Private equity no longer necessarily involves large amounts of debt, i.e. LBOs. Most managers have an economic effect they deploy to bring efficiency to an industry. The first popular one was deconglomeratisation. Then capital structure management. Digitisation and supply chain management followed. In each phase, they delivered then overcorrected.
Hospitals initially started on the scale side. The thesis was that the biggest cost centre is administration, so if you linked together the administration of many hospitals you could reduce costs compared to private practices. This initially panned out. But hospitals are natural monopolies; those initial theses were rapidly corrupted.
> given how often these businesses end up in bankruptcy
Private-equity backed companies tend to be more resilient, not less [1].
[1] https://siepr.stanford.edu/news/private-equity-firms-show-re...
Or, your PE firm is actually owned by a foreign country and they don't care about profit as their long term goal is wrecking your country's economy.
Even in the case of bankruptcy though, the bondholders may still come out OK. Toys R Us actually made about 5 billion in debt payments in the years it was privately owned, and it took about 5 billion in debt as part of the buyout. The bondholders may not have gotten the return they were expecting, but they mostly got their principal back.
All of that said, the real problem as I see it with PE is that it's just so exploitative. The only thing that matters is the investor's money. For example, one very common strategy after a buyout is to cut quality in various forms. People may have a positive quality impression of a store or a brand, and then keep buying it even after the PE company cuts quality. It takes them a while to realize that the product they're buying is not what it once was, and so the PE firm is making money by tricking people into buying bad products.
The hospital case is just an extreme example of this where the cuts in quality lead to people getting sick and dying.
PE benefited greatly from a long-term decline in interest rates. The amount of debt a company can service at a given profitability is directly related to the current prevailing interest. So as long as interest rates drifted down, PE firms could buy, load with debt to be paid out as dividend, and sell again, sometimes to the next PE buyer.
Secondly, banks will not hold this debt directly on their books, but either sell bonds directly (the low interest environment led to some life insurers and other long term investors to buy pretty risky corporate debt) or repackage them with (hopefully) uncorrelated debt to obtain better ratings (price).
There's an argument that the success of PE funds had everything to do with them being a macro bet on falling interest rates.
It’s incorrect. The leveraged buyout, for example, found its footing in the high-rate environment of the early 1980s.
As in: The fact that the 80s had comparatively high interest rates doesn't matter to the argument, as the necessary infrastructure to issue and trade high yield corporate debt quickly didn't exist - so in some sense effective interest rates dropped from infty to something, enabling the entire LBO model.
And since then, with the exception of the recent hiccup, the long term trend in interest rates has been downward?
What's your read?
Capital was uniquely available in the 1980s. But Milken was a symptom, not the cause. The booming American economy provided the fuel, but digitisation turbocharged the engine: issuing, pricing and trading securities, in particular bonds, became easier very quickly. (This is why your stereotypical trader from the 80s has an accent and is uncouth. They replaced blue-blooded bankers who had run bonds, calculating prices and yields by hand using tables.)
Put another way, America is “unusually good at creating tradeable claims on the profits and revenues that its economy generates” [2]. Computers amplified that strength and prompted massive opportunities in reshaping the economy.
> with the exception of the recent hiccup, the long term trend in interest rates has been downward
Yes, this is a function of increasing stability and time horizons [1]. That said, the relevant frame is a fund lifespan, usually 5 to 10 years. (Unless you’re Warren Buffett.) In those intervals, the long-term signal is dwarfed by short-term noise.
[1] http://www.economist.com/news/finance-and-economics/21598651...
[2] https://www.bankofengland.co.uk/-/media/boe/files/working-pa...
And I'd be surprised if in the period between 1980 and 2021 you could find a 10 year interval that didn't exhibit significantly lower rates at the end than at the beginning, and only a select few 5-year periods.
You seem to have the viewpoint that this had nothing to do with the historical performance of PE funds?
It had a strong effect. But it’s far from dominating. Compounding PE’s performance woes are that fundraising is easier when the economy is strong. That is why there has been a tendency of the largest LBOs happening just before a downturn; the last cycle’s was Twitter.