"These creditors they were upsetting were some of the largest and sophisticated firms in the financial world, such as Oak Tree Capital (led by Howard Marks), Appaloosa (David Tepper), Elliot Management (Paul Singer), GSO and many others."
Important factor, at least in my non-expert vantage point of an employee of such a case, is that the success scenario posits a relatively brief period of ownership by the PE - before they flip the new-and-improved version of their acquisition(s). During that time, the balance sheet is invariably pushed to its limit to boost the valuation, and there is every incentive in the universe to sweep risk under the rug. The management under PE ownership has primarily just one duty - flip the asset for the required profit.
Even cases that are a success from the point of view of PE (ie they get to exit with a profit justifying their risk) often leave the next owner with both dysfunction and enough debt to put a drag on any corrections, which subsequent owners organic to the industry would recognize. Whereas prior to the PE buyout, typical candidates (outside of distress buys) would often have been a combination of roughly breakeven but conservative debt profile (thus "undervalued"). That is an entirely systematic phenomenon, a machine to defer risk for just a couple of years.
Very astute and in most cases it’s not great to be an employee of a PE backed company or the person buying in after they try to exist.
A big issue is PE is having a very tough time exiting so now they just keep recycling from one fund to the next or selling to other PE firms but at a certain point there’s no juice left to squeeze.
Nice discussion, Ben. Another angle here is that a lot of those leveraged buyouts were exited by sending the company back to the stock market with a lot more debt, via an IPO. Most of the big retail failures from 2017 through 2020 were the failure of such companies. The problem was Private Equity, NOT ecommerce.
"These creditors they were upsetting were some of the largest and sophisticated firms in the financial world, such as Oak Tree Capital (led by Howard Marks), Appaloosa (David Tepper), Elliot Management (Paul Singer), GSO and many others."
Wouldn't mess with Elliot https://www.businessinsider.com/hedge-fund-elliott-capital-management-seizes-ara-libertad-ship-owned-by-argentina-2012-10
These guys are not afraid to go scorched earth and they proved it
To quote a friend who builds PE deals:
“There has never been a story that ended with ‘and then private equity got involved and everything got better.’”
Hahaha few and far between at least
Important factor, at least in my non-expert vantage point of an employee of such a case, is that the success scenario posits a relatively brief period of ownership by the PE - before they flip the new-and-improved version of their acquisition(s). During that time, the balance sheet is invariably pushed to its limit to boost the valuation, and there is every incentive in the universe to sweep risk under the rug. The management under PE ownership has primarily just one duty - flip the asset for the required profit.
Even cases that are a success from the point of view of PE (ie they get to exit with a profit justifying their risk) often leave the next owner with both dysfunction and enough debt to put a drag on any corrections, which subsequent owners organic to the industry would recognize. Whereas prior to the PE buyout, typical candidates (outside of distress buys) would often have been a combination of roughly breakeven but conservative debt profile (thus "undervalued"). That is an entirely systematic phenomenon, a machine to defer risk for just a couple of years.
Very astute and in most cases it’s not great to be an employee of a PE backed company or the person buying in after they try to exist.
A big issue is PE is having a very tough time exiting so now they just keep recycling from one fund to the next or selling to other PE firms but at a certain point there’s no juice left to squeeze.
This is why distributions are harder to come by.
Nice discussion, Ben. Another angle here is that a lot of those leveraged buyouts were exited by sending the company back to the stock market with a lot more debt, via an IPO. Most of the big retail failures from 2017 through 2020 were the failure of such companies. The problem was Private Equity, NOT ecommerce.
Debt when not deployed in investments that provide an outsized return serve as an anchor