Private equity bought America's essential services
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Pensions fund a significant part of PE and they do so because they need around a 7% return in order to look solvent. If they do not have the higher PE returns, they basically go out if cash in 10 years and everyone would scream bloody murder. But with the higher returns from PE they have 40-50 year runways and people can pretend everything is fine.
So PE firms exist to extract value from basically all high quality goods and services to show a high ROI to prop up pensions. They extract wealth by buying up companies and gutting the “extra” things in them - for luxury goods, it’s quality, customer service and warranties (like my venta humidifier or reformation dresses), for services it’s stripping the underlying excess risk management and quality control. One can argue that PEs make the business more efficient but in my opinion they just turn worker or consumer related benefits into profits (stakeholder and business benefits). It’s a transfer of value from worker and consumer to business and asset holders at a massive scale.
But sadly it’s not some evil dudes at the top doing this transfer, the market force behind it is because we promised old people way too aggressive paychecks when they retired. Pensions need to invest massive amounts of money into higher rates of return and PEs just happened to be the medium that is the most successful. Sure the people running the PE firm extract a ton of value drying up all luxury quality and robust services from the daily lives of working families, but their take home is a tiny fraction of the wealth they extract (but yes they take home a massive amount of wealth for an individual). Instead the wealth extracted shows up on a 1400$/m for some old person probably living in a retirement home somewhere.
So if you wanna fix or ban PE, solve pensions.
1. If you assume that P.E is uncorrelated/has a low correlation to the stock market (subject of many years of diatribes), then you decrease volatility of your portfolio by adding it.
2. Because a pension fund has a lot of years until they need start to paying out, then it is natural for it to attempt to harvest the illiquidity risk premium.
3. The (edit: removed extra words) "high required rate of return problem" is really a defined benefit problem. A DC plan can (and probably should) just be in mostly straight indices unless it's so big it can negotiate a good fee with asset managers for other classes.
Answering the implied statement - pensions invest in PE only to the tune of about 14%. [1]
If a company being purchased by PE meant that they lost the vast majority of their customers as soon as contractually possible, then the possible value extracted by PE would drop off a cliff.
This isn't necessarily the fault of the customers - we're all dealing with a lot of information to process.
And, up until recently, it was reasonable to attach reputation to brand instead of to owners.
And I think that's a lot of what PE exploits - the gap between people's belief about a brand's reliability/reputation, and the fact that the actual reliability has been a function of who the actual owners of the company are for many years - but people are still attached to the old mental model.
(there may also be some value for PE to extract from assets aside from customer relationships and the higher-order "brand value", but I suspect that that's secondary - if I'm wrong please correct me)
How so?
Isn’t this just what happens when you have an inverted pyramid (older population is larger than the younger population)?
> One can argue that PEs make the business more efficient
I’ve never seen it (I agree with you). To improve something they’d have to understand the business and do a bunch of work. Mostly they show up at quarterly meetings and want spreadsheets that measure some number that will go up (regardless if that number means anything).
> if you wanna fix or ban PE, solve pensions
How does one solve pensions?
I was thinking that Covid and widespread antivaxxer mentality would have.
But no. This will be the latest ladder-pull by the boomers and silents to extract the last bit of wealth from all the younger generations. And this will impoverish gen-x and all younger generations even more so than we already are.
The world isn't likely to change much over that time, so my guess is we'll collective find new victims to blame for everything rather than boomers. Old people are such great targets.
[0]: https://fixedincome.fidelity.com/ftgw/fi/FIYieldTable?popupM...
(it's a blog summary of a much longer, and rather esoteric, academic article)
Who do you think is buying .. everything? They're holding substantial fractions of both the whole stockmarket and national debt.
Now... if you mean IRAs then yeah... that's 99% of all private "investors"
EDIT: I forgot all about State and Federal pensions.
It's the corporate businesses that have gotten rid of pensions in favor of 401k plans.
They can also offer some really nice benefits like accessing your pension income at 55 which can be a substantial portion of your last year's salary, and you can keep working elsewhere if you want.
I've seen PE make businesses more efficient by reviewing all contracts and dropping or renegotiating ones that no longer align. Closing product lines that aren't profitable. But that is year 1-2. By year 3 they start the squeeze, layoffs, asset selloffs (stripping), and lowering quality, raising prices. That is where the real teeth of wolf are shown.
In principle, I don't think there's anything wrong with this. All investment expects a ROI over some time horizon. Public companies do the same thing. Anyone who founds a start-up is doing it too. The only real distinguishing feature of PE is how successful they have become at aggressively optimising for market value.
The issue is that the sale value at the end of the cycle can be massively influenced by cynical financial engineering. This seems to me to be more of an issue with how every institutional investor apparently now prices companies purely on reductive metrics like EBITDA x the industry standard multiple.
The cause of the rot is widespread over-confidence in dumb financialization models shaping the system.
(Or, since it's HN: if your machine learning model is training well, but misaligned with real life: do you blame AdamW?)
They use money to turn value into money, which they then use to turn more value, into more money. And in the end, they have a lot of money, and all of the value is gone.
IFF a company is truly, honest to god, less valuable than the sum of its parts, then it (or the subset that would have more value to someone else) SHOULD be dismantled, and those resources sold and reallocated to more productive use. You probably make these sorts of decisions in the capacity of your own personal finances without even thinking about it.
On the other hand (and what I believe is likely happening is) if cynical financial engineering is allowing you to turn a useful company that's valued poorly by the market into a useless company that's is paradoxically highly valued by the market, in the short term, and that keeps happening over and over again, then the tools used to calculate the market value are wrong.
This is illustrated by how PE commonly trashes trusted brands. A brand doesn't show up in your EBITDA. If you trash a brand quickly enough by cutting costs and quality, some institutional sucker will buy the company because they haven't clocked that the current EBITDA is elevated due to asymmetry in how quickly the costs come off and how quickly the revenue falls off after burning the brand.
They've simply valued the company wrong.
Well… yeah. I mean, it seems clear that the market is pretty bad at valuing companies. At the very least, valuations are based on a combination of (a) measurable attributes, and (b) vibes. (a) will always be incomplete, and runs into all of the same measurement problems that everything else does. And (b) is really unreliable.
Plus, PE companies are not especially interested in long timelines, whereas companies can eventually provide a lot more value that they’re worth right now.
And that’s not even getting into situations where they own enough of the market to not care about losing customers.
The value of a company does include the value of future returns. The standard model is net present value. In theory, if the market is valuing those future returns correctly, a PE fund would probably just do the value maximisation through investment and genuine business rationalisation, and skip the financial engineering phase of the cycle. I believe this is actually what most PE managers would prefer to do. They generally don’t actually want to burn their efforts for a short term fake valuation boost. They are still people after all. It just seems to be what the market wants them to do, and they prefer money.
> the market is pretty bad at valuing companies
The market has always been bad, but probably more randomly bad, historically. Different people had their own finger-in-the-air methodologies and an estimated market value of a company had a lot more random noise around it.
The issue is now that ~every large institutional investor is valuing companies in the same wrong way, which creates opportunities for, essentially, an arbitrage between reality and their dumb models which these types of PE funds are exploiting.
It also creates systemic risk to the financial system. When everyone is making the same mistake, “independent” market participants aren’t really independent. This is in essence what any bubble is, but usually isolated to people misreading the fundamentals of a particular sector. If the techniques behind financialisation are themselves a bubble, however, we could be in for one hell of a pop if the market realises. Like when the market realised they’d been valuing subprime mortgage books wrong in 2008.
...have you looked around? Some of the biggest companies in our economy basically just serve ads...
What sort of institutions would try to take on operating such a business? And when does word get around, and the pool of suckers dry up?
Essentially anyone - other PE funds, competitors merging, the general stock market if you take it public. And they're not wrong want to buy it - there's a valuable business there - they're just bad at assessing the right price.
> And when does word get around, and the pool of suckers dry up?
One born every minute. And it's hard to even notice you're being taken for a ride as opposed to mismanaging the business you bought or just being unlucky.
I believe you are using the wrong language
> some institutional sucker will buy
They are committing fraud in the high trust society. Literally sucking blood from our kids and grandkids who would have to rebuild, if that’s even possible
Huh? Why is there nothing wrong? Yes they wouldn’t make the investment if they didn’t think they had a way to get ROI, but how does that entitle them to one at any cost or make it necessarily moral?
As an extreme example, If I invest to create a company that is clearly exploitive and addictive, nothing is wrong in principle and I’m entitled to my roi?
My view is companies don't have a conscience, and any expectation that they are going to independently act with moral righteousness is unrealistic. Any perceived conscience is either for marketing (green/pinkwashing), or the sum of the morals of their owners multiplied by their willingness to exert any moral authority over the company.
Besides, if you try to imagine a company having an independent conscience, what even would that conscience be based in? I'm vegetarian and think it's immoral to eat meat, but obviously I'd be insane to expect companies to divest from meat based on my peculiar moral position.
In most cases, people do not exert any moral authority over anything they own. Do you actively select your pension investments based on your morality and vote in the shareholder meetings? If you do, I'm genuinely pleased and happy that someone is. But the reality is most people don't give their investments any thought beyond "line goes up", so companies end up acting as ROI maximisers.
So: the main way we enforce morality on companies is ultimately the government. If you want companies to act morally, you set the rules such that an ROI depends on following our democratically agreed set of regulations. Maybe that even harms economic growth but we still consider it worth it (which is typically how we think in Europe, but look at our economies are doing!). However, the company and its investors are still acting as ROI maximisers.
The poster said “I don’t think there’s anything wrong with this” are they a corporation? If they are, apparently they do have consciousness because they say “I think”
And yes some people do in fact try to vote with their dollars. Canadians are doing it plenty right now for an easy example.
That companies’ sole purpose is to maximize shareholder value, usually near term, is basically a toxic social construct and fairly recent. It’s not grounded in anything other than greed.
but there are plenty of other reasons as well.
starting a new venture, whether from the foundation of an existing company or doing a new one takes investment and carries risk. maybe the sales relationships the existing company had were the results of decades of investment. maybe the ownership or the employees had a specific skillset or maybe they used tooling that could be bought easily anymore. maybe they had an important and established relationship with suppliers.
maybe PE moved in because the business was viable, but not really growing and there isn't sufficient upside to motivate investors.
or the business only existed because the owner just loved that thing so much and funded it at a near-loss out of family money.
or the business was based on a huge capital investment or ownership of property in a key location that happened 20 years ago and isn't possible to replicate because of changes in the environment.
there are 1000 reasons why these things aren't spherical cows.
