I hear that PE destroys products and culture to make money at all costs, but i don’t get how that can net them back the >$6 billion they paid for a company with <$300 million yearly revenue and negative profit.
[1] https://d18rn0p25nwr6d.cloudfront.net/CIK-0001496963/d08174f...
I don't know what the customer makeup of Squarespace is. It could be that by volume their typical customers are business that fail a lot, or have a high amount of churn (think sole proprietorships, businesses with 1 - 10 employees without in house tech experience, or part-time/side businesses like Etsy or Instagram stores). Depending on the makeup, a significant amount of this marketing could be required just to maintain a constant customer base.
If this is the case, Permira and its lenders are bailing the public out of a shit business on their own dime.
https://cloud.substack.com/p/5-interesting-learnings-from-sq...
Not always true. Certainly your impression is based on something real, i.e. people like Carl Icahn and other 1980's corporate raiders. But the fundamental way in which PE can add value is by forcing leadership change and removing the pressure (from public markets) to deliver better numbers every quarter, to instead make deep cultural change and deep investments in the business that will take years to pay off. One of the better examples from recent years was Dell: https://www.crn.com/news/data-center/dell-s-public-journey-f... .
I'm interested in hearing other PE success stories where the product isn't ruined as a result.
Because on average, target firms of leveraged buyouts become more productive [1]. That lets them pay back shareholders and lenders in most cases.
The reason public perception is off is the size effect and availability heuristic. The first shows that big deals do badly [2]. The second means the last widely-reported deal is likely to stand in for private equity in the public consciousness [3]. Add in inflation, which makes each sticker price seem more historic than it is, and the fact that the last deal in a cycle is doubly cursed by being financed and priced at precisely the wrong time and you have a consistent pattern of the most recently-memorable deal being a clusterfuck.
[1] https://www.jstor.org/stable/43495362
[2] https://www.sciencedirect.com/science/article/abs/pii/S03044...
I think private equity-induced lay-offs seem to create more negative PR than corporate ones, but I have no hard numbers.
(Private equity in healthcare has also been an unmitigated disaster, which obviously doesn't help its image.)
It's always hard to analyze anything this big, especially with something as vague as "more productive":
> First, employment shrinks more rapidly, on average, at target establishments than at controls after private equity buyouts. The average cumulative difference in favor of controls is about 3 percent of initial employment over two years and 6 percent over five years. Second, the larger post-buyout employment losses at target establishments entirely reflect higher rates of job destruction at shrinking and exiting establishments. In fact, targets exhibit greater post-buyout creation of new jobs at expanding establishments. Adding controls for pre-buyout growth history shrinks the estimated employment responses to private equity buyouts but does not change the overall pattern. Third, earnings per worker at continuing target establishments fall by an average of 2.4 percent relative to controls over two years post buyout
So if I'm reading this right, huge layoffs followed by lots of churn with an overall decrease in salaries. But I must be missing something because the framing & wording seems to suggest that this is a positive thing. That paper also only looks at 2 years of data following acquisition. But the criticism for leveraged PE takeovers like this is that the PE firm is starting a 5-10 year project to strip mine the company for all it's worth and leaving a husk of a company that's loaded with the debt that was used to acquire it and no real assets. I'm not sure how looking at the first 2 years tells you anything.
The PE firm's switch to cheaper labor and suppliers is also reflected typically in a significant decrease in product quality which isn't analyzed here.
The main argument for leverage PE buyouts are they are performing a valuable service as they're doing a more graceful shutdown of a company vs letting the company fail on the public markets. But that's a harder argument when squarespace doesn't seem to be particularly struggling - they just IPOed during the pandemic bubble when internet stocks were crazy overvalued but they've been working their way back up.
Long-term default rates for private-equity targets are low across markets [1]. Banks and leveraged-loan lenders tend to get paid back.
Also, most targets that later go public have low enough leverage to be able to immediately pay dividends [2]. You just don’t tend to hear about the specialty farm equipment maker IPO in most circles.
> that's a harder argument when squarespace doesn't seem to be particularly struggling
They’re turning hundreds of millions of dollars of revenue into hundreds of thousands of profits by spending hundreds of millions on sales and marketing.
[1] https://core.ac.uk/download/pdf/154670852.pdf
[2] https://www.darden.virginia.edu/sites/default/files/inline-f...
You read it right. Private Equity firms come in, and then lay off everyone they can and replace them with the cheapest folks possible, to churn down salaries and get rid of long-time staff with higher benefits costs. It's the classic playbook, and it's written here positively because if you're a soulless MBA beancounter, this is a positive thing. If you're a 50 year old engineer who is 12 years from retirement and just got a cancer diagnosis 6 months prior, it's not a good thing though.
Also good to remember that the business model of PE firms is to buy a leveraged asset, hold for 5 ish years, resale asset at a higher price than it was bought from. Ofc easier said than done, but these investors don’t get involved to lose money purpose
traditional LBOs are not done on revenue multiples
Also, CFs are the most important thing for an LBO. The point of this investment model is for an asset to pay for itself, so if it has no cash flows how can it possibly do that. Also cash flows =/= profit here. You can be cash flow positive and not be profitable.
And you are right about LBOs not being done on rev multiples
The point is Tech companies don't strictly need profitability to be considered good LBO candidates, because everything is done at the top line level for the "sexier" very high growth companies.
The asset still "pays for itself" on exit, just not so much during the investment period. In other words, the value to equity holders is not from debt paydown with the assets' cash flows, but with the exit proceeds.
Mainly when I look at this, I think "it doesn't seem like its that easy to make money in PE these days." Maybe in the 80s there were lots of large corporations that were so poorly run that you could buy them with debt, cut costs, and make lots of money (see RJR Nabisco/Barbarians at the Gate, that was a terribly run company). But in regards to this deal, someone raised $6B, had to find a place to put it, and found the pickings were pretty slim.
Still, someone apparently thinks they can cover the debt service with the cash flow.
https://investors.squarespace.com/news-events-financials/inv...
For a company like SquareSpace unless they're massively overspending and they are rife with inefficiencies I don't see how this works out for the PE firm.
red lobster acquired by Golden Gate PE in cash deal in 2020 [1]
red lobster subsequently squeezed for any value at all costs (cuts in labor, switching suppliers) [2]
[1] https://www.restaurantbusinessonline.com/financing/asian-inv...
[2] https://www.cnn.com/2024/05/03/food/red-lobster-seafood-rest...
1. Acquire loan to buy company
2. Take money that was being spent on growth and use it to make the payments on the debt
3. Try to decrease operating costs while maintaining revenue or increase revenue while maintaining operating costs (or some combination)
4. Sell the company for more than you paid based on the improved profit margins
The key is finding a company who's still spending on growth but isn't really growing. If the company is actually still growing then you're going to have trouble making your money back if you cut growth activities (because your initial price would be higher due to implied growth in the future).
The challenge is in step three. Can you increase revenue or decrease operating costs without sacrificing too much goodwill? If you do too much to scare away suppliers or customers then step 4 is hard and the whole thing blows up.
...and have more site downtime