Hacker News Reader

Comment by afavour | Hacker News Reader

Small(er) businesses can be poorly run. In theory private equity takes knowledge already in practise in other locations and shares it with this new location, improving results. Downside of course is that they care a lot less about that specific location than the previous owners would have.

One specific practise I’d like to see banned is private equity buying companies with debt the company then assumes. It staggers me that it’s legal.

View on HN

> One specific practise I’d like to see banned is private equity buying companies with debt the company then assumes. It staggers me that it’s legal.

What alternative are you imagining?

That the buying company keeps the debt on their books instead of offloading it onto the company that they bought.

So form a shell buying company A and secure the debt of company A with the assets of the newly purchased company B? Congrats, you added about 5 minutes of paperwork.

How would that be an example of what I described?

If you are putting the debt on a shell company’s books, you aren’t putting debt on the buying companies books.

The buying company is the shell company.

Are you proposing that only an established company can buy another business with profits from their operations or something?

If I start a company with a loan and want to buy 3 HVAC companies in my area, is that allowed under your rule?

I’m arguing against the practice of leveraged buyouts. You aren’t describing all of the steps of a leveraged buyout. You are just describing a buyout. Buyouts are fine. Leveraged buyouts are what I think is not. I cannot be more clear or keep explaining until you go learn the difference since you aren’t understanding what I’m saying.

That's a silly suggestion. The lenders buying that debt know what they're getting into. Those are sophisticated investors. If lenders want to limit what borrowers are allowed to do then there's nothing stopping them from imposing debt covenants on the deal. No need for the government to ban anything.

I’ve literally never seen that happen. what does always happen is cutting ‘non essentials’ that are essential until the company implodes.

That is one of the core strategies in the private equity playbook.

Why would it be profitable for the company they just paid a lot of money to acquire to implode?

They sell off everything of value before it implodes and cash out. THEN they let it implode with nothing but the debt remaining.

Why would banks lend to such an enterprise if they don't expect to get paid back?

They don't. They lend to the target company BEFORE the buyout.

So over time banks will learn to avoid lending to buyout targets?

banks generally lend using a set of relatively hard coded critera. it would take systemic change for them to ‘learn’.

they usually get the company to take out the debt to actually be acquired. it’s the key first step.

then they extract as much cash as possible while the debt ballons. so called ‘extracting brand value’.

the investors usually do quite well

I suspect there’s a survival bias at work here. The PE purchased companies that continued to thrive are ones you probably never even knew got bought out.

cites?

Hilton Hotels, Dell, Burger King, Dunkin Donuts? Google works if you use it.

I guess not everything is a Sears, K-Mart, LastPass, HCR/Carlyle, etc, etc. [https://www.congress.gov/119/meeting/house/118337/documents/...].

Those are certainly some... examples. Not things I would hold up as a sign that PE is a good thing since all those businesses look like they are perpetually on the edge of collapse around my area. Dilapidated, mostly empty parking lots, poor service from understaffing. I think we would all be better off if those businesses died and left room for others to replace them.

Who’s preventing a competing coffee shop or burger restaurant from opening? If your area is such a prime business market, but these businesses aren’t capitalizing on it, one of your assumptions may be wrong.

It does happen, but often the companies end up poisoning the local markets on their debt binge fueled way down.

The fact that they are still there in business, even if it is low and crappy business, will still hold onto some customers. And long established business has advantages that a new business can't buy. If there isn't enough traffic for two burger joints, it can become a standoff of both bleeding money until one of them fails, and the new business likely doesn't have the same credit line.

Reply on news.ycombinator.com