AVGO/Broadcom in some way acts like a big PE firm, rolling up other software companies, integrating them into their huge suite of offerings, ousting the new integrated offering's competing tools from the customers environments and selling the increment, and cutting off smaller customers not willing to subscribe to the huge suite.
A core function of enterprise sales is figuring out where that opportunity cost threshold is. PE often targets industries that are currently (in their estimation) priced well below that threshold.
Moved right in with the same old price so I didn't even have to expand the budget and they threw in training for free!
Currently in PE hell myself. Company I work for was bought out few years ago when the owner cashed out. Right out of the gate it was a numbers go up game. New sales person was hired and their first order of business was - drum roll please - triple prices! Customers balked. Some walked. In addition, some employee benefits evaporated, vacation time cut drastically, shitty health insurance switch, employee perks like the monthly pizza Fridays were canned as if ~$500/mo in pizza was going to bankrupt the company. Meanwhile, employee morale is at an all time low and quality has faded.
Perhaps there is good PE out there. Somewhere. All I see are vampires.
To play devil's advocate:
Doesn't this also open the market to new entrants?
e.g. young person looking to start a HVAC company in the old days couldn't compete with the established firm that already had contracts and the local market wasn't big enough for two players.
If the established firm gets bought by PE and driven into the ground, wouldn't the newer more nimble firm now have a better competitive market position?
The HVAC for example - the large firms around you do not run HVAC/plumbing/electrical, they run marketing companies that happen to schedule and bill H+P+E service appointments.
That being said I've never heard or encountered a single services company in the US that can't find business, in fact it's the opposite. They're trying not to drown themselves in front of a fire hose.
Maybe if you’re talking about the small residential market, that’s not where the money is.
The large HVAC/Electrical/Plumbing contractors in my area all perform their own work, including the one I work for. Large contractors do commercial and industrial work, not service calls for homeowners. Doing service calls homeowners sounds like a nightmare, personally.
Bain Capital just bought Service Logic which is a holding company for HVAC contractors. They own a couple of the local HVAC shops and they all have their own PMs, sales, estimating, and field staff.
If the market doesn't reward this then maybe quality isn't important to the customer. Could be price, location, availability, etc. - PE can absolutely create that value even when they roll up 70% of your local HVAC market.
A lot of small business owners in the trades are pretty bad at the business side of things, even if they do great work.
It's not uncommon in more rural areas to find a business that is essentially "more than an urgent care but less than an emergency room". e.g. they aren't doing trauma surgery but they can deal with broken limbs, severe lacerations etc that an urgent care couldn't handle.
My point is that while it's true that there are "step functions" in certain services, this is not always the case.
I remember watching a discussion about privatizing the local fire department aka the town pays a private company to run the fire department.
Opposition folks use the line:
"You used to have a shield on your building that denoted you had paid for fire coverage. The old fire departments would drive past the unshielded buildings while fighting the fires."
(this is, of course, no longer the case but love to mention this discussion when ever privatization comes up)
But this very thing happened not that far in the past: https://www.nbcnews.com/id/wbna39516346
Grants Pass, Oregon, has privatized fire. And there's three companies that service it, one is good, one is alright and the other... well, I was going to tell you to watch a YouTube video but after years its been deleted. Some hints: Title "Worst Fire Department in America". They roll up to a fully involved house fire with two engines that are 50+ years old, are hamstrung by the fact that they are staffed with kids in jeans and wildland coats (bunker gear, let alone SCBA, are nowhere to be seen), actually getting water on the fire is an issue because 1) someone has to sit in the cab to keep their foot on the throttle to give the pump any power (this "notmally" is controlled from the panel) and even then the pump is screaming at 3000+ rpm about to die any minute (this is maybe 2, 2.5 times what the pump runs at), there's no sense of strategy.
They call for mutual aid from Rural/Metro who shows up, helps them get a little ground on the fire, only to be told to leave the scene (so the company doesn't have to pay them) and the fire predictably takes over. It was horrific.
At least, though after too many of these calls, the Oregon Fire Marshal actually de-certified this company.
Let me introduce you to the Certificate of Need.
If you want to open a new hospital or facility like this in a town, you need a Certificate of Need from the Department of Health in your state. This ostensibly shows that there is a need for your facility because it is underserved. In actuality, it asks your competitors to say whether they'd reduce services or close beds if you opened your facility. While there is some community research etc., a lot of it comes down to "do your competitors think they can stay profitable enough if you open up shop?", and if they don't, no CoN for you.
Or maybe by then nobody trusts the name of the original company and it's just useless
Does it begin with A and end with X? ;0)
The irony goes way deeper than that.
A large part of PE clients are university endowment funds.
Harvard for instance has close to $60B in its endowment fund, 40% of which is invested in PE. At this point, Harvard is more an investment fund, with a university as side business.
https://en.wikipedia.org/wiki/List_of_colleges_and_universit...
But… if you were to say hey we need to pay our old people and we desperately need some way we can deploy massive amounts of money at higher rates of return, people will say… hmm well it’s broken but the alternative is worse so we’ll ignore it.
But now imagine you have a way to deploy large amounts of money and get large returns off that money. Every large amount of money (endowments basically) will jump on it because why not? That’s literally an endowment dream scenario.
So pension funds are the moral reason these other huge chunks of money to get large returns. PE firms have become a streamlined business model because they continue to improve what they are good at doing, and it’s insane that we haven’t passed laws against it yet. Except of course we can’t mess with it because it touches government workers.
So yeah even if we wanted to policy it out of our society it’s practically impossible from a social point of view.
It's true that private equity is dominated by institutional investors. One reason for this is that the investments are generally deemed too complicated, illiquid, and risky for retail investors (although the Trump administration is trying to change this).
Additionally, if we added the kinds of regulations, reporting requirements, standardization, etc, that would be necessary to scale this model to hundreds of thousands or millions of investors participating in an informed manner, we would simply recreate public markets.
Freakonomics recently did an episode on this that I thought was pretty good: https://freakonomics.com/podcast/is-the-public-ready-for-pri...
They've done some pieces on private equity in the past too: https://freakonomics.com/podcast/are-private-equity-firms-pl...
Pensions did not create this business structure, it has existed forever.
The second definition is the subset of PE that is systemically buying businesses and extracting wealth from consumer and worker to asset and shareholder.
The article is not talking about the first definition and neither am I.
To regulate private businesses equity is not what I’m going for either, it’s regulating the large PE firms doing this specific business model en masse.
People have to eat. They need water. They need a roof over their head. Nobody has to buy out all the veterinarians in an area at rates they can't say no to, have them sign non-competes and them jack up all the prices by 300% because, hey, you now own all of them. Nobody has to buy up all the trailer parks, which are normally peopple's last stop before being homeless, and then jack up the ground rent because, hey, where else are they going to go? Nobody has to buy up utilities, spend big on capex because legally you can pass on that charge and effectively double people's electricity bills.
Hannah Arendt coined the term "banality of evil" [1] decades ago and, in all honesty, I think it applies to the predatory nature of PE. It also goes for working for Palantir and a bunch of other companies. "I need to pay my student loans", "I'm just doing data science", "I'm just writing AI software that identifies when somebody is home" and on it goes.
PE serves no useful function in society. It's pure rent-seeking and incredibly predatory in many cases. ~15 years ago, there was a story about Goldman Sachs invented a derivative on the price of wheat and then essentially conspired to jack up the price of wheat [2]. This wasn't just manipulating a ticker on a Bloomberg terminal. It had real-world consequences. People starved and died because of this decision.
Yet I'm sure there were people who argued "I'm just doing legally allowed financial engineering here".
[1]: https://aeon.co/ideas/what-did-hannah-arendt-really-mean-by-...
[2]: https://theecologist.org/2011/sep/13/how-goldman-sachs-start...
It's kind of like the university system. It's a (mostly) privately run industry that gets massive injections of cash from the government because of both campaign promises (everyone needs healthcare, everyone goes to college and, bonus, everyone gets a house) and it being an incredibly unpopular position to either remove that funding or make the program entirely public which would, imo, alleviate both problems (but have their own unique drawbacks). The hybrid model we have is the worst of both worlds.
The hybrid system we have now of massive injections of public money into private industry is like blood in the water for do nothing intermediaries. PBMs are just the assistant dean of underwater basketweaving for medicine.
I find it very hard to believe that if pensions didn't exist, nobody would have come along and exploited the same loopholes.
1. Taking advantage of a pricing inefficiency; and/or
2. Using local monopolies, inelastic demand and regulation to jack up prices.
But what powers PE is the LBO (leveraged buyout). That is, you buy csome company with borrowed money and then you borrow against the assets of that company to repay your original loan.. That... shouldn't be allowed. Obviously that company is saddled with debt and it's usually structured to explode at some future point when the buyers won't actually own it anymore. I think of it like subprime lending in a way.
Now passive funds kind of have to buy sufficiently large companies. This has been an issue with the SpaceX IPO because SpaceX is doing a small float (~5%) and NASDAQ has changed the rules to essentially force passive funds to buy SpaceX where up until now that wasn't the case unless at least 25% of the company was available to buy. It's so nakedly corrupt.
Anyway, if a LBOed company saddled with complicated debt gets re-listed it kind of has a captive market of buyers with passive funds.
So going back to (1) there is long historical precedent for pricing inefficiencies. I'm speaking about the corporate raiders of the 1980s. The movie Wall Street was about this era (well that and insider trading). Essentially ailing companies would be trading below their book value. The book value was simply the value of assets (real estate, etc) so you could buy the company, sell it for parts and make a profit. All the lost jobs be damned.
The companies that tend to get targeted for PE own real estate. This has been a competitive advantage because yet other rent-seekers can't exploit them by jacking up rents. But real estate is an easy asset to sell to pay back your LBO and you can even split the real estate into a separate company and lease it back from that company. It's just financial hocus pocus.
Private Equity/Capital IMO is a pretty fascinating topic and I have some nuanced thoughts on it but this isn't the forum to have that conversation. There are great books out there on it though and I highly suggest reading them.
Some papers about this:
* https://pmc.ncbi.nlm.nih.gov/articles/PMC12216932/
* https://www.pnas.org/doi/10.1073/pnas.1008636108
I specifically find conversations about private equity to be highly polarized by community which is why I think it's a better idea to learn from first principles and then engage in the Internet commentariat.
https://www.psprs.com/uploads/sites/1/AIC_PublicPensionRepor...
Some interesting details:
- "Nearly 50 percent of the private equity investment dollars that make their way into American businesses come from public pension funds", which substantiates OP's thesis.
