article is excellent. “dividend recapitalization” seems absolutely insane for anyone running a business.

Yes: https://www.rollingstone.com/politics/politics-news/greed-an...

> Romney and Bain avoided the hostile approach, preferring to secure the cooperation of their takeover targets by buying off a company’s management with lucrative bonuses. Once management is on board, the rest is just math. So if the target company is worth $500 million, Bain might put down $20 million of its own cash, then borrow $350 million from an investment bank to take over a controlling stake.

> But here’s the catch. When Bain borrows all of that money from the bank, it’s the target company that ends up on the hook for all of the debt.

> This business model wasn’t really “helping,” of course – and it wasn’t new. Fans of mob movies will recognize what’s known as the “bust-out,” in which a gangster takes over a restaurant or sporting goods store and then monetizes his investment by running up giant debts on the company’s credit line. (Think Paulie buying all those cases of Cutty Sark in Goodfellas.) When the note comes due, the mobster simply torches the restaurant and collects the insurance money. Reduced to their most basic level, the leveraged buyouts engineered by Romney followed exactly the same business model. “It’s the bust-out,” one Wall Street trader says with a laugh. “That’s all it is.”

What I want to know, is how do the banks keep lending to PE outfits? They are surely the losers in this situation?

It's not like the government will allow banks to fail. Now consider the inverted incentives that might cause.

I don't know the answer here, so Im asking hoping that someone may. Couldn't private equity be seen as the "ants" of the economic landscape? Scraping the skeleton companies of the world for the last bits of meat on the bone and then move on to the next?

PE is more like a flock of buzzards, cleaning up the bodies at train wrecks. A very clever, malicious flock of buzzards - who've learned how to hack the switches & signals, to ensure an ample & growing supply of train wrecks.

More like zombies overrunning the last defenses of civilization and consuming the few remaining survivors.

Yes. That's perfect. Except that the animal they're eating wasn't necessarily dying, it might have just been growing slowly.

I'd say more like some slimy poison frog, toxic, nasty and only care about themselves while smearing themselves all over the place. Looks great from a distance tho.

Or, they are a self-aware trolley that eats run-over people after choosing to switch tracks to where a bunch of people are tied down.

I think more similar descriptions can be found, but as for what they really are: definitely not the economy immune system cleaning up the remains of dead companies. They are just predatory wealth hoarders. But it's all legal and I'm sure the people making lots of money don't emphatise with the rest of the humans, otherwise they might not be doing it.

Frogs are notorious for their selfishness.

> Or, they are a self-aware trolley that eats run-over people after choosing to switch tracks to where a bunch of people are tied down.

This is pure poetry.

No -- the companies in question aren't usually basket cases -- if they were, they wouldn't have the assets to make the PE takeover profitable in the first place. In most cases, they're growing at a fine, steady rate, or even better. It's just whatever the PE vultures can get away with.

Instant Pot just got knifed by PE.

https://www.theverge.com/2023/6/12/23758602/instant-pot-bank...

> The other reason it’s absolutely got to keep growing is that there are expectations placed upon it by Cornell Capital, the private equity firm that acquired the Instant from its founder in 2019 and merged it with Corelle Brands, which makes all the Pyrex and CorningWare products you probably heat up leftovers in. … > Sometimes you don’t have to grow at all costs. You can just be very good at one thing

By knifed you mean the corporation that owns it is going through chapter 11. Debt will be converted to equity, and the shareholders will be wiped out.

Instant Pots aren't going anywhere.

Instapot was going into a crapper PE or no PE.

That's a pretty low-effort take. I'm a very serious cook and I absolutely loathe kitchen gadget culture but the Instant Pot has to be the most innovative kitchen tool created in my lifetime. It's a mobile oven, pressure cooker, saute pan, and mess-free food transport system all in one and it's affordable. The amount of food it can produce relative to the active cook time needed is unparalleled. It's the gateway drug to cooking for people who grew up not knowing how to cook.

It’s going into the crapper because there are so many instapots you can sell.

The company sold them and then revenues went into the toilet.

I feel like private equitys game plan is generally to make a good profit while making employers and customers both miserable. So... this is great for our society.

This has been capitalism at large since the days of "there's no such thing as society." and I mean that literally. When the edict became shareholder value over all else, the nosedive began and now we get to feel it in earnest.

I have a game, whenever I see a familiar brand or local franchise selling consumer products or services whose quality seems to have declined recently, first I try to guess if they've been PE funded, then I check by going to their website and looking for the "investors relations" page, or googling "<company> investors". It's crazy how often it's the case.

