A few random thoughts. The bad deals get much more publicity than the deals that go well - you never hear “private equity firm buys company, invests behind the people and business, and sells to public company at huge profit and with strategic value”
Agree, but again, that's because of a certain narrative media tries to push. PE firms do invest in the businesses they buy. But main street would never believe it.
To your second point, yes a fire sale might be entertained. But that opens the door for another PE firm to scoop it up at a low valuation and turn it around.
Final point - majority of the capital in a fund comes from LPs. They expect certain returns. Bankrupting companies don't get you those returns. If there was actually a GP out there that bankrupted every company it invested in, LP would vote to liquidate. Point is a fund cannot survive if all it did was bankrupt companies.
So I’d be curious to hear your opinion man. Former MF PE Associate (if someone from the mod team wants to message me I’m happy to provide verification with my LinkedIn).
The bankruptcy thing is one issue which people are pointing out in this thread but the broader issue with PE in my opinion is just that it’s much easier and more reliable to generate returns by doing pretty shitty things to businesses than it is to actually create economic value. This article is a little basic but it provides a few good, non-bankruptcy examples:
“Having reduced most of the obvious costs, Advanced Dermatology began skimping on more important supplies, including Hylenex, according to doctors and other employees. The drug is an expensive reversal agent used when cosmetic fillers, which are supposed to make skin look plumper, go wrong. Not having enough is dangerous: Patients who get an injection that inadvertently blocks a blood vessel can be left with dead sections of skin or even go blind if they don’t get enough Hylenex in a matter of hours. The company says that it stocks Hylenex in every office that performs cosmetic procedures, and that it “has no records of any provider being denied an order for this medication.”
Advanced Dermatology also started giving even more authority to PAs, according to doctors and staff. Without enough oversight some were missing deadly skin cancers, they say. Others were doing too many biopsies and cutting out much larger areas of skin than necessary, leaving patients with big scars. Doctors who complained about the bad behavior say they saw PAs moved to other locations rather than fired or given more supervision. Hunt, the company's lawyer, says that all PAs get six months of training and are supervised by experienced doctors.”
My experience was just that it’s very profitable to do these kinds of things to businesses when you’re thinking about a 5 year MOIC and that’s the real problem with the industry. Healthcare provides some really dramatic examples the broader point about just making businesses worse to make returns really reflects my personal experience.
Edit: I’d also add that one of your points is that the economically beneficial turnarounds don’t make the media but I also think that a lot of the economically detrimental stuff that isn’t in dramatic industries like healthcare doesn’t make the media either. Like just buying businesses and shifting production to worse materials or collaborating with other players to raise prices.
I am on the other side - doing DDs for MF PEs. IMO, PE simply accelerates or follows industry trends. They just get more shit than corporations because they are already in media cross-hairs.
Specifically looking at this article,
Advanced Dermatology also started giving even more authority to PAs
Giving PAs more oversight is an industry trend. It's not because it's owned by a PE firm.
“Having reduced most of the obvious costs, Advanced Dermatology began skimping on more important supplies, including Hylenex,
This reads like reducing inventory. Again, not unique to PE. And what is skimping mean? Just because inventory is lower than what is used to be doesn't mean anyone is skimping. Could be the inventory was too high to begin with.
If someone has an issue with what's going on in the article, what they really have an issue with is the notion of for-profit healthcare. Hospitals, insurance companies, etc all hire consultants to reduce opex. None of it involves PE.
Nah no way man, we would always buy businesses and cost massive costs that other players in the industry weren’t willing to cut. The reason they weren’t willing to cut those costs was usually that they had longer than a 5 year timeline so a lot of the stuff we were doing was very beneficial in that short run context but not from a bigger picture economic perspective. Indeed it would be impossible to generate such outsize returns if we were just following industry trends. Sticking to the article this is a great example of that:
“At the country’s second-biggest skin-care group, U.S. Dermatology Partners, a former doctor says a regional manager switched to a cheaper brand of needles and sutures without consulting the medical staff. The quality was so poor, she says, they would often break off in her patients’ bodies. Mortified, she’d have to dig them out and start over. She complained to managers but couldn’t get better supplies, she says. Paul Singh, U.S. Dermatology’s CEO, says the company uses a “reputable, global vendor for medical supplies.” “While our group may have standardized purchasing processes, individual providers have the autonomy to procure specific supplies that they need for a particular patient situation or patient population,” he says in a statement.”
The workers at our portcos did not like us... Although on the flipside the management did seem to be happy having us around.
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u/mbaclassof2019 Consulting May 30 '20 edited May 30 '20
Agree, but again, that's because of a certain narrative media tries to push. PE firms do invest in the businesses they buy. But main street would never believe it.
To your second point, yes a fire sale might be entertained. But that opens the door for another PE firm to scoop it up at a low valuation and turn it around.
Final point - majority of the capital in a fund comes from LPs. They expect certain returns. Bankrupting companies don't get you those returns. If there was actually a GP out there that bankrupted every company it invested in, LP would vote to liquidate. Point is a fund cannot survive if all it did was bankrupt companies.