- "U.S. public pension funds invest 9% of their portfolios in private equity, on a dollar-weighted basis." 46% is in public equity, so obviously the lion's share is in still in public markets.
We solved pensions. People have defined-contribution plans now. I would expect insurance float to dwarf pensions as a source of PE funding.
The real reason PE exists is because it charges high fees. The financial industry does not make products to serve customer needs, though by happy accident that sometimes happens. It makes products to charge fees. Index funds removed a big chunk of the fees that active mutual funds used to charge, so financiers went looking for a replacement.
Even if you snapped your fingers and all remaining pensions (and insurance float?) disappeared, PE is aggressively going after individual retirement accounts, now. Most insidiously, trying to work their way into the "target date" funds that are the defaults for most plans. So "solving pensions" will not make PE go away.
Like millions upon millions?
They need to be paid out somehow.
Do they have to be paid out in full, though? I remember cases in the past where a company went bankrupt and had to renege on some parts of pensions, so maybe you'll see that again?
I don’t see how it is relevant, unless the rate is close to 100%.
...no. It doesn't even matter what the rest of the words in the question are. Just no, lol.
> They need to be paid out somehow.
No they don't. Lots of pensions, especially the not-gilded ones, go bankrupt.
In fact, that's precisely what happens to pensions of companies that are acquired by PE. The company gets stripped for parts, it goes bankrupt, and PBGC covers a fraction of the affected pensioners' payouts.
In other words, with or without PE, bloated pensions ultimately end up being the taxpayer's burden.
Why are you replying to a comment where you believe the words “doesn’t even matter”?
I find this characterization offensive. Who is to judge if the defined benefit pension if a primary school teacher or fireman, for example, is bloated? It's part of the negotiated pay package, nothing more or less.
Teachers are the easy ones to point to, it is hard to be mad at an underpaid teacher who receives a reasonable pension for life. We certainly can be mad at NYPD scamming the system to get $100-200k/year for life.
[1] https://www.bloomberg.com/graphics/2021-nyc-police-overtime-...
[2] https://www.empirecenter.org/publications/newly-retired-nypd...
Boomers (only people I know receiving pensions) use pensions to fund lavish lifestyles without having build major companies.
Is that not the case for police unions in the states?
“If your last few years before you retire, you work 300, 400 hours of overtime and bump up your pay by $40,000, that all goes into the salary that your pension is based on,” said Ana Champeny, director of city studies at New York’s Citizens Budget Commission."
So yeah, it seems like a bad idea to be able to scam the pension system like that.
And yes, pensions are a major part of the PE funding, but not all of it. There are a bunch of incredibly rich people who are also profiting from all of this at exorbitant rates. Can we be mad at them instead?
A Phoenix police sergeant who was recently in the news for other reasons was listed as having a total salary in 2025 of $430,000.
Nothing personal here. It's possible for some pensions to suck and not others. It's also possible for a pension to suck and its beneficiaries to not suck.
And like FIRE devotees, maybe they should model a lower withdrawal rate.
He has been in the role over a decade.
Effectively it’s burning all of the trust built up with consumers as firewood by tricking them into buying mediocre products at high prices.
They moved around the year 2000 to accounts that don't have the AT LEAST clause, and they earn what they earn, but due to the backlog of people still retiring that were grandfathered in, its wrecking our state.
My city has a huge budget deficit, but 24% of its total payroll budget goes to the public retirement system to 'catch up' from years when it did not make 8%. Next year or two, that is supposed to jump to 28% of payroll.
Problem won't start getting better until something like 2034 when the boomers start 'leaving the retirement system'
Pensions fund PE because PE can do a short term cooking of the books in order to smooth out the growth curve. So the return is usually positive each year, not raising problems.
Also what does significant mean? Pensions are the main mechanism non-wealthy people are investing in PE. Being that millions are involved, you would expect pensions would have a sizable portion of the market, but family offices and high net worth offices dominate. If it offers above average returns, why would they not invest? PE is like every other asset class other than housing, the top 1% own a large chunk, the top 20% own the majority, and the bottom 50% own very little. Decisions are not driven by sone fireman, they are driven by the wealthy like everything else. And the origin and continuation of pushing for retirement to come from capital investment comes from the wealthy as well.
Its been awhile since I worked there, but CalPERS and CalSTRS were the two biggest LPs Blackstone had while I was there.
Mass index fund investment is basically socialism but stupid. My retirement money is going to get invested in the SpaceX IPO against my will. The market is not efficiently allocating capital, it's structured to allow elites to skim off the top while forcing middle class people to subsidize them.
In a hybrid scenario where there is still a market, we would ... collect more taxes to pay for this stuff? It seems like you came up with a pithy response and tried to back up into a critique that doesn't make sense.
I really appreciate this perspective as It helps fill in gaps in my mental model of where our economy has gone wrong the last 50 years. Unrelated but - I've read an interesting paper on how allowing private banks to create money has led to the infinite profit growth goose chase...
I live in a working-class southside neighborhood. The people who are complaining about property taxes for SFUs in the city are people in neighborhoods with skyrocketing home values.
Those people stand to receive a massive windfall when they sell. And while it may be annoying for them if they find themselves having to sell when they didn't want to, the they're vastly better off than all then renters in that neighborhood who got priced out much faster with no windfall.
The Gold Cost isn't suffering a shortage of landlords.
Note though that there is never a shortage of demand in that area for rentals either, so I'll keep increasing the rent following increases in property taxes and assessments, and people will pay. If anyone has a problem with that, let them bring this up with the City of Chicago and the Cook County.
So what's your alternative proposal for people in retirement?
The pension people aren't being scored on doing well for their clients. They're scored on money. They don't care.
Ain't no different than some jerk in an insurance/regulator office cooking up a rule about PPE based on first order assessment of a bunch of crappy data. The guy who gets mashed by a forklift he couldn't hear coming doesn't hurt their KPIs. He didn't suffer occupation related hearing loss. MissionAccomplished(TM)
Pretty much every industry that deals at the statistical level whether it's PE making investments or something else runs in this manner.
It's just a ploy for the wealthy to extract even more wealth from the rest of us, while stripping the country for parts and dooming the actual economy for years to come.
On the subject, if you have 50 minutes to waste: https://youtu.be/tyNFosOFUDM?is=hwDH5tFCAYc7soHG
Lots of things are profitable but immoral. People will do crazy immoral and illegal stuff for money, but we outlaw and slander the more abusive stuff, like monopolies and such.
If it wasn't pensions that were funding PE, I'm sure PEs would get a lot more criticism and would not be allowed to do what they do.
Slavery is bad economics. If you want your economy to grow, paying workers is not bad. Economic growth isn't zero sum.
People who argue otherwise simply cannot escape their zero-sum worldview.
Yes you can pick up cotton at a lower labor cost with slaves, but you can't charge the slaves rent, sell them useless clothes, tax them, etc.
No but there would be a lot less PE dry powder available. To the parent's point - there is currently a trillion dollars in dry powder that is allocated to acquiring businesses. If that trillion dollars drys up then less businesses get acquired - it's that simple.
Well, yes, that's how any retirement (or any social benefit, really) system works: people who actually do work support the people who don't. Those latter include children, the elderly, pop-stars, politicians, etc. So unless you make people work until the day they die (which is possible, and have been done in the past, mind you — it just severely decreases the average life expectancy), we're going to transfer some of the created wealth to the elderly. The exact form of how this transfer is performed is a fascinating topic for discussion (make their direct descendants care for them! make a state-, or charity-funded fund to feed them hot soup once a day! make them save up for retirement themselves! lots of options, really) but it will still happen one way or another. After all, some people simply do have lots of money (and keep getting more) with doing no labour; some of them are retirees.
There are also many benefits you don’t notice because they don’t bother you
You seem to be quite confused about pensions, not only "old people" have pensions. Actually the vast majority of contributions to pensions funds come from people who aren't old at all and are actively employed.
> If they do not have the higher PE returns, they basically go out if cash in 10 years and everyone would scream bloody murder.
Where would they "scream"? On the internet? And who'd hear them? The answer is nobody in any PE cares about anyone screaming.
PE's operations have nothing to do with screaming old people, that viewpoint simply avoids the real issues and replaces them with red herring age baiting.
This is exactly how pensions work: newer members to the defined benefits plan pay for older members. This isn't surprising.
> Where would they "scream"? On the internet? And who'd hear them? The answer is nobody in any PE cares about anyone screaming.
At the ballot box. There is a reason that public pensions are exempt from the PBGC reserve ratio requirements. People with pensions aggressively vote their interest.
No, that's now how they work, if that was the case, there wouldn't be any need for PEs to buy and enshitify the assets we are talking about here. Your current description contradicts your previous comment.
I'm not going to explain it to you, there's enough information about the topic.
> At the ballot box.
We don't vote for PEs. And who we vote for makes no difference to them, these truths are so basic, it's a shame you don't know them.
PE is a bogeyman, emblematic of a problem but not the problem per se. The problem is leverage. Critical services should have a borrowing limit and prohibitions on any pay-outs to owners while any leverage is in place.
Kicking out private equity and replacing them with family offices doesn’t solve anything; removing the debt does.
Do you have any evidence for this claim?
> Pensions fund a significant part of PE and they do so because they need around a 7% return in order to look solvent.
Again, please provide some sources for this claim. The S&P 500 index has returned about 15% on average over the past 10 years, and historically returned about 10% on average. [1]
> So if you wanna fix or ban PE, solve pensions.
This is a misinterpretation at best. Pensions do not make operational decisions at PE - PE management does.
This statement mistakes a funding source for the whole business model, which is problematic. Pensions supply capital, but PE’s behavior is from the general PE model: buy companies, use leverage, extract fees, seek exit in 5 to 10 years, and earn management fees plus carried interest. That structure exists whether the capital comes from pensions, sovereign wealth funds, insurers, endowments, family offices, or wealthy individuals. Public pensions are one major funding source, not the whole machine.
This statement also implies that PE is mainly a pension-funding response, which would be a falsehood. PE did not buy nursing homes or hospitals or vet clinics or prison telecoms or ambulance companies or dental chains or infrastructure-like services merely because pensions put in capital.
When you turn 65/70/whatever, your pension/IRA/401(k) isn't paid out as a monthly cheque, but instead as a lifetime lease to an apartment in a retirement complex with subsidized services, and a relatively tiny cash stipend.
The quality of life remains comparable, except we've removed the ceremony of passing most of the money through the hands of the pensioners on the way to landlords, medical providers, etc. But because the goods and services can be preplanned and bulk-contracted and managed long-term, the operation can get get more value out of $1000 than an individual buyer would get out of $1400. This reduces the pressure for high returns.