Ballou's criticism of PE fund managers being skilled in finance but not in operations or engineering is missing the point. A good PE fund manager understands the ins and outs of capital allocation and its long-term effects on corporate performance. A typical engineer or product company founder does not, and those who do are the exception. PE companies are never operators of businesses. They find (ideally) competent management teams and advise them in capital allocation. Ballou alleges PE buys to pillage and throw away the corpse. In truth, PE buys to sell, that's the only way to make good returns.

In a perfect world, they'd buy an under-managed, undervalued company, where necessary throw out management, bring in competent management, perform bolt-on M&A where it makes sense, improve KPIs, then sell a rejuvenated and much more competitive company 5-10 years later at a much higher multiple. Examples? Ingersoll-Rand, Brenntag, SS&C. Unfortunately, Ballou does not talk about the positive outcomes because they don't make headlines.

Private equity buying goods that should be public (e.g., hospitals, schools) is a disaster that is crippling society. It should be banned.

I have seen this happen over and over. This is the issue that should be front and center for elections but public doesn't know what is going on. Recently PE firm bought out the building which had oldest and only rock climbing gym. PE firm refused to renew their lease and forced to shut it down. The entire community of rock climbers basically died overnight. Lots of children growing up and learning this sport would not have opportunity that their parents did.

The disease of PE firm is very real. I am all for free markets but this is NOT free market. These are the cockroaches that get capital from funds that manages yours and mine 401K. They use that capital to kill local businesses, install new passive income generator like warehouse in order to cut all the costs and then sell it back to suckers for short term profits. The price of their profits are paid by huge negative impact on who continues in the area where they caused devastations.

While you've clearly explained how this is bad, how is this not a free market?

>an economic system based on supply and demand with little or no government control

It is not the free market because they are privileged through their connections to acquire massive amount of cash in form of credit. The trillions of dollars available in funds from banks and retirement funds are managed by just handful of entities. You and me don't fly in our private jets to play golf with CEOs in Palm Beach. You and me don't have privileged access to these entities to get $10M loan in blink of an eye to buy up a local Rock Climbing gym and shut them down overnight. They CAN and they DO. They use their massive credit leverage through privileged connections to destruct any businesses they want, extract short term profits and move on. In many ways, few entities have monopolies over such credit leverage and that's absolutely not free market.

So, "because nepotism"?

That's always been a problem and capitalism can't solve it.

There are an enormous amount of laws governing private equity. Clearly there is a lot of government control involved in the industry. Government actions basically makes PE possible in the first place.

Well, to be fair, doctors sold themselves out. In New Jersey and New York City, I have to explicitly state that I only want to meet with an MD and not an assistant physician or nurse practitioner. As to how this is even legal is probably explained by insurance company lobbying efforts for cost control.

That hasn't been quite my experience.

I've used PAs/NPs when it was appropriate (annual physical, etc) - I don't need an MD to take a blood sample, run a blood pressure check, and read of a standard checklist of questions.

And I've seen MDs when that was appropriate (specialist procedures, things that aren't "a cold", etc).

There's room for both.

Well, there is a nationwide (potentially global) doctor shortage.

It's not like doctors are sitting in a room twiddling their thumbs because insurance companies in the US are cheap.

Residency programs are kept artificially low through successful efforts of the AMA to intentionally limit the number of doctors in the US.

Doctors are a cartel. Every organization that artificially controls the number of doctors is run by doctors.

Ofc, no individual doctor is malicious, but their continued support of what's effectively a 5-10 year hazing is at the core of the issue.

Freakonomics had a couple of related episodes: https://freakonomics.com/podcast/should-you-trust-private-eq....

Not just in the US either - in the UK my local gym (part of a national chain) that I've been with for over a decade got bought by a PE firm. In 18 months the fees went up over 60%. They used to give out regular guest passes - now only 1-2 passes once a year and they're valid for less time than they used to be. They've also doubled the charges for bringing a guest.

All these price increases and while the staff are still nice, the gym is now overcrowded and many times there isn't any equipment available. Also, there is dust on almost all the equipment - like a thick layer, clearly the only thing being regularly cleaned is the floor.

Naturally, I am looking to go elsewhere but my impression of PE as a consumer based on my personal experience is quite negative.

The PE firm has managed to charge more, clean less, AND bring in enough customers that the gym is overcrowded?

