PE is good business for the raiders, bad business for the raided.
And when they part one out like you are referencing, it’s usually a bad business. While what Eddie Lampert did to Sears/K-Mart was criminal, or at least should be, they were not a good business and hadn’t been in a very long time.
A good business is rarely worth more parted out than whole. It’s most often good business for the “raided” too because they are failing and the alternative is bankruptcy. A company that survives after laying off 25% of its staff still employs more people than one that dies entirely.
This is why they prefer companies with high revenue and low profits. That’s nearly always the sign of a business that has been mismanaged and can be fixed.
I have come to the conclusion that people in tech are as largely ignorant of finance as people in finance are of tech.
I've always been very skeptical of the sale/spinoff of various divisions of automakers in the 80s/90s. To me it always felt like they were looking for a short term profit vs the general 'steady pace' of government contracts and the like, I also can't help to feel amazed nobody even showed a good second option for the next gen mail carrier... but again, I feel like it's because everyone sold the farm already.
I think Tesla is a good illustration. They make a lot of parts other auto makers outsource, and they also have a whole lot of quality control issues. I am sure I suffer from observational bias here, as my GF has a model Y and I notice all the parts that fail that never would on any other car (like vent fans, door handles, etc.) but the upside exists in some engineering document or p&l I don’t see.
Well I'm you can certainly speak for yourself, but that doesn't mean the rest of us are, so maybe keep your opinions to yourself. I was responding to the premise that people hate on PE because of negativity bias - there is a negativity bias toward Private Equity, and it is entirely on the fault of the industry for their mendacity and lack of empathy. The fact is, there are more than enough examples of this bad behavior (recently, Chuck E Cheese and Toys'R'Us come to mind). There are also plenty of examples of PE "improving management" by crushing labor, degradation of product quality and screwing customers, so that is is the reputation for the entire industry.
I'm not even specifically criticizing the industry - they have a role to play in the economy. What I am saying is don't go crying about the public perception - if they want the big money, they get to own that reputation and be the bad guy. No one likes a parasite.
PE is a giant thing. There is a lot of it. The ones who don’t run companies out of business have no control over the ones who do. You’re using “they” to refer to thousands of people as if they’re a monolith.
And I don’t disagree that the bias you mention is accurate, I was pointing out that it’s because the people who think that way simply don’t understand finance. And judging by the comments here every time it comes up, the bias you mention is very popular.
Keeping opinions to ourselves would make these comments sections pretty sparse. Why is mine not ok but yours is? I was largely agreeing with you and expounding anyway.
> You’re using “they” to refer to thousands of people as if they’re a monolith.
This is the same thing the cops whine about. The PE industry has a ton of money - if 90% of them are good actors, they could easily organize and lobby for rules to stop the bad actors. That they don't tells me that the incumbents like the rules where they get to do whatever they want.
> I was pointing out that it’s because the people who think that way simply don’t understand finance
I think you are wrong. They understand the impacts that financiers have had on themselves, their families and their communities. There is a reason private equity (and its' older equivalents) have been loathed by common people for over a hundred years in this country :)
It's a strong indicator of a second-class mind and surface level thinking when they say "you compared X and Y!?!?". Comparisons don't mean anything. "Abraham Lincoln and Hitler were both men" is logically equivalent to what I said, and just as true. I didn't equate the societal effects of the two, I was merely pointing out that people who don't understand groups tend to lump them all together and suffer from observational bias. Human irrationality repeats itself in clear, obvious ways. Sometimes it leads to something terrible (centuries of opression), sometimes it leads to something innocuous (people saying something stupid in a comment thread) but it's the exact same mechanism. Think deeper before saying things that dumb, you're hard to take seriously.
People absolutely do not understand the impacts financiers have had on themselves. They do not understand economics, at all. This is a country (and, in most cases, it's the same everywhere, just swap the title) where most people think the President is a major factor in things like inflation, gas prices, etc. They have no more idea why the economic things they observe happen than they do why they universe exists, and so in the exact same way they jump to the conclusion they understand. Skydaddy made us, rich guys ruined everything for their gain. (There you go, I just compared poor economics knowledge to religion, have fun.)
If a lot of people think something, it is not because it is correct. (Sometimes it is correct by happenstance.) It is because they are exposed to a lot of propaganda to that effect and they don't know enough to have a more nuanced explanation.
PE's, meawhile, don't really have that control. They are shooting all the hell up and we don't know if they are self destructively OD'ing or are curing cancer. Most high profile results are sadly the former. There's simply less financial incentives these days to invest in "saving" a company if you don't emotionally invest in it.
It is not, however, the business model, as many here seem to think, because the people on the other end aren’t THAT stupid. There isn’t that much dumb money.
The business model is buy a company that’s in serious need of improvement, fix it, then sell it/take it public. That’s why they prefer companies with high revenue and losses.
Or sometimes, if they think an industry is just poised for strong growth, they just buy and hold. I suspect that’s what’s going on with all the veterinary office purchases we discussed recently.
I really don’t know where Squarespace falls. They’re allegedly keeping management in place which would make me guess they just think it’s poised for strong growth but I really just don’t know.
LBO is just one type of PE, and even among LBO, there are lots of stories about firms fixing a business. For every K-Mart there’s a Dollar General.
And even with the K-Mart type stories, those businesses were 100% failing without intervention anyway. They might have done so in a way that was better for shareholders, and that’s an egregious example. But they’re not generally parting out thriving companies and leaving banks holding a bunch of bad debt. Banks are smart and good companies are almost always better off whole, just as a running car is almost always worth more than the parts.
And even with a negative outlook and debts (i.e. liquidation), extracting value without making bigger issues is not at all simple.