This also eliminates the risk of outliving your money. With a prepaid obligation to be fed/sheltered/taken care of, the risk is transferred back to the pension scheme, or society as a whole through a state-insurance-backstop fund, which is probably better resourced and capable of swallowing the risk than your typical individual 85-year-old in failing health.
I’m sort of kidding about the PE here us particular. But institutions that aren’t run by people who personally care about services tend to be really bad at maintaining things like food quality or ventilation or furniture or any of the hard-to-measure attributes that make for a nice housing situation.
> The first ever Roman fire brigade was created by Crassus. Fires were almost a daily occurrence in Rome, and Crassus took advantage of the fact that Rome had no fire department, by creating his own brigade—500 men strong—which rushed to burning buildings at the first cry of alarm. Upon arriving at the scene, however, the firefighters did nothing while Crassus offered to buy the burning building from the distressed property owner, at a miserable price. If the owner agreed to sell the property, his men would put out the fire; if the owner refused, then they would simply let the structure burn to the ground. After buying many properties this way, he rebuilt them, and often leased the properties to their original owners or new tenants.
sigma
I wonder if the incidence of fires increased during this time.
For the curious, above is how Crassus died.
TLDR: Got over his skis and mad with power and money. Decides to invade Parthia. Gets wrecked by horse archers. That ends up being typical for Romans, but this was the first-ish time that happened. Some of those captured legionaries may have ended up in China, though it is unlikely.
in some sense I even respect that decision
Historically (with all the accuracy you get when you summarize all of history) raising an army and not leading it was effectively telling everyone that you should be replaced by whoever did lead it.
I don't think the Western Romans ever really learned from it did they? The Huns ended up wreaking them pretty hard.
I know the Eastern Romans did learn at some point out of necessity by creating their own professional units and hiring mercs.
A company doesn’t have to make billions per quarter to be solvent, it only needs to beat inflation. Beyond that, the people running the company should have some basic human decency. If they don’t, we as consumers, employees, founders, whatever can and should cease doing business with them.
I'm spitballing here, but what if we created a browser extension that gives users the option to block various monopolistic/oligarchic tech platforms. If the browser navigates to a blocked platform, we show a "consider these alternatives" page instead. Competitors to the monopolies could offer incentives (raffles, discounts, etc) in exchange for promotion on the recommended alternatives list, creating an incentive to participate in a boycott.
Example: a user opts into an Amazon boycott, but later clicks an affiliate link that leads them to a book listing on amazon.com. The browser extension intercepts this and displays a list of other places to shop for that book. Barnes and Noble offers a 10% discount for people who boycott Amazon, so they're the top recommended alternative, and the user gets the book for a discount.
It was a Chrome extension which allowed a user to upload a list (pluggable community-maintained lists, akin to ublock). It would light up when a user was on a site in the list with details about the site, the ownership/board, recent news, etc.
It also had a space for recommended alternatives. I built it because I was tired of giving money to companies who used the profits to make society worse.
I’d be down to pick up work on it again and get development going in the open or shift to work on the more commercial oriented design you describe. Lmk a good way to reach you if you’re open to it.
If you’d rather I can set up an email for this alias I just don’t have one handy to post publicly at the time of writing.
It's basically impossible to boycott amazon completely because of AWS which powers everything.
The hard thing needed is better politicians. And to get better politicians we need a better and more politically literate voting public. To get that, we need better journalism.
It's a real hard battle to win especially since a huge portion of the electorate will vote for the incumbent and the incumbents will deploy every dirty trick in the book to stay in power. Including getting people to run to split tickets.
But that's ultimately what must happen. The thing Amazon or Walmart actually fear is a government willing to regulate them or their employees unionizing. And the only way to get regulations is voting for politicians that do that and voting out politicians unwilling to do that. For unions, you have to convince people that even though it may cost them their jobs, it's worth it to drive the likes of Walmart out of town to support more local businesses. It helps to get union friendly politicians into office.
(Un)fortunately, there's a pretty big generational divide. As boomers expire, I have hope that Gen X and Millennials will make things better. The question is how bad things will get before that happens.
Most of the Trump supporters most everyone here knows are also the oldest folks they know. Funny that.
Intergenerational war is stupid. Why be angry because someone lived in a time they gave them a benefit? In the case of the boomers, they were also the generation beaten by cops, water cannoned, and shot for being antiwar and pro civil rights. While many boomers are crappy, they’re are also every bit as diverse as any other group.
Finally, the old folks I was thinking of were born in the 20s and 30s, not the 50s.
In my area PE is gobbling up mom-and-pop apartment complexes, plumbing companies, restaurants, and generally making customers and employees alike pretty miserable.
Hard-working founders should be able to cash out, but there has to be a better system than this one. Succession, maybe. Not that we should push an unmysterious destiny on our children, but maybe more ought to consider pulling one?
Instead of succession, I wonder if there is a way to make it easier for these people to sell their company when its time to retire to someone who is looking to start the next step of their career. A lot of software engineers joke about becoming farmers, but if they could instead make an easy transition into a small business by buying a small business, we could prevent PE from raiding things.
And that’s before you even make it to the question of “can the person that manages to buy it actually live off of it as a lifestyle business?”
I guess what I would like to see is a pathway to making it easy to buy or start up crucial businesses like a plumbing business, HVAC company, etc. As the current generation of owners want to sell and retire, we should make it easier for people to be able to get in there and buy these companies before PE can.
So they can only really be inherited or given away (and they often are).
But if it's not to kids on death, it's moderately difficult to give away a business that has "paper value".
I'm sure there are tons of people in my local area who could happily and successfully run such a business, but nobody can swing it financially. The initial financial hurdle of going from "not a business owner" to "a business owner" is real.
Same thing happened with a restaurant - nobody wanted to buy the business so it shut down, even though you could have bought the whole business for the cost of the building, basically.
(There's a path for entrepreneurial "youngsters" - identify these businesses 10 years before, and become a valuable employee in such; I've seen them given away for a song to such. Of course, in some of them they also ended up with the daughter, so ...)
Family businesses handle this by slowly getting the next generation involved, such that the intangible value has been transferred by the time the owner wants to retire. That works less well with a stranger. You really need high levels of trust to make that work fairly for both parties.
This leads to them pushing their kids to be employees even though that's...really contradictory to their actual lived experience.
[0] https://en.wikipedia.org/wiki/Employee_stock_purchase_plan
https://en.wikipedia.org/wiki/Employee_stock_ownership_plan
An ESOP is where a portion of or an entire company is sold to the employees. Our company took out loans to acquire the shares from the former owners and shares are disbursed to employees yearly instead of purchased by employees. It took 5 years to fully buy out the former owners, so we’re a 100% ESOP now and we just finished paying off the loans taken out to buy out the former owners.
An ESPP just gives employees of a company the option to buy shares at a discount.
Why? Operating a successful business should be remunerative on its own, or else it's not successful. Owners who don't want to do it anymore can let it become worker owned. If they don't want it, it can dissolve. What else do you need? The very concept that the end of a successful business is a big payday for its creator is itself the poison here. There is no end just another workday, success is ongoing not final. This is natural and correct.
My guess is owner-operator selflessness is a key ingredient in a lot of beloved small businesses. I don't know for certain that the winning personality for getting a business off the ground on all the bad days is the same one that raises rates proportionally with their success.
So it becomes all-or-nothing. It's my friends and neighbors when I'm working, when I sell-out it's purely business. No in-between.
When they retired they didn't have any money in the bank besides the proceeds from their final harvest, but all their loans were paid off. That's where the profits went -- paying off the loans.
The farm was their retirement savings. They sold it off for high six figures, and that's what funded their frugal but comfortable retirement.
The neighbor's son bought the farm; I hope he's pretty much paid off the loan he took out to buy it.
It's the same with gentrified zones: yes there are some dark patterns going on as well, but mainly is previous, smaller owners that want to make big bucks by selling to someone with money from outside rather than someone local like themselves for less money.
I'm not trying to put all of the blame on individuals responding to the pressures being applied to them. But neither am I accepting their abdication of the responsibility to act with honor and courage in the face of those pressures.
The door refused to open. It said, “Five cents, please.”
He searched his pockets. No more coins; nothing. “I’ll pay you tomorrow,” he told the door. Again he tried the knob. Again it remained locked tight. “What I pay you,” he informed it, “is in the nature of a gratuity; I don’t have to pay you.”
“I think otherwise,” the door said. “Look in the purchase contract you signed when you bought this conapt.”
In his desk drawer he found the contract; since signing it he had found it necessary to refer to the document many times. Sure enough; payment to his door for opening and shutting constituted a mandatory fee. Not a tip.
“You discover I’m right,” the door said. It sounded smug.
From the drawer beside the sink Joe Chip got a stainless steel knife; with it he began systematically to unscrew the bolt assembly of his apt’s money-gulping door.
“I’ll sue you,” the door said as the first screw fell out.
Joe Chip said, “I’ve never been sued by a door. But I guess I can live through it.
- Philip K. Dick, Ubik
"In developing countries, everything is possible and nothing works. In developed countries, everything works and nothing is possible."
The large PE buyouts that came from the ridiculous ZIRP period could deliver better financial stability than handing the business down.
I know two families with businesses that attracted huge PE offers in the past few years. One of them took the buyout and the family members slowly left their jobs at the company because they effectively been early retired by their buyout.
Now the kids are looking at new businesses to buy and start for themselves with this new financial freedom that has come to the family. One of their considerations is starting another business in or around their old line of work that was sold off. They have to wait until the contractual non-compete expires, but if the PE owners are really making both the employees and customers miserable then it becomes a golden opportunity for experienced operators to come in and run a good business in the vacuum. Even many of the old employees have expressed a desire to join.
The bad PE phenomenon buyout is annoying, but businesses that become miserable for the customers and employees are not stable long-term businesses. When they decline because competitors show up to do a better job and retain better talent, it becomes a transfer of money from the lenders to the old owners and an annoying churn in the local business scene. As we see more of these failures, the willingness of banks to lend for these buyouts will go down.
https://privateequityvet.org/vet-list/ https://whoownsmydentists.com/ https://ledger.worseonpurpose.com/
The trick is that the business owner has a good relationship with his customers. After the PE investors run it into the ground, they can credibly reach out to customers directly, assure them that the adults are back in charge, and basically be a hero to the old customers who hate what the business became.