I'd be looking elsewhere too, but from a business perspective that sounds like a roaring success.

> I'd be looking elsewhere too, but from a business perspective that sounds like a roaring success.

Short term, yeah. Long term, it's a big opportunity for someone else to come in and provide the original superior service and eat their lunch.

This is weird.

- Prices went up - Way more people are going to the point where it’s overcrowded - But still dust accumulates on the equipment?

I am getting into M&A, which is what PE do, and I don't even need to read the article to know it's bs.

In essence, the PE firm's goal is to consolidate multiple companies, make them work as efficiently as possible, by sharing resources and utilize the best processes, and then either operate them for increased profit or sell them off for good multiples of earnings, because they have added value to it, so someone else can run it from there on with less headache and no more need to put these efficiencies in place. There is nothing bad with any of this. In essence, it's about bringing efficiency into the market and getting paid for doing so.

>> "There is nothing bad with any of this."

My experience has been that once a small business is snatched up by a firm, customer service goes out the window and the focus on efficiency leads to a marked decline in overall quality. I'm sure it's all gravy for the people making money though.

If decline in service goes up, the people at the top most definitely feel it. It is actually multiplied by the fact that it is consolidated. So it is exponential.

The problem with ->big<- PEs is that they usually do not care too much. They usually have 5y exit plan, no matter what. If they are managing other people's money, like pension funds and whatnot, they usually do not care because they already got their fees. So yes, it can become a problem over time. Large PE firms simply gobble up every good deal they can so it is quantity over quality. But then, this can happen with small shop anyway. With PE it might be more exaggerated due to the scope but that's just the market. It bares what it financially can and it does not matter how big or small a business is if the management is lacking.

But even big PE firms can be good managers. So again, it is circumstantial and not something that can be generalized.

There are always bad apples. But those apples, once they make their bad name, they will go out of business sooner or later because other people will know of them and to avoid them.

Genuine question, why do most articles discussing PE seem to portray them in a malicious light? Fundamentally, PE investors have skin in the game - they do invest on behalf of their LP, but typically GPs contribute a portion of their own income into the fund as well, not to mention their compensation is tied to performance. The consequence of that gives them every incentive to help a company succeed, and not ruin it.

Sure there are failures as with every investments, but one can simply evaluate the overall returns within the asset class across a period of time to see that there is value being created (or at least allocated)

Because Private Equity is associated with squeezing every penny from the purchased business and making user experience a secondary concern.

For some examples, read some of the stories in other comments here and on the web.

Here's another perspective - I've seen PE firms do as you described, cut costs and fire employees, just as much as I've seen them inject more capital into a business and help them with further M&A. Having better user experience can lead to increased revenue (better product, improved branding - leading to increased market share for example) - which should equally be an incentive to PE firms as well.

None of the anecdotes you mention counteract the nature of the industry as whole: https://caia.org/blog/2022/07/20/long-term-private-equity-pe...

I've already caveated that bad investments may occur. My question is why the negatives are being focused versus the positives?

I don't know if it was PE change, but I remember the last time I went to Toys R Us. The whole shop was full of expensive garbage toys. I didn't buy anything and left feeling like someone had just tried to scam me.

Rana Foroohar effectively wrote about this in her amazing book, "Makers and Takers". She discusses the ongoing transformation of the economy from one of innovation to one of financial services - using companies like Ford and Apple as examples. Frankly, it's brilliant and highly recommended, regardless of agreeing with her nor not.

If anyone has read her second book, I'd love to know your thoughts - I'm debating it, and given what think pieces are books can be... it's a serious investment for me.

Curious hot take:

There's really dumb money, i.e. public markets

Then there's dumb money, i.e. VC

Then there's smart-ish money, where I'd place PE, that basically wants to strip mine any value away from companies

And it must be some kind of food chain - people get rich from dumb public investors, dupe some companies investing in venture funds, pillage some veterinary clinics or dentists or whatever. But then what?

Is there really smart money somewhere making good, sustainable investments in stuff, to secure generational wealth? Some pension funds maybe? And some family offices?

One of the Montessori schools in SF (across the street from blue bird hq) was bought by some Miami PE fund… that and some other data points informed our decision to pass on it.

I can’t speak to Toys R Us specifically, but if the underlying business was solid, it would reemerge under chapter 11.

All of the corporate profits from the post-pandemic bonanza, the ones that were the single biggest contributor to the ongoing inflation, are now free to crash other markets because that cash has to be invested somewhere.

