A short discussion on Private Equity

[Shaun @ Tru6]

Private Equity has been an interest of mine after learning how much it's buying up from housing to veterinary clinics and the resulting increase in cost to consumers. This popped up today, basic interesting stuff.

[Jeff Jagusch]

Hi Shaun,
in my role (sales) over the last 20 years, I have encountered Private Equity many times.
I can confidently say that I don't have a single positive thing to report about the groups we have encountered!

[Macroni]

Sold to PE backed Company.... No complaints....

[LWJ]

Many of my clients got bought by PE. I think most of them run poorer after. My employer just got bought by PE. We will wait and see but I am not optimistic at all. I invested in a PE recently. Shocker. I made good money. BUT, I had zero control or liquidity. Not a fun experience.

I think that PE mostly a big fad and lots of it will fold up and go away. My buddy who made 10's of millions selling his profitable company offered to buy his company back from the PE people that turned it into a loser in a few short months. I think this is a somewhat typical experience.

[wdfifteen]

Private Equity - people who only want to make money take over companies that produce products and destroy their ability to produce. We really need the people who produce goods and services to have more power than those who only want to make money.

[Alan A]

Originally Posted by wdfifteen

Private Equity - people who only want to make money take over companies that produce products and destroy their ability to produce. We really need the people who produce goods and services to have more power than those who only want to make money.

You forgot leverage the value of the company to laden it down with debt - while charging fees at every turn - in order to pad the pension funds of public sector employees and those already wealthy enough to afford the upfront nut to get into a pe fund.

[jyl]

My comment is from another angle.

Private equity (PE) funds do not have to mark to market, so they can show strong and steady growth in fund value based on their models, which appeals to investors who think they are getting return without risk. This works until it doesn’t and the funds have to show their true returns. As more investment money has gone into PE, the quality of the PE funds and their investments decline, which is masked by mark to model, until it isn’t.

[Seahawk]

We get approached by PE Firms all the time.

As always, it is easy to get married, difficult to get divorced.

We have never gotten beyond the pre-nup phase because we insist on certain protections for us.

Take the call/meeting and be prepared to ask questions:

https://vistapointadvisors.com/news/questions-to-ask-a-private-equity-firm

https://www.wallstreetoasis.com/forum/investment-banking/smart-questions-to-ask-during-a-private-equity-interview

[Crowbob]

Here PE firms are buying everything in sight real estate-wise. Everything that goes on the market. Houses, land, commercial buildings, resorts, apartment buildings, vacant malls, everything.

Of course, the cost of living around here is skyrocketing. Service people, the hospitality industry, ag labor and unskilled workers can’t afford to live here so the area is being flooded with ‘affordable housing’ units being built by the tens of thousands.

It’s getting ridiculous. It doesn’t help that The WSJ just published its list of best places in the entire world to visit and guess what? My town is in the top ten:

https://www.9and10news.com/2024/12/27/traverse-city-named-a-top-10-travel-destination-in-the-world/

They’re wrecking the place.

[Macroni]

Why blame PE as the destructive force? Owners sell before PE buys.

I sold, I made the decision to hire an Investment bank to run an auction. I entertained then selected the buyer. I believed I was doing the best thing for not only my company but the industry. There needed to be investment and PE was willing. I am sure not all my employees or customers were thrilled with the ownership change.

[berettafan]

PE is the skid mark on the underwear of capitalism.

As consumers and fellow community members we benefit from businesses that MAKE THINGS and make things that are better/improve on something. Greedy ****bags squeezing every last dollar out of something somebody else built is, IMNSHO, morally bankrupt and greasy.

[zakthor]

My wife rages because of all the stuff she reads online about PE. Hospitals, health care, houses.

But really what is the difference between PE buying something and a big corp buying it, or a single billionaire? The PE isn't publicly listed, doesn't have the constraints of a public company, but that doesn't make it intrinsically more evil or less competent.

I don't think there's anything that can be reasonably done about PE.

Focus on fixing the bad stuff that is happening and let the 'agile' PE work around it.

Personally I don't think it is healthy as a society to have anyone making tons of money on health care, or housing, but that is orthagonal to whether 'the PE are evil or incompetent'.

[jyl]

Broad brushes miss details, but here’s a broad brush comment anyway.

Most PE firms do not intend to hold their investments long term. To return their investors’ capital over the promised period, they have to sell what they buy, usually in a few or at most several years. Thus the most common complaint about PE firms: they run the acquired company to maximize short-term profit in order to raise the sale valuation, which can mean shortchanging customers, employees, or the company’s long term future. In other cases they run the acquired company to maximize short-term growth, if growth is what brings the better sale valuation. In other cases they load the company with debt, use that to pay the PE fund and investors, then sell the now debt-heavy company for whatever it fetches.

[berettafan]

Zakthor the answer to your question is simple experience. It tells us exactly what we need to know about the model.

[tdw28210]

Private equity is bigger patially because public equity is smaller. The number of shares and publicly-traded companies has been steadily shrinking over the past couple decades.

[Rtrorkt]

Greed. Simple

[cstreit]

As with anything, it depends o the objectives and leadership of the firm. I’ve worked as a consultant with many solid PE firms that genuinely care about what they buy.

[Shaun @ Tru6]

The main issue I have with private equity participating in the housing market is that it skews the competitive edge too far into their favor resulting in pure exploitation of the market. Home buyers have a reasonable range of readiness to buy a home when competing against each other. And those at the lower level can learn and improve their lot. But PE is anti-competitive because no family in nearly any housing can rise to the level of inherent strengths of these firms.

It would be interesting to see the percentage of homes closed on by American families when PE is bidding on the same homes. My gut says less than 10% and could very well be staggeringly small.

[jyl]

If I were king, I'd prohibit any entity or group of related entities from owning more than, say, 100 houses.

During the GFC, PE formed investment funds to snap up houses in foreclosure or pre-foreclosure. The big institutional rental home fleets started then, like Invitation Homes INVH (I recall 80K houses). During the pandemic, PE formed more such investment funds, anticipating widespread housing distress, which didn't happen but the funds bought up houses anyway - they're not going to give the money back after all. At points in the past couple of years, investors have been as much as 25% of home purchasers in many metros. Ordinary buyers cannot compete with large investors, who buy quickly with cash and raise capital much more cheaply than families. The epicenter is the South, in Atlanta 51,000 houses are owned by these institutional funds. The funds are also moving in on new home construction, with about 8% of new houses "build-to-rent"; sometimes a big fund will pre-buy an entire development.

https://hoodline.com/2024/12/over-51-000-atlanta-homes-owned-by-corporations-dominating-local-real-estate-market/

https://www.fixr.com/articles/build-to-rent-homes

Why does this matter? Well, the wealthiest own nearly all of the assets in the US (e.g. top 10% own 89% of stock market value). The only major asset class not almost completely owned by the wealthiest is single-family houses, which is still mostly owned by regular households as middle-class owner-occupants. For generations, our financial system has been deliberately set up to promote family ownership of their houses, via bank regulations and the GSEs Fannie and Freddie - otherwise the fixed-rate 30 year mortgage would not exist (and it does not exist in almost any other country). Houses are an incredible investment, in the long run, because the government keep the interest rate low, you can use big leverage, the loans are non-recourse, and the costs are tax-advantaged. And when those regular folks get old, their largest asset is usually that house, which helps them make it through retirement and leave something to thei kids. As PE and institutional investors (which are, essentially, owned by the wealthy) own more of the housing stock, the middle class' grip on their last asset class is stripped away.