What happens when those businesses are hospitals, for example? I've read too many stories of hospitals getting bought by PE and either shutting down or staying (while offering increasingly poor service). In one outcome, it reduces the accessibility to healthcare. In the other, it forces those most unable to choose to stay with subpar care. In both cases, it's not like other health systems are rushing in to replace what has been lost. We just end up with fewer and shittier hospitals.
Family businesses have traditionally gotten around this by having their children involved for 10+ years prior to taking over. That way, you slowly transfer your "social capital" to the new owner (in this case your kid). This is understandably harder to manage with a stranger, because you can't transfer the value before they buy it, but they won't buy it if they can't guarantee you'll help them transfer the value.
The entire SBA loan program exists to solve this.
Which would increase the rate of defaults (if they are authorized in the first place) and in turn increase interest even further. I guess the PE is always maxxing out the leverage on every deal at _just_ the projected break-even point for loan repayment? But that leaves no room for error or changing market conditions which also increase the rate of defaults and so on.
And everyone gets their management fees until people start asking their money back...
Great another financial crisis.
That's exactly what happened famously with Red Lobster. PE sold off all the underlying real-estate to get the initial sugar-high and replaced it with a leasebacks. Those leases had escalating costs and fixed terms, which made it difficult to adapt to changing trends, and was a big contributor in what ultimately sunk it all.
Sounds like a problem for whoever is providing the financing. Not really my concern unless you're saying there's some systemic problem it causes like with mortgage securitization during 2007. The lender will charge a high interest rate if what you're saying is true.
It’s literally a way to extract revenue from our broader social institutions by spreading the pain across so many people that individuals don’t complain (or, in some cases, don’t even understand how it harms them).
Has everyone forgotten the social contract? We do not exist as communities to make a small number of people richer. If the trade doesn't work for all involved, we change the rules.
Pure parasitism.
If the company wasn’t able to borrow money for itself, a wrapper company could which would still have very closely the same effect as being an asset-poor borrower.
Note that from the lender's perspective, the risk is the same and in a perfect-information universe could be mitigated by charging higher interest. The problem for society is the externality that the business's services get worse.
In fact, they'd much rather single-action foreclose as they'll likely get a house than force you into bankruptcy where they might not even get that.
Even 3% or 0% down mortgages?
That's why the parent is saying "It is like paying for the company with the money from the company you are buying.".
*Coverage of 1:1 is an accident waiting to happen, but otherwise sure.
If PE firm A wants to buy company C using an LBO, it could do so by having C borrow money and then A purchase C, or by creating an entity B that borrows money and then purchases C. Whether B or C owns the debt doesn't change anything meaningful for A, and it's pretty clear that you're allowed to form company B (and really hard to imagine how you'd make that illegal without effects that would be worse than current).
I would prefer that! I'd prefer even more strongly that the debt be owed by someone else entirely, so a default isn't associated with me at all. If you're up for it I'd also prefer to use your credit card number to buy stuff on Amazon. But for whatever reason the law doesn't always seem to follow my preference.
I'm sensitive to your point about restricting formation of new corps. The system can't just be changed randomly without extremely careful thought. And often not even then.
It's like taking out a mortgage on a house, but letting the house owe the debt.
Isn't that a non-recourse loan, which in some states is the default for the initial loan to acquire the housel
Most small-time single family landlords actually go above and beyond that and "pretend" the rental is a house they're buying to live in (or actually is, for a time) and get a "home owner's mortgage" which is even easier.
Large commercial real estate is sold and loaned based on future rental income, pretty formulaically.
It’s possible to “understand” mortgages by understanding that conditions for stable home markets don’t arise by themselves—we collectively make them possible because the outcome is desired—then wonder WTF because what social function is creating conditions for private equity getting us.
Not only is that politically attractive, I think it’s more good than bad as public policy.
Turning back to PE/LBOs:
Having limited liability entities (companies) also serves good public purposes. Having companies being able to borrow money also does. Having companies being able to own other companies also does. I think that’s the only three ingredients you need for the PE model to operate and I don’t think that the public is helped by barring any of those three things.
As a business owner, if you want cash today because you are done with a business. You could go to a bank and get a loan to pay dividends. This is a bad deal for the bank as you have no incentive to operate the business after you cash out the loan. A private equity firm comes in and operates the business on the model that they still keep some of the profits after the loan value.
The crappy side comes in as a customer, the PE firm can do this to an arbitrary number of firms in the area and raise prices on each/cut services. PE firms can trivially build out monopolies. Many of these monopolies will be invisible as they leave the existing branding etc. in place.
> As a business owner, if you want cash today because you are done with a business. You could go to a bank and get a loan to pay dividends.
If you are a business owner you could borrow yourself using the business as security.
One correction is that it’s not like paying for the company with money from the company you’re buying, because that obviously wouldn’t benefit the sellers. The money comes from a lender and they get terms to take the business if the loan terms aren’t meant. The lenders are the effective new largest owners of the company with the PE firm being a smaller owner but the expected primary operator.
In an analysis of "European companies around their buyout event in the period 2000 - 2008," private equity was found to "select companies which are less financially distressed than comparable companies prior to the transaction and that the distress risks increase after the buyout" [1]. Critically, however, "the distress risk in private equity-backed companies does not exceed the distress risk in comparable companies three years after the buyout," and, "despite this risk increase, private equity-backed companies do not suffer from higher bankruptcy rates than the control group."
More broadly, an analysis of "17,171 worldwide leveraged buyout transactions that include every transaction with a financial sponsor in the CapitalIQ database announced between 1/1/1970 and 6/30/2007" found bankruptcy rates around 6% [2]. This isn't exceptionally high.
[1] https://madoc.bib.uni-mannheim.de/31366/1/dp11076.pdf
[2] https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.23.1.121 Table 2
Some modern economists have suggested this should work theoretically if properly implemented. See Helmut Creutz, Das Geld-Syndrom (1993) and “The Natural Rate of Interest Is Zero” — Mathew Forstater & Warren Mosler.
There's also a strong argument that charity transfers to the poor does far more harm than good. How do you price a field worth of wheat, a mill, or even a local grocery when an airdrop of processed flour and food rations can arrive at any moment with no warning? And how do you get the capital to start one of those when it's illegal to get a loan?
Of course there are solutions if you have enough tenacity, but the overall result is far fewer businesses started because the friction is just so much higher.
LOL, read up on how baking and loans in Islamic countries work. Banks buy whatever you want and then sell it to you partially at a higher rate. The customer then pays a rent for the portion owned by the bank till the principle is paid off. No interest charged technically, but effectively they do pay; except it is now kosher/halal. We humans use language to work around every such restriction by debating on the literal meaning of any such religious restrction.
Hoarding of what?
Commodities? Should I be taxed for hoarding firewood before winter?
Money? Only poor people hoard money. The wealthy invest it.
I (and leaders at my PE-owned company) cannot say enough bad things about private equity. How anyone who managed to make money in their life decides PE is a good investment blows my mind.
We are now on our 5th PE firm in 10 years, and just completed a "PE lifecycle" of buy -> merge -> sell -> part out -> merge.
None of these PE firms bring anything to the table. Even the hundreds of billions AUM giants. They have zero interest in tangibly improving the company, and lots of interest in cheap window dressings meant to fool other PE firms. Not that they could do much else, because it's mostly business grads with minimal real world exposure, and hunger to be rich above all else.
The most critical thing to understand is that they pay themselves "advisory and oversight fees" for the incredibly difficult work of increasing sales targets 300%. These fees can eat 10% of our revenue, and is one click above theft. Trust me, they will lay-off 75% of the company before even considering cutting back their personal take. Never mind the fees they take from investors too. They bill both sides.
Also, if they kill some of the companies they acquire, it's the investors loss. It is not their loss. They still collect all their fees just the same.
There is a total misalignment between investors and PE firms, where PE firms just want to maximize their looting while investors think they are actually trying to improve the acquired companies. If the invesotrs do see gains, it's mostly because the firm successfully conned another firm into overpaying.
Run from investing in PE, run as fast as you can. Recently they changed the law to allow regular people to have PE in their retirement. They are running out of useful idiots, and want access to the general public. DO NOT FALL FOR IT
I make a good amount every time the company changes hands so I’m kind of complicit but I also try very hard to run each company the best it can be run from the perspective of all stakeholders. Sometimes they just live in la la land with their expectations. They put together an investment thesis prior to investing and cant wrap their heads around any deviations from some stupid excel model they built with 5-10 year financials all on rose colored assumptions. One business I was a part of had a new government regulation immediately erode 40% of their revenues and every month explaining it over and over why we were down to plan was ridiculous. Then the annual budget we told them would be a readjustment to reality. When we presented it they acted flabbergasted. This same thing went on over and over until I just got fed up telling them I didn’t care about their investment thesis and would only discuss reality and left the company purely because of the investors. Stuff like that is pretty common
Quote (from article) “This didn’t just happen to you accidentally. This is a business decision, isn’t it? You keep these backlogs like this. […] Another word for this would be a heist. This sounds to me like private equity came in; bought up all of these small companies; combined them; shut down their production; rolled up a huge backlog; massive profits; stiffed these guys; and now you’re making out like bandits.”
https://www.thebignewsletter.com/p/did-a-private-equity-fire...
The last part never made sense to be. Where do they find willing buyers for these debt laden, hollowed out husks?
PE funds seem a bit like the latest manifestation of the 80s corporate raiders to me.
This just seems wrong. The buyer takes out a loan, how does that become the responsibility of the company they purchased? I thought loans used to buy a business treated the business as collateral, like a home mortgage. What lender would participate in this? and why?
Because the company they purchased is now a part of them.
As for why a lender would agree to it, it's because these transactions are not as simplistic or universally disastrous as they are usually described. A lender will obviously only make that loan if it has a reasonable expectation of being paid back, and most of them are. They may get additional collateral like parent/affiliate guarantees and the loans will have covenants relating to financial performance etc.
You can take the cash flow, take debt against the companies own cash flow to buy it, pay yourself back, consolidate, then raise the prices on a captive market.
Frankly this stuff is impossible to talk about in the abstract. The details of every individual case matters. If you're actually curious (instead of just playing a shell game), you can go look up the types of analysis that FTC does to evaluate market dominance and whether a given transaction will excessively consolidate a market.
https://hn.algolia.com/?dateRange=all&page=0&prefix=true&que...
Lots of success during the last admin for those paying attention.
https://www.ftc.gov/news-events/news/press-releases/2025/01/...
https://www.economicliberties.us/press-release/lina-khans-tr...
https://www.economicliberties.us/our-work/factsheet-the-ftc-...
Your cause and effect is wrong.
The US doesn't fail to attempt to enforce, the gov representatives often get paid to not enforce by said corporations who have been allowed to put money into their campaign for election/reelection.