Vulture capitalists are bad, but at least sometimes they can fund something decent. PE is full of scammers and criminals that honestly should be behind bars because their entire existence involves destruction. It should be blatantly illegal to buy a company and saddle it with the debt you used to buy it.

I am not anti-capitalists by any means and I think much of the VC industry is a Ponzi scheme. But at least some good comes out of it occasionally.

But private equity is pure evil. I worked for a number of VC backed companies and the only one that failed completely was just not able to pivot to a changing mobile landscape as much as we tried.

We had a years long head start on mobile devices/field services with Windows CE and Microsoft imploding in mobile and the rise of iPhones and cheap Android devices was too much of a sea change.

On the other hand, the slice and dice and look good for the public market that I saw first hand from a PE firm when I was the tech lead was too much. They wouldn’t hire any permanent people for a massive migration/integration effort as they were consolidating the market and forced me to use contractors.

At overinflated values I'm sure. I guess this is what happens when interest rates are low and all the good companies have been bought up.

I think that smart money understands that the US dollar is going to lose a lot of purchasing power or value so they want to buy up “real things.”

There’s an effective tactic for dealing with Wall St control: unionize.

If you haven't read Barbarians At The Gate.... you should.

Not much has changed.

I fucking hate the financial system

I've been reading this book. I’m not actually done with it, but I’ve gotten through a pretty substantial portion of it. The author clearly has a bias, having worked as the DOJ as a prosecutor, but also has the facts to back up what he’s saying. It’s not like this bias makes him not credible. However, there were times when reading I would say to myself, “yeah but a company would probably justify things this way…” I’ve seen firsthand a lot of rationalization of things that seem bad, so maybe this is just how I am now.

My takeaways thus far:

1. The author seems to put the blame squarely on the shoulders of private equity firms. While they’re obviously not blameless, a lot of the blame should also go toward the C-suite executives and the boards that run the companies that are eventually bought by these firms. I’m guessing that for the most part, these schemes, like taking out massive debt to pay the PE firm, also hugely benefits the executives that are probably agreeing to sign over the firm for a payday. If I’m understanding ‘dividend recapitalization’ correctly, it’s unsurprising that an executive at a target company would turn down a “loan” that they themselves literally never have to pay back. I mean, corporate executives are probably the kind of people that have been waiting their whole lives for someone to make them this exact offer.

2. I’m getting to the part on how some of these cases have been prosecuted, but it doesn’t seem like the fines for doing anything illicit ever outweigh the benefit of doing so in purely dollar terms… as the author says, the lawsuits and fines faced by these firms are “just a cost of doing business.” If the government is getting paid the fine out of the profits made by illicit activity, then this pretty much fits the definition of extortion by the government as David Graeber has pointed out (somewhere, I don’t remember where). PE is definitely not the only industry that this occurs in but I guess I wasn’t aware of how entrenched they are, especially with the GOP.

3. The easiest way of thinking about these PE firms is almost as if they weren’t run by humans but as if someone wrote a program to extract profits over a 5-year horizon by any means possible. You almost have to admire some of the legal loopholes that they’re able to exploit (and question why they exist). Usually there is at least some potentially fake virtual signaling that comes with “public” capitalism, but in the PE world, it seems like none of that exists (with the pretty hilarious exception of Tom Gores, who released this statement while benefitting from charges from prison phone calls). Most “steady revenue streams” and things that make sense on paper AND abide by the social contract are probably already owned, and anything left screws someone over, somewhere in a pretty unethical way.

4. Following from the last two points, my guess is that the thing that PE firms fear most is press and journalism, not because it affects them directly (they probably don’t care about that) but because it puts pressure on companies and funds and whoever else is involved with them to divest if they don’t want to be considered evil. Like I said before, profits that look good on paper and in Excel are almost undoubtedly screwing someone over somewhere, and people (read: executives) want these profits, but they don’t want to know how they’re obtained. PE firms do this dirty work. A big, underrated selling point of PE seems to be blame avoidance – if you’re the CEO at a major retailer, you hate your job, and you want to retire in Beverly Hills now with absolutely no mortgage payments, then PE is your answer. If someone starts attacking you on Twitter when the benefits get cut, you’ve got a great alibi – “I had no idea Blackstone was gonna do this!”

PE = pirate equity

If you want to understand what went wrong with America, start with private equity

Lobbying/Bribery seems more egregious than investing.

