Do PE firms create value? How?
gain.pro
gain.pro
After the PE acquisition, an exec stands up in front of the entire company and says, and I am not kidding:
"This was a telecom company. Telecom companies grow at 10 to 15% a year. This is now a data services company. Data services companies grow at 20 to 25% a year. Get to work."
PE changed nothing else at that time. They simply decided the company was in another category, and thus, this would yield more money. I have always marveled how some business people can simply move things around on a spreadsheet and think that reality will follow.
Lets look at Vetinarians. They are buying up huge numbers of vet clinics. The owners retire and they bring in H1B or other lower cost vets, and increase prices 3x. My dog got sick and it cost $7k for then to figure out she had Addison's disease. The POC was some business person trained to extract money from you using guilt. They would give cost estimates and thrn ask for triple that every 24 hours. "she is such a sweet dog, I know its a lot of money but it costs so much to run a pet urgent care, we could just put her to sleep" was a paraphrase of every conversation. In the end it cost 2 cents to give her a pill that is the first thing they should have tried and she recovered. More than $7k for a dog to be at the vet for 3 days.
This is not sustainable. I will never take another pet to a facility like this, its impossible to afford it. In the meantime they have several years of burning customers and fantastic financials, plenty to get a massive loan for a second PE firm to buy the business, that PE firm gambling they can extract enough management fees to make back the small % of equity they actually had to pay themselves before it goes bankrupt.
If you made PE firms responsible for even a fraction of the debt of the businesses they operate they would disappear inside of 3 months. They are purely a hack on our laws around corporate debt and too much dumb money flooding the market due to privatization of retirement accounts.
Enter PE. They buy out the old practitioner, hire the young one that would have ideally bought the place themselves, then proceed to gradually dismantle the business. Divest all the capital assets, fire all the institutional knowledge, and even convert the business's accumulated customer good will into cold hard cash by exploiting the hell out of them.
Then it's just a matter of running the hollowed-out shell of business until a stiff breeze leads to complete bankruptcy.
Sometimes the owners want to cash in and retire after decades of operating their business. Selling to PE is one way to do that.
For example, Family Dining restaurants (i.e, relatively cheap sit down restaurants where the appeal is more the service than the food like Red Lobster, Chili's, Applebees, etc) are doomed, and have been for a while. Millennials and younger, on average, value table service less than their parents did, preferring fast casual restaurants (restaurants where you order at the counter, but are a step up from fast food) with better food in the same price bracket. This trend is widely known, so there's a shortage of people willing to buy up family dining franchises. But there's a lot of capital tied up in these restaurants. So in swoops PE, to basically bet that they can make more money killing the business than its current owners are able/willing to.
This may have been true in the past, but in today's world, normal people have an increasingly hard time affording the things that our parents took for granted (y'know, things like a modest house, a vacation every 2-3 years, decent food). If the owners of a small local business are offered the opportunity to cash out and retire with enough money that they can guarantee their reasonable comfort for the rest of their lives (barring total societal collapse), they're not going to worry about what's "healthy" or "thriving". And PE companies can afford to do that.
Nor does the fact that they're struggling reflect on the industry that the local business happens to be in. It reflects on our entire system today.
Probably not what people expect based on the submission title (“Do PE firms create value? How?”) which seems removed from the “article” title “The Private Equity Value Creation Report: 2025 From Entry to Exit: How Do PE Firms Create Value?”.
So I'm not expecting PE to be called out in this piece. Maybe instead it's just weenie suckling of PE. Or maybe just posturing filler, for their own sociopathic benefit, to which PE can relate.