Nobody likes this state of affairs so we are asking you to stop strawmanning and start steelmanning the posts you are responding to.
You are clearly not dumb, so stop responding to the dumbest possible and easiest to dismiss interpretation of other people’s comments and instead go deeper
2025 numbers: https://www.sec.gov/Archives/edgar/data/796343/0000796343250...
2026 Q1 numbers: https://mlq.ai/stocks/ADBE/q1-2026-earnings/
For the record: national economic policy shouldn't revolve around Y Combinator classes and similar startups.
I'm totally fine if it turns out a sensible antitrust policy completely destroys the acquisition exit pathway for tech startups. I'm not saying one will, but I'm saying that's a cost I'm willing to pay.
People always give these vague guidelines (and even the guidelines in the 80s were) and wonder why they are easily circumvented.
Antitrust enforcement can be done retroactively as well, if it appears that a large company abuses its financial firepower to undercut competitors or a marketshare gets too dominant.
That's pretty unfair. IIRC, Standard Oil was on of the companies that was the impetus for antitrust law (and broken up by it), and AT&T was broken up (famously) in the 80s.
Basically, your "argument" is a troll or a deep and basic misunderstanding. Especially in the case of Standard Oil. You're basically saying the law doesn't work because it didn't work before it existed (Standard Oil became dominant in the 1870s or 1880s and the Sherman Antitrust act wasn't passed until 1890).
The information is captured the same way as most policy - via statute and precedent, and guidelines for enforcement agencies.
None of this is confusing, or even hard, except insofar as it's hard to fight against well funded opponents.
I've read enough of the pre-Borkian (ie, pre-1980s) history of antitrust law to know this was very actionable.
They were not easily circumvented in that it required decades of funding and activism to nerf the Sherman Antitrust Act and its successors.
Montgomery Ward thought it was "too big to fail" and too powerful to regulate.
So, what happened?
If the US government wants to, and it has in the past, it just takes your business at gunpoint.
4 soldiers walked into the ultra-conservative owners office and made him leave. Two of them picked up his arms and legs, took him outside, and deposited him on the sidewalk.
> a major U.S. CEO being physically evicted from his own company by armed troops became one of the most famous news photos of the home-front war
No, because if we had proper anti-trust they already would have both been broken up years ago.
It sure is.
> and it inevitably will result in the same situation
Why?
And it should also prevent the acquihire.
But that's not what you're talking about, is it?
How about doing what America used to do? Provide seed funding for a new fire truck company in trade for condictions. Can we agree to do that? Fund 3 companies to make fire trucks, fast-track whatever certification and approvals they need. Create the companies we need, risking (and in fact expecting to lose) a bunch of the capital used for this.
Many countries already have a progressive tax on income, but that is irrelevant to business profits.
Alternatively, don't. I expect this proposal to be popular with executives regardless because it creates new spots for executives, just as it does with lower-flying labor.
Looking at the companies on the top image for https://en.wikipedia.org/wiki/Big_Tech ... it's outdated, but close enough.
Apple: Computers, Phones, maybe even break out Operating Systems
Microsoft: Hardware, Gaming, Operating Systems, Office/other software, Cloud Services, Consulting
Alphabet: Google Search, Ads, Android, Chrome, Cloud Services, Other consumer services, Waymo
Amazon: Retail, Warehouse, Shipping, Cloud Services
Tesla: Cars, Batteries, Charging Network, Solar, Scammy bullshit
Berkshire Hathaway: it's a holding company, spin out the big holdings
Nvidia (this one is tougher): Ethernet, Video Cards, AI cards; maybe chipsets vs cards?
Meta: Facebook, Instagram, WhatsApp. Or ... split out the internal Cloud Services from the frontends.
TSMC: I dunno what to do here, but it's also not a US corp, so yeah. You could spin off fabs by node maybe.
United Health: not a tech company, but Insurance (possibly spin out regionally), Regional Healthcare Providers, Pharmacy Stuff
There's potential to break up some of the other companies along regional lines, like the Baby Bells ... but IMHO, that doesn't make that much sense for most of these.
Have some sort of phase-in, but if ownership between formerly related companies remains similar, contracts between them need to be a) public, b) terms must be available to others (FRAND). For cases where the spun-off companies are still market dominant (a lot of what I've suggested), constrain the company from entering other markets; this doesn't end the monopoly, but it prevents using one dominant position to establish another.
The "consumer harm" standard is idiotic.
The US economy generally did very well with those standards, maybe the best it ever did, especially considering distribution of benefits.
Spurious correlation. Few experts (economists) think old regulations caused economic growth.
If we really want to recreate post-war growth, we should destroy half our infastructure and fight a world war. Then, in the years following the end of that war, we can experience catch-up growth.
I didn't say they caused it, but they sure didn't stop it.
I specifically said it was about distribution, not aggregate growth.
There's still no argument for the GGP presented.
> the years following the end of that war
Until the 1980s? I think some evidence is needed.
Summary of the old regime: Mergers that lead to 5+% market share were blocked.
Then the "consumer harm in terms of prices" was adopted. Which swung the pendulum the other way. That is the fundamental economic policy now. Which has lead to abhorrent results.
I wrote a comment on previous post that was about how consumer harm standards have warped the discussion on tariffs: https://news.ycombinator.com/item?id=48096236
Most of the R&D that laid the future of the world happened during that period. The middle class grew to its largest portion during that period.
I don’t think the economy was hamstrung in the least
The classic example is airline deregulation which happened under Carter. The real cost of flights is way, way down since then. But this doesn't stop people from complaining about how "flying is a worse experience now" and wishing for a return to inane regulations.
"Inane regulations", however misguided, generally exist to prevent the Torment Nexus. PE devolves companies into the Torment Nexus to create more profit.
But the downside is that flying would be for rich people, just like it was pre-reforms. The poors would have to take trains or drive. Is that a good trade-off?
And to top it off, if you want to pay for a premium flying experience today, you can! For similar prices (to pre-reform flights, in real terms) you can book a "luxury flight".
Like I said, rose colored glasses.
post WW2 the world basically outside of the US blew up and the US pumped a ton of money into europe+asia to bolster it.
it's easy to be #1 when everything else burnt down
The UK high street has been a notable victim. Gradually, over the past couple of decades, company after company has been snapped up by PE. Not just shops, but restaurants too. Suddenly you realise that the 5 or 6 high street chains that were competing are now owned by the same fund. Quality collapses, prices rise, not just at one chain but everywhere. People stop going, the chain collapses, another empty unit, the fund moves on. It's easy to point at Amazon and internet shopping as having degraded the British high street, but there are several other factors, and PE is a big one.
PE is often just legalised larceny.
Same for Amazon vs going direct to the manufacturers, which is more often than not, China.
That comes with a bunch of problems. Taxes, import duties and import refusals are the biggest one. With Amazon, at least as long as it's sold or fulfilled by Amazon, no matter what, you are going to get the product in a reasonable time frame (1-3 days IME).
Shipping... depends. If you're in bad luck, the seller doesn't ship Fedex or DHL, but Yanwen or another one of the usual bunch of "aggregators" that bundle weeks worth of shipment to forward it to the US or Europe and unbundle the shipments there.
Assuming your product shows up at your doorstep, legally, you are now the importer and fully responsible for anything related to that specific product - say, an electrical appliance that sets your house on fire. You can't hold anyone accountable but yourself.
And finally, if there's defects, you only have to deal with Amazon. Free shipment back, done. With anything straight out of China, you are now responsible for shipments.
What keeps a newly graduated Veterinarian from opening her own clinic and undercutting the PE competition? With no massive loans on her books, she can profitably offer lower prices than PE can. She may even drive the local PE clinic out of business.
If it becomes too much, things actually happen.
(This is the dark side of financialization, as it can be used to maximize human misery.)
Except every newly-graduated veterinarian does have a massive loan on their books, in the form of student loans. And even if she didn't, where does the startup capital for her clinic come from? Whether in human or animal medicine, starting your own practice--especially as a new grad--is usually the course of action with the highest-risk-to-lowest-pay ratio.
Assuming you had $$$ for some supplies but couldn't afford to lease a commercial building, you could provide small mammal services from your vehicle, driving to people's homes to give vaccinations and well care.
Being mobile would also allow you to serve a larger market than a fixed clinic; you could serve a couple small towns on Monday, a couple others on Tuesday, and server a larger metro on the weekends.
Once you're consistently profiting $$$$/day you'll be able to start saving for the equipment you'll need for a commercial lease somewhere because you have both the cash, cash flow, a loyal customer base, and critically, a good sense of where a good location would be to serve them from.
Even if they are lucky enough to have no debt, I don't think the average graduate has $10,000+ in the bank to spend. I have never started a business so I honestly have no idea how hard it is to get a small business loan for something like this, maybe it's easy, but even so it's certainly risky.
How many veterinarians got into the game to become relentless, driven, scrappy and indomitable business owners vs because they love furry things and helping?
Depends entirely on fixed vs variable costs. Rollups (which are very common now) work mainly because most "mom and pop" businesses can easily be "unlocked" by pooling the treasury, HR, accounting, commercial banking, supplier negotiations etc.
Nobody has that kinda cash lying around, banks can't justify such high liabilities, and VCs are not interested in "stable", businesses.
2017 my city bought a Pierce ladder truck for $1.1M. The same-specced model that we ordered at the start of 2025 was $2M.
Our ambulance costs have gone from $250K to $250K. Engines from $400K to $800K.
And everything takes years - we're having to order multiple years ahead of time. Even a "simple" brush truck we waited for 30 months for delivery (and that's counting day 1 being "the day the Ford chassis was delivered to the factory for the brush truck build").
Does anyone know about the source?
https://rubbishtalk.com/media-kit/
Whoever put this together couldn't even be bothered to compete the template they were using.
So you're looking to attract investors with smaller margins on specialized $500k trucks that don't yet exist for a sector already monopolized by PE?
The new PE overlord will do things like send you a bill for inspection after you inquire about their pricing ("Well, our guy was in the area so he took a look!") while billing you for gas from their home location.
This is disgusting on so many levels—no competition here at all, just oppression by those with a lot of money.
That would also be legal. But if you take the assets out of the daughter company you would go to prison for https://web.archive.org/web/20141030194421/http://www.sfo.go...
Please edit out the AI-isms in your article. If you do, let me know and I’ll come back and read your thing.
Thank you for your attention to this matter.