At least investing has some economic forces that cause people to conserve resources and allocate them better than prior.

Lobbying/Bribery is just pure corruption. The medical industry is so extravagant because they are among the top lobbyists of all time. Only the entirety of real estate or all US businesses(chamber of commerce) can even compete with merely the American Medical Association or AHA. Heck, combining all of medical and the lobbying is worse than every other industry including all US businesses

https://www.opensecrets.org/federal-lobbying/top-spenders?cy...

Private Equity is the most destructive and bad-faith-operating version of investing, in much the same way that Kim Jong Un is the most destructive and bad-faith-operating version of a politician. The capital that one would define as the "investment" is in fact just a viral delivery mechanism, so the parasite can infest the host, devour its innards, and leave its husk to dry up.

> At least investing has some economic forces that cause people to conserve resources and allocate them better than prior.

Not when the money is basically free, e.g. the last decade of money policy. PE has always been around, so why is it hated now? Probably the forces that would normally keep it in check, namely, a cost to capital and a competitive business environment (as opposed to monopolies and natural monopolies all over the place) haven't been present in the last decade.

PE has been hated since at least the 1980s, when capital was very far from free.

Yep. When Carl Icahn was doing it they just called it "asset stripping" and "corporate raiding" instead of using the term private equity.

Fucker made squillions off the backs of misery for hundreds of thousands of people.

Don’t forget teachers unions and the Dept of Ed.

They bleed taxpayers dry because they are “helping the children” and everybody knows a nice teacher who isn’t part of the problem but will be held out as a defense of govt and union corruption.

> At least investing has some economic forces that cause people to conserve resources and allocate them better than prior.

That's a really whitewashed way of saying "layoffs, benefit reductions, and no more pay raises or bonuses". Far too often, "economic inefficiency" translates to "workers are too highly paid", you see this all time now with companies complaining about a labor shortage while there are tons of people ready to work for respectable wages.

Where does the money for all of that lobbying come from?

Bribery has and will occur in every society. Lobbying is so bad in the US because certain groups have basically unlimited money

I mostly agree with this. I would say a lot of what is wrong with America is that corporation laws allow this kind of thing. There are other ways. Nobody thinks Germany is an economic backwater and they require, I believe in large companies, for employees to have a role in the management of the company [1]. There are also co-ops like the Mondragon Coop in Spain[2]. Some states have co-op laws but are mostly used by farmers and a few other niche things.

Interesting, most professional firms must be managed by their professionals, so law firms are partially "worker owned" too.

But I think the German model is probably the best. Equity interests and employee interests can both be short-term, but usually the best way to balance them is with long-term thinking.

I'm not sure that would save the world, but I think it would improve the lives of working people.

[1] https://en.wikipedia.org/wiki/Codetermination_in_Germany [2] https://en.wikipedia.org/wiki/Mondragon_Corporation

What I know about PE firms in Europe, they mostly operate the same way as in the US. There are plenty of PE firms and in general to me it feels like they are more popular here than US actually, as with LP's they are perceived as lower risk.

What I don't understand from the article, is how the PE firm is able to shift the debt from the buyer to the firm. That shouldn't be possible in any jurisdiction I know a little bit of, and I highly doubt that it is easy to do in US.

Leveraged buyouts. I’ve seen them explained like a mortgage, except that doesn’t work in my head either.

I am not a PE expert but I will try to explain using the mortgage analogy. This is drastically simplified. The shoehorned part of the analogy is that a bank won't exactly lend as described below.

You take out a mortgage for a property you intend to cashflow by posting it on AirBnB. You open an LLC to do so. You put down a fraction of the price of the home, let's say 5-10% and then you do some upgrades, but you borrow against the price of the home for the upgrades, not against your own credit. Now, you start AirBnBing this very nice house out for absolute top dollar. It's nice and people love it, you have great reviews. Every time you get a payment from AirBnB, you take most of the money and move it to your personal bank account as a "management fee" or a "bonus" and you put the smallest amount possible into the mortgage and the second mortgage (the one you used to upgrade the house). Now, as the house gets more use, or you cut costs, say on having the pool cleaned, or on yard maintenance, the house goes down in quality pretty significantly, but your original AirBnB ratings are there and people are willing to pay significant sums so you continue to rake in cash, and you try to avoid maintenance as much as possible.

Eventually, the place is a run down heap, and people are leaving terrible reviews, so you stop having bookings/cashflow. Okay, now you just send the keys to the bank and say "it's your problem". They get a rundown house that has barely repaid its mortgage, and you get to keep the cash. The trick is to have moved a lot more cash into your account than you lose in the mortgage down payment.

