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Comment by Apreche | Hacker News Reader

Private equity hoovers up existing businesses that are mostly well functioning.

If they fail, we suffer as those businesses we depend upon fail and disappear. Everything from big national chains to your local doctors office can be destroyed in this way.

But if private equity succeeds, we also suffer.

Private equity is… private. Normal people have our savings invested in public markets. We can’t easily invest in private equity, and we shouldn’t because it’s too risky.

But imagine a world where every strong business goes private and only failing businesses are public. The wealthy take everything private so they don’t have to share the wealth.

IMO any business over a certain size should be forced to be public and no option to go private again.

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> Private equity hoovers up existing businesses that are mostly well functioning.

There's many flavors of private equity, but the predatory ones tend to buy businesses that are slowly failing, and turn them into something that hits a brick wall and completely fails.

If it was a mostly well functioning business with good prospects, likely the current ownership would be less interested in selling or a sale to similar ownership could be made.

Dental clinics owned by a dentist sell to a new dentist all the time. If they're being sold to PE firms, it's because the business of being a dentist is changing and not in a good way. Dental insurance is a hassle and doesn't pay well, finding customers can be hard without accepting insurance, hiring staff is hard (at least in my area), young dentists may not have the capital to buy out retirees, new equipment is expensive but patients like being wowed.

There are predatory ones that corner the market on something (pet care, dentistry) in an area to jack up prices and make a killing.

> Private equity is… private. Normal people have our savings invested in public markets. We can’t easily invest in private equity, and we shouldn’t because it’s too risky.

Financial entities you rely on (pension funds, insurance companies, and universities among others) invest, and you may be getting access yourself thanks to Trump!

> IMO any business over a certain size should be forced to be public and no option to go private again.

What on earth is the rationale for this policy? If you build a successful company, you're required by law to give up control?

I don't think there is a valid rationale for this.

Unfortunately, there are a lot of armchair spectators that don't understand how the economy actually functions; and they've got brigades that go after people that do actually know who speak out (based on certain keywords).

As a result, its totally not worth talking about since the point of no return has largely already come and gone and we're stuck in a hysteresis trap.

People don't see how the things we are seeing today were predictable outcomes given choices made at the money-printer level (i.e. Fed/Private Banking).

No deposit requirement, is no reserve money-printing. It always fails, but I'm sure someone will say... but this time will be different. Needless to say, any discussion on economics is basically flame bait these days with a lot of delusional people on both sides of the aisle.

Fractional Banking (RIP, Circa 2020).

Your tiny indirect share of the PE firm's profits will not match your direct loss of service as a customer and/or loss of compensation as an employee. Contrary to popular myth, wealth does not trickle down in any meaningful way. In an unregulated capitalist system, wealth flows toward the centers of wealth, just as surely as gravity pulls toward the centers of mass.

> But imagine a world where every strong business goes private and only failing businesses are public.

That's the opposite of what happens with PE. PE firms don't buy fairly priced, well run businesses. They (typically) buy underpriced, poorly performing but cash flow heavy businesses that would benefit from leveraging up and making operations more lean.

Think about it, if a business is fairly priced and well run, PE firms have no incentive to buy it because where do they generate returns?

I don't like PE firms but there's no doubt that they force businesses to operate better, and ultimately that benefits people like you and me who have retirement savings, because PE firms aren't getting their money out of thin air.

Do PE hospitals and veterinary clinics perform better?

Depends how you define "better" doesn't it?

Better ROI: yes!

Better Customer Prices: No!

Better Business Operations: Yes.

Better Customer Experience: No.

Better Profit Margins: Yes.

Better Care: No.

Better Shareholder Returns: Yes.

Better Employee Compensation: No.

For the owners? Yeah, they do typically. For the service they provide stakeholders other than the owners? Probably not.

> Think about it, if a business is fairly priced and well run, PE firms have no incentive to buy it because where do they generate returns?

PE has access to business models unavailable to the original owner.

- Buy all local dentist clinics at an enticing markup then increase rates.

- Buy businesses and migrate them to tech where the PE firm holds an advantage. For example, a PE firm that runs its own payment gateway.

- Buy a business that complements a larger business to reduce churn or increase sales.

Right, which implies that the business was not run well, or at the least didn't reach its full potential.

None of those situations imply the business was poorly run.

If they were run well, then you wouldn't be able to improve on them by buying them.

Offerring a dentist a large amount of money (for them) to sell isn’t an indication how the business is run.

How does private equity businesses operating better improve our retirement savings? Wont they just improve the PE fund performance and benefit only the investors ?I am genuinely curious as its very difficult to find public information on how they actually function

PE firms are heavily funded by pensions, sovereign wealth, university endowments, and insurance companies.

Read Matt Levine's newsletter, it's a VERY simple business model built on financial engineering (it's rare they do something "novel"). But broadly, if you've got money in any sort of mutual fund, pension or retirement asset, the people managing your money WILL have some sort of allocation into PE funds. Even if you own a stock standard ETF like SPDR, PE funds like KKR are publicly listed.

Or they can do things like buy VMWare, gut the support/engineering/sales staff, hound and threaten their install base, and ultimatley profit greatly by stripping down and destroying a perfectly healthy if relatively late stage business.

That was Broadcom and not a PE fund?

True, though Broadcom operates in a very similar manner in this regard.

>I don't like PE firms but there's no doubt that they force businesses to operate better, and ultimately that benefits people like you and me...

They do not force businesses to "operate better." They force businesses to operate at a higher EBITDA, purely for their own benefit. Sometimes by chance this results in improvements for the employees or customers, but more often it ultimately results in a worse experience for both and the eventual demise of the business after the PE firm has taken sufficient profit to generate its target returns.

Believe it or not, businesses don't exist to provide you a "good service" they exist to make money. So yes, they do in fact force firms to operate better when they attain a higher EBITDA.

Until the definition of why a business exists changes, you can purely measure a business success over how much money it makes for the owner, legally.

Should that be the case? No, I don't agree. But as it currently stands, that's how things are.

>Believe it or not, businesses don't exist to provide you a "good service" they exist to make money.

This is a common misconception. Businesses actually exist to serve the public interest, which is why some kinds of businesses are illegal. The premise of capitalism isn't that it maximizes individual wealth, but that it maximizes the general welfare of the population.

Only some fringe definitions meet that. Maybe Adam Smith and Stiglitz. I deeply wish more westerners talked about Adam Smith and Stiglitz. But modern definitions of capitalism omit the words people, public, and welfare.

Definition and description do not necessarily include purpose. You could define a hammer very precisely without ever mentioning that its purpose is to drive nails. And since it's in the best interest of capital to minimize the original purpose of capitalism, and capital increasingly dominates public and political discourse, it's not surprising that the public interest angle would be increasingly ignored. But corporations and private property, the cornerstones of capitalism, are both purely creations of government, and both are subject to regulation in the public interest. We just need the political will to do so.

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