Another anecdote is private equity buying up psychologist firms providing therapy to people. The dude told me people walk in with their chat gipity transcripts. The goal of the PE firm was to buy out and make money and then somehow offer some software to give these people a "productive" chat gipity conversation
Just get the fuck out of here already? How many fingers up your own ass do you gotta have to keep up that kind of work?
If it sounds substantial, it’s because it’s paraphrasing actual reporting, or it’s hallucinating. I found one of article it’s plagiarizing [1]. Other “articles” on the same site link to the real sources that the AI is regurgitating.
The topic is interesting and discussion is thoughtful, but I’m saddened to see it under a fake article like this.
[1]: The intro is an AI rewording of this: https://www.atlantanewsfirst.com/2025/12/08/burnout-fire-tru...
1. No one forced these people to sell. Is the idea that you can’t sell to an entity with more money? If you block that good luck with the world economy.
2. If above is ok is the idea that the new owner is inherently worse because they have more money, whereas as the smaller would be OK then where are the new entrants?
3. Going to the article it is clear enough. These industries just are not lucrative to begin with. PE buys them and raises prices, but this only works because people complain instead of starting rival business.
4. Somehow leaving money on the table in the form of a backlog is bad? Why don’t others start a business and take those orders? Why don't they? Not profitable or worth the hassle.
Well there you go.
Separately, American manufacturing just seems very uncompetitive.
This reads like fiction. When they corner the market it's of course trivial to just jump in and take that share. No way they will try to be disruptive to you or sue you to hell and back and of course the bank will loan you the pile of money to start a new company since there is no giant corporation to compete with who can squeeze you out in an instance.
Sue for what exactly? Of course they will be disruptive, that is what competing means.
... they sold the original business to retire??
Conjecture unsupported by article
You will not find any investors.
The investors that want to invest in fire trucks already invested in the PE fund and will give them money over any new start
That’s the point
There’s no money elsewhere.
This is the insidious part: small markets that grow organically over about 10-20 years are specifically what PE investors look for because they are cash heavy but don’t have desire to expand.
So the owner gets 3M cash out for property worth 4M. PE bundles similar businesses (boba tea shops are a popular one) and then uses the net cash to get a loan to expand.
They expand, cut corners then cash out on the net profit and then sell the skeleton in the pink sheets or go bankrupt.
I’ve had to deal with investors and finance for almost 15 years now. My company was bought by a PE backed company and I knew fund owners
this is how the economy works
1. In the 90s, I had a struggling one-man Mac ISV, and would do gig programming on the side. I did a lot of work for boutique investment banks, and also for a "consulting" firm that did about 75% of their business with the finance industry. The owner of that firm praised me, but didn't like that if my business took off, he'd lose me.
"What would it take to get your commitment to this firm?"
50%
"Where will you get the money to buy half my company?"
A loan from the firm?
When the dust cleared, the business loaned me the money to buy in, and I paid it back with 50% of my profit sharing payouts. This is not some weird financial alchemy, a lot of partnerships are run this way.
———
2. My Duathlon racing buddy was a mold-maker, very specialized and good at his trade. He worked for an elderly entrepreneur who had built his mold business up over decades. Said entrepreneur sent his own kids to university to become "professionals."
What to do about succession when he was ready to retire? My buddy literally photocopied my own arrangement, bought 50% so the business would have a successor it could count on, and bought the remainder when the founder retired. He is now a comfortably wealthy automotive sector entrepreneur.
———
The huge LBOs in the news always seem like space-age deals, but little LBOs for succession purposes are remarkably common.
Ultimately the influence of rent seekers has grown and the category of people who can take risks by starting a business was the first to collapse, leaving only the wealthy who don't care and the people who can't risk their own survival.
You need a street legal product, which takes certification You probably need multiple firefighter associations, which takes not only meeting criteria but politicking with associations (don't know about firefighters but some associations are themselves captured and limit approval to their friends/connections).
My family doctor underwent that along with several of her local peers and got out from under it and started her own practice. I'm obviously not her only patient, so yes, heightening stress on caregivers by demanding more work to drive profits higher is justifiable of a bad reputation.
Leaving things like medical care, food, water, shelter at the mercy of for-profit dynamics leaves the possibility open that those services stop being provided because it is unprofitable at the expense of the population.
America is deciding it likes profit over its population.
Why do we need antitrust laws? Why do mergers need government approval? Or are you a libertarian who believes in unfettered capitalism?
Where does it end? What if I threatened you with violence to sell your business? Is that OK? You might correctly say "that's illegal". If so, does that stipulate we do need laws? How far can coercion go while still being legal? What if I also own your key suppliers? What if you run a veterinarian practice and I jack up the price of all your meds, radiological film, etc if you don't sell? What if I own the major pet insurance providers and decide that your practice, if you don't sell, is no longer covered by my insurance?
> 2. If above is ok
It's not.
> 3. Going to the article it is clear enough. These industries just are not lucrative to begin with
They're engaged in anticompetitive behavior but on a local level so it tends to escape scrutiny. Unfortunately, if you dog is sick and you like in Cincinatti, you don't really have the option to go Reno where there's (for now at least) a cheaper option.
This is all just rent-seeking behavior. Nothing about this is productive. The people who engage in this should be treated the same way profitters are in wars and natural disasters, which historically hasn't been a fine or legal sanctions. I'll put it that way.
> 4. Somehow leaving money on the table in the form of a backlog is bad?
That's what rent-seeking is. It's unproductive extraction of wealth by removing all other options.
Wait until PE comes for your ISP and suddenly a 1gig fiber connection is $300/month. What are you going to do then? Start your own ISP? Good luck with that.
If you just keep gutting companies with leveraged buyouts, you're not taking on any real risk.
If you're buying up firms that deliver "essential services", you're likely engaging a monopoly. Again, low risk, high reward. A direct violation of the rules of how investments should work. Regulate the monopoly and this goes away.
And that debt financing bears an interest proportional to the riskiness of the asset's cashflows.
There are lots to hate about LBOs but they aren't entirely devoid of value
But for the company that was bought? Those are people's jobs, their livelihood. A community that depended on those jobs to sustain a town's economy. And for company's providing essential services with inelastic demand (like fucking fire trucks), the downside is loss of those services, broken fire trucks, and ultimately loss of life.
When you hear "profits over people" as a complaint, it sounds abstract. It is not. Though this specific article is AI slop, the underlying phenomenon is very real (that other commenters have shared other links to better reporting). A very real dollar figure can be crystallized against very real human lives that have been harmed or sacrificed.
Most "regular people" (you know, the ones who just want firefighters to have working trucks and ladders, and to come quickly when there's a fire) don't care about the most hyper-efficient allocation of capital through some skewed financial engineering and legal wizardry (especially when the definition of "efficient" allocation is a biased one, that doesn't account for externalities properly, like people fucking dying due to broken or not-enough trucks). But regular people don't really get a "vote", when it comes to LBOs (and I am specifically focusing on the ones that affect essential services). They just get screwed with the increased tax bills that fund the increasing profit margins of the PE firms. That seems unfair to me, but fairness is a matter of politics and not finance.
---
Personal disclosure: I made a post a few months back about a related topic (https://news.ycombinator.com/item?id=46307300), of PE buying up and consolidating the companies that used to provide software to emergency services, and jacking up the price and taking advantage of inelastic demand. This is a topic I am personally passionate about, and I am still exploring different options for fighting back in various ways.
We have spent the last 50-ish years "legitimizing" things like PE buying up essential services and implementing cost cuts. When I say "legitimizing", I mean we keep removing the avenues for the "regular people" to legally and formally reduce the harms that this sort of business brings about. It becomes just a fact of life: people can come in and do this and you have to "deal with it".
When you have people dying, watching their streets crumble, have garbage piling up, etc., you can't just think that "regular people" (or maybe "the little people", as some businesspeople might view them) will "deal with it" forever, regardless of how much legal, financial, and political cover you provide yourself. At some point, there will be a reckoning. In that case, you'll prefer that it be through a regulation change, lawsuit, or lost election/ballot initiative.
You can only make money in an LBO if you meaningfully improve margins or you grow massively such that the debt portion of enterprise value becomes smaller. In both cases, the company is better off than it was before.
I do think there are limits to the value that PE can bring and there are many bottom feeders going into businesses they shouldn't, like fire trucks. But not all of PE is bad.
The better solution is to tax PE capital gains as income so they pay their fair share of taxes, making good deals harder to find, drying up some appetite for that highly saturated part of finance, and returning more value to communities when they do succeed.
To quote the bandana-clad bard of Venice, CA, Mike Muir: "it's the difference between a Porsche and a Rolls Royce".
If you're playing the LBO game at the level where you're looking at buying up chunks of a community's essential services, you are unlikely to be doing business in a way that presents meaningful risk to your personal financial situation.
According to "high risk, high reward", yes, you do.
> Should we forbid CEO roles?
The current model of it? Absolutely. It's built upon the pretense that these people are the most competent available for the job and that they have a stronger-than-average innate drive to see the business succeed in a way that serves the most good to interested parties. This gets proven false on an almost daily basis in very demonstrable ways these days. I was unlucky enough to spend four years under empty suit CEOs at a former employer. Neither of those men were worth a penny of their contracts. They majorly damaged the company, its customers (hospitals), the workers' finances, and the local economy. Would a "one share, one vote" system of corporate governance have done worse? Probably not.
LBOs are encouraged by tax law. Stop it by stop making interest on debt tax deductible. Equity is an investment and represents ownership interest, and so does debt. From the company's perspective, interest deductiblity increases profits when the company takes on debt.
Homeowner interest deductibility should also stop. Want to incentivize home ownership? Give people the money, leave the tax code alone. You know what would happen then? the rest of the people would rebel, "why are you giving these people money!?" Hiding it in the tax code is just that, hiding, and that's not healthy for an open society.
Cost insensitive customers with bizarre business requirements, what could go wrong?
0. https://www.slashgear.com/1890538/why-american-fire-trucks-b...
1. https://www.pulsara.com/blog/why-does-911-send-a-fire-truck-...
2. https://sf-fire.org/our-organization/division-support-servic...
Why would anybody expend time reading something that is probably full of hallucinations? And what's crazy is clearly only a few of us have enough experience with Instruct Mode LLMs to even spot it. The rest of these guys don't even know they're reading slop.
It's a good thing that profit margins for manufacturing have increased, it's a bad that cities don't want to pay what a firetruck is worth in a post-industrial country.
Now they are buying fire stations, dentist offices, ski resorts, whatever the fuck they can think of and then raise the prices. Something needs to be done to stop this.