Edit: I should add that PE firms aren't always trying to extract value at the cost of the business (sometimes they absolutely are). However, they are always incentivized to make cash flow and take maximum business risk for potentially even larger payout.

> Every time you get a payment from AirBnB, you take most of the money and move it to your personal bank account as a "management fee" or a "bonus" and you put the smallest amount possible into the mortgage and the second mortgage

Correction: you pay your debt first. Then you take the money and spend it on yourself versus investing in the business, upgrading the home.

It’s basically the acquisition (buying out) a company using debt-financing (leverage). The typical plan is usually to use business revenue to finance the interest payments, optimize the business via cost-cuts or roll-ups, and flip it for a profit in 5-7 years. Like most things, PE can be helpful or destructive depending on the execution and the exact strategy for flipping.

At its best, it’s bringing in experienced operators and maturing a company into something that is stable, before selling it to an acquirer or IPO.

At its worst, it’s saddling a weak business with debt, hiring terrible execs, and making unsustainable cost cuts to stave off an implosion.

The strategy matters a lot. Some funds specialize in “distressed assets”, for example and are very good at carving up dying company and selling it for parts.

Thank you, this is a balanced and detailed response. I don’t personally “buy” the narrative that all LBOs are destructive. After all there are entire funds devoted to LBOs and how would these PE outfits carry on getting loans if their companies constantly defaulted?

Thats right. At the end of the day, PE investors need to make their returns and blow-ups like Toys-R-Us did not make good returns. That said, there are systematic problems with the incentives involved.

1. PE investors tend to be VERY financially savvy, but sell to less skilled investors. If they see that they have the chance to sell one of their assets at a great price, they don't have any issue with anyone holding the bag. There were at least a few IPOs/SPACs that left the (relatively less-savvy) public holding the bag.

2. PE investors tend to be be finance-minded, not operations-focused. That means that their planned optimizations think about the financial health of a company, not the "real" health. Culture can suffer because of this, for example.

3. PE is very interest rate dependent, and low interest rates / bad investors can (and probably did) make the tech bubble worse.

I'm very interested to see what's going to happen to private equity now that interest rates are above zero. At the very least I have to imagine some of the loony schemes like buying up houses are going to stall.

Debt can be acquired so long as there's a counterparty willing to lend it. Banks can be convinced to pony up a lot the cash because the business will often have scrap value if all else fails and they can secure themselves a very senior tranche to get that scrap value if everything goes belly up. The unsecured tranches are often marketed directly by PE firms to suckers otherwise known as investors. They like to do lots of little things to make the investor feel better like being able to convert debt to equity at highly attractive rates ("if we IPO you'll make squillions!") but for the investor they might as well be buying a lottery ticket.

>I highly doubt that it is easy to do in US.

There are many such cases. The book in the article "Barbarians at the Gate" was probably the most famous instance until AOL took over Time Warner.

We also have very effective unions in a lot of sectors, particularly manufacturing. They're usually one of the main factions in a Betriebsrat, so do a lot of negotiating long before problems rise to the level of a strike.

We employees vote for our Betriebsrat members, and in very large firms like mine, the candidates organize themselves into faction lists (kind of like parties), and it works basically like electoral politics do in the national and state parliaments. At my company, our Betriebsrat elections are every four years. You can go to the Betriebsrat, either individual members or the council as a whole, with things Americans would (reluctantly) go to HR for.

The top members of a large company Betriebsrat (but not all - our Betriebsrat is way too large for that) are then part of the board of directors during their elected term.

A former IT colleague of mine is currently serving as a full-time Betriebsrat member after years of being involved, still receiving his full salary; he will go back to working in IT again at the end of the current term. Another colleague is a lower-ranking member (different faction, too) and just gets a certain number of paid hours per month to do Betriebsrat stuff.

There were many similarities to this in the US. Employment lawsuits are a constant drag on business, but this is the future they chose. Where a labor contract existed, dispute resolution was often easier similar to the way you said and can be a lot more likely to stay out of the courts. Businesses do not want to hear this. They'd rather avoid the slow drag of the union and risk never hitting the landmine of an employment lawsuit, until they do. Now there are very few unions left, especially in the private sector.

Nah, many countries have it. If people have a damn it would be a different story but in the US, cheaper is always better. See architecture, food, housing, hotels...

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