> The result is a backlog that reads like a financial opportunity in earnings calls and a crisis in every fire station in the country. As of 2025, REV Group’s backlog stands at $4.5 billion. Wait times for a custom fire truck run to four years. Prices have doubled in a decade: a pumper truck now costs around $1 million; a ladder truck runs over $2 million. Profit margins in the industry have tripled — from the historic 4-to-5 percent range to over 13 percent.
The article goes on to talk about how a backlog is actually genius. Here's a quote from a senator:
> “This didn’t just happen to you accidentally. This is a business decision, isn’t it? You keep these backlogs like this. […] Another word for this would be a heist. This sounds to me like private equity came in; bought up all of these small companies; combined them; shut down their production; rolled up a huge backlog; massive profits; stiffed these guys; and now you’re making out like bandits.”
So you make money by ... not delivering? I'm missing something.
> The fire truck industry is the most publicly documented case, but the underlying playbook — acquire, consolidate, reduce supply, extract margin — appears across essential sectors with alarming consistency.
Sure, anyone can reduce supply and increase prices if they're a large enough supplier. But companies don't produce up to the point where marginal price is equal to marginal cost out of the goodness of their heart. It's the profit maximizing level. This is economics 101. The article doesn't even try to explain beyond hand waving. No one cares about profit margin, they care about maximizing profit, and you don't do that by creating backlogs. So something is off here and the author is either too incompetent to ask basic questions or just wants to write another PE bad article
The buyer (who PE sells to) is "thinking about" collecting on the backlog.
Obviously, the backlog is "fake".
EDIT: The backlog is fake or worthless in the sense, that dollars worth of reputation (a.k.a. Brand) were given away to get pennies worth of backlog. Customer satisfaction is real, even in a business valuation sense.
But such a big backlog suggests that they're underpricing. So it may be as simple as increasing price and ramping up your production, even though it would likely mean higher marginal costs.
Overall no one wants a backlog. It's not good business
There's only one company: the one with the backlog. The other company either went bankrupt or was bought out and consolidated into the first company.
The point of the exercise is not to suppose what other things could have been different to allow these two hypothetical companies to end up in the described state. The point is to actually freeze everything else, do not allow it to vary, and look at the backlog in isolation. Obviously such a situation would never actually arise. Even if things were trending in that direction, the two companies would very quickly diverge from ceteris paribus.
Obviously having a backlog is better than no backlog because unless you make a new sale tomorrow, you have a problem. You will have idle capital and labor resources. Which company do you think has easier access to credit?
Private equity is very much interested in the margins. That is one of the key differences between private and public companies. Public companies are under pressure to grow at all costs. PE would probably be satisfied to make half the profit and double the margin, especially if it also happens to position the company for a more favorable sale. Would you rather buy a business that's at 5 or 10% margin?
The depth of the backlog also happens to be a pretty decent proxy for how much competition there is the market. A deep backlog means there isn't another firm around to fill that demand. That makes your company look better.
Let's go a little left/up the funnel. Imagine two startups, all things equal, their sales funnel goes wide > qualified > sale. They consistently convert 5% of qualified leads into sales. Do you want to be the company that has zero qualified leads, or $4.5b of qualified leads?
It's like me saying "all things being equal except you're a duck"
You can't be a duck and have all things equal. Same way a company can't be equal to another company and have a $4bn backlog. This isn't an independent variable like the color of your logo.
> PE would probably be satisfied to make half the profit and double the margin, especially if it also happens to position the company for a more favorable sale. Would you rather buy a business that's at 5 or 10% margin?
So PE doesn't maximize profit but instead maximizes profit margin? This makes no sense. Why?
The demand curve for a business could be such that you sell 100 widgets and get $100 profit, sell 200 widgets get $101 profit. Why bother trying to sell more than 100 widgets?
Maybe you can sell 50 widgets and make $90, that sounds like a pretty good deal. Instead of making 50 more widgets you could do something else and make more than $10 profit in the same time.
For the sake of argument, we're imagining both startups have equal levels of investing/funding secured, equally talented founders and employee, equal access to equal networks (i.e. I'm imagining something like defense or aerospace, to make it a little easier to imagine a startup getting $4.5b in qualified leads), equal technology or IP, equal EVERYTHING as per your hypothetical... and yet somehow one startup has $4.5b in qualified leads and the other does not.
I truthfully would rather buy into the one with zero leads, because presumably, under ceteris paribus conditions, that startup must be priced at a discount to the other one, since it has no leads... and yet, EVERYTHING ELSE is equal (equally strong team, equally good tech, equal networks, etc.), and so it seems to me, that I would be able to buy a larger equity stake for a discounted price, and have EQUAL odds of winning future business since this startup is EQUAL in all other respects expect for the odd qualified leads backlog.
Would you rather buy shares in NVIDIA, or buy shares in another company that is equal to NVIDIA in every way (same talent, same tech, same everything), but just happens to have no backlog of confirmed orders? I think I'd like to buy this shadow-clone of NVIDIA, because I would buy into the thesis that there is more room for growth, vs buying the incumbent... after all, ceteris paribus, right?
You say it’s ridiculous to compare two equal companies with different backlogs, well it’s ridiculous to presume that they could have just produced $4.5b worth of product perfectly efficiently if they wanted to.
It’s just used to make the point that all other things being equal, some backlog is better than no backlog. You can invent all kinds of reasons why having a backlog is bad, but in any of those situations, if everything in the backlog was canceled at once that would probably be bad, right?
> So you make money by ... not delivering? I'm missing something.
Precisely. Let's review imperfect competition. Although it's you who so unpleasantly insists on framing the discussion in econ 101 terms, it's your comment that is sunk by a misunderstanding of elementary economics.
What you're missing is evidently the things one learns when they go past chapter 1 of an intro textbook!
> It's the profit maximizing level.
Not all markets match the assumptions of the simple "perfect competition" ideal you learn about first. The efficient equilibrium you describe requires an assumption that there are no barriers to entering the marketplace as a producer. An extreme example breaking this assumption is the "monopoly market", where there is only one seller of the good because barriers prevent other sellers from viably entering the marketplace. That's why the consolidation in OP is relevant to the discussion...
In the extreme case the market equilibrium is reached when a monopoly jacks up the price and produces less than it would in a competitive market. Deliberate scarcity! The (single) producer makes more money in this kind of market. The consumer is worse off. But the every extra dollar the monopolist makes in profits takes more than a dollar away from the consumers. Deviating from the perfectly competitive equilibrium results in a market inefficiency called "deadweight loss".
The article also nodded to the price-inelastic demand for the equipment enabling emergency services. Inelastic demand makes this phenomenon more extreme. It's pretty intuitive that fire departments' demand for firetrucks would be price-inelastic.
So anyway. Your comment implied that you don't want to be mad about the consolidation and price gouging for e.g. firetrucks if you're in the "woohoo go free markets" tribe. Couldn't be more wrong. You should be just as mad if you're in that tribe. The extraction of monopoly rents from emergency services is not just dangerous, and not just unfair, but also a textbook case of market inefficiency.
Wrong. The amount produced is still the point at which marginal cost is equal to marginal revenue under a perfect competition. However the amount charged is higher. Below is the monopoly model, chapter 7-2 :-)
> The monopoly firm maximizes profit by producing an output Qm at point G, where the marginal revenue and marginal cost curves intersect. It sells this output at price Pm.
Basic economics doesn't not apply when you go past chapter 1.
https://uw.pressbooks.pub/microman/chapter/7-2-the-monopoly-...
https://www.thebignewsletter.com/p/did-a-private-equity-fire...
Moreover, one company having control of 44% of the market would suggest that there might still be other options available.
What trash.
Other examples not mentioned: eggs, kids athletics, I’ve heard stories in fintech services as well
1.Shareholder primacy. Under Delaware corporate law (which governs most large U.S. public companies), once a board decides to sell, directors have a fiduciary duty to maximize the price shareholders receive. A premium cash offer from a PE firm is hard to refuse without legal exposure.
2.Interest deductibility. The tax code lets companies deduct interest payments but not dividends, which makes debt-heavy capital structures more tax-efficient. LBOs exploit a feature of tax law that exists for many reasons unrelated to private equity.
3.Freedom of contract and limited liability. Sponsors can put a thin equity check into a holding company, have that company borrow on the target's assets, and walk away if it fails, because limited liability is the foundation of corporate law generally.
How would you know this attention is getting paid or not unless you are consuming local news from the places this is happening?
Why would the retiring dentist selling their practice be a trust or collusion problem?
That’s the whole math of it. That cash out comes from the future business increasing profit, which is over the longest term cutting service quality.
Start small biz > be successful > want to retire > find someone to buy biz
There’s a lot of pathways with a giant c corp, almost none for the local successful small biz.
I had a acquaintance sell three local trash companies to LRS which is exactly what happened.
Unfortunately people are mortal and everything ends. Even if a someone didn't sell their business to PE, the trusting relationship is over once they retire. There's no guarantee that someone new - even if vetted - is going to be as good as the previous owner.
Sure, and it's often a real loss to customers, but are you suggesting mandating that you vet the person you're selling to for their business aspirations and then have some kind of legal covenant that binds them to those stated aspirations, enforced by...something?
Otherwise we can just be satisfied with shaming them, but seems like an awfully convenient way to sidetrack this conversation from the obvious remedies.
> That cash out comes from the future business increasing profit, which is over the longest term cutting service quality.
Which is a problem when the same person buying also bought up all the other dentist offices, so there's no choice, let alone competition, in services.
Eliminate that and the sweetheart buyout offers make a lot less financial sense and we can at least prevent the scales from tippng so steeply toward PE buying up all the dentists, hospitals, retirement homes, HVAC repair, roofing companies, pest control, etc etc
> When a fire truck fails to deploy in a burning building and four people die, the cause isn’t just mechanical failure. It’s a business model.
leaves
There are other greed-based systems which also eat themselves, but we live in the era of capitalism as the vehicle of self-destruction.
Many of us won’t be alive to see it, but it will result in the fall of the US. Maybe it will be 50 years from now, but I suspect sooner.
Once enough safeguards get systematically removed, the rate of growth of the beast becomes unstoppable.
Eventually the few who have not been crushed and who have the (illusion of) control will have to wall themselves off in heavily guarded compounds to prevent the masses of desperate poor from overrunning them. It will be like so many dystopian stories that have already been written.
I see no way to correct it now, at least not in the US. Moneyed interests clearly have control of the government. The few good civil servants and elected officials are increasingly under pressure to give up their principles and accept pay-to-play, lest they lose their jobs or what little power they had to do good.
This isn’t just a right wing problem (US right), because the same money flows to the left. At the end of the day, one side may indeed be more cruel, but they both support the same system.