WTF Does Private Equity Actually Do?
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- Опубликовано: 27 май 2024
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Private equity has minted more global billionaires than Oil and Technology.
It’s a four point seven TRILLION-dollar [$4,700,000,000,000] global business that according to some outlets has crushed your ability to buy a house and your chance to relive your childhood at Toys R Us. Private equity is simultaneously the ultimate career goal of every insufferable business bro AND the cause of all the world’s problems…
But what do these people actually do?
Private equity is nothing more than any investment company that invests into assets that are not listed on public markets. The variety of private equity companies is enormous.
Some private equity firms will invest in very early-stage startups and give them money to grow their business and acquire new customers, these firms tend to go by name venture capital, but that’s still a type of private equity. Other private equity companies focus on buying alternative assets like airports, toll roads, intellectual property rights and carbon credits.
These firms offer liquidity to asset holders that would find it almost impossible to sell what they own without their services; you can’t put your North Dakota drilling rights on Facebook Marketplace and expect to find a buyer. If something is worth money, there WILL be a private equity firm that will try and make a deal out of it. There are even private equity firms that are called a fund of funds, which you guessed it, raises money to invest into OTHER private equity funds, BUT when you hear politicians, journalists and angry people online talking about “private equity”, they are normally talking about the buyout funds…
If you can start and run a successful buyout fund, there is a good chance you will become a billionaire because these firms are fine tuned to make the most amount of money possible from buying entire companies. So, if you wake up one day and decide to start a private equity firm specializing in corporate buyouts here is what you will actually need to do in 3 easy steps. Step number one, before you even think about going out to find your first investor or acquisition opportunity is to get your corporate structure right.
So it’s time to learn How Money Works to find out what private equity firms actually do.
Upgrade the way you learn with Brilliant! To get started for FREE go to www.brilliant.org/howmoneyworks
The first thumbnail was better
Can you do a similar video on commercial real estate syndications? Or maybe buying into a Delaware Statutory Trust that owns commercial real estate?
Private Equity LBOs are well on the way to destroying the United States.off topic but i feel Saving for a market slump is also a bad idea. There are different perspectives on recessions and depressions; we cannot always expect significant rewards; and taking risks is preferable to doing nothing. The bottom line is that by diversifying your portfolio and making sensible judgments, you will accomplish exceptional outcomes. In just 5 months, my portfolio's raw earnings increased by $608k.
I know nothing about trading /investment and l'm keen on getting started. What are some strategies to get started with?
Interesting, please how can i get more information? i don't want to remain out of ignorance, i really need to stack up this 2024.
Private equity sounds like a mechanism that extracts the most amount of value from a business, and transfers that wealth to the few general partners.
Everyone loses - the business, the employees, the local consumers, the tax payers.... except for the general partners
The people you’re claiming don’t benefit wouldn’t have benefited with or without the private equity buyout. The business was failing before private equity came in, they just more efficiently manage the end of the companies life. Most likely allowing most companies to work there longer than they would have been able to do before.
@@tahirisaid2693 That’s flat-out incorrect. Private equity firms do not typically come into the picture as “white knights”. They come in strictly in order to make money. Many a good profitable company has been destroyed by private equity coming in, using the company’s good status to load the company with debt, extracting their bonuses, and walking away.
Since a private equity company started buying up shares in my company, they started cutting benefits and laying off employees to "create shareholder value"
I feel like this problem would would wane if private equity companies were forced to hold onto their acquisitions for longer periods of time.
@@GeoMeridiumor just, don't.
The same thing happened to me - - and I worked at KFC... I didn't even think that was possible lol 😂 (It was a company that bought the franchise from another franchise owner, can't remember what they cut)
Ahh that sounds like the playbook for when private equity buys into any business. They often do at least 2 things. 1) Raise the prices of whatever is being sold (goods or rent) 2) cut services of the same. (reduce workforce/reduce support).
@@GeoMeridiumIf it didn’t work they would stop doing it.
There’s a popular narrative that PE doesn’t work. It scams investors, makes companies less valuable, and creates an environment that makes workers want to quit their jobs.
If this were true, PE funds would lose money and no one would invest in them.
Clearly, there’s more going on.
Here in the UK, private equity firms are buying up veterinary practices (Vets) and then immediately doubling (at least) the cost of care and provided medicines, because they know people will pay above the odds for the care of beloved pets. It's an absolute cash cow for PE firms. It's not illegal, but morally it's pretty despicable.
Damn
Been going on in the US for a while. The vets caught on though, so I think it’s getting stopped. Many of the vets don’t like becoming sales hacks who rip off customers who then forego care for the pets. Also, they don’t like the managers.
One thing the internet was supposed to do was provide reputation sites, but the sites are all bogus so it simply promotes these schemes.
This is why capitalism is nonsense when it comes to health care.
Why can't people open new practices which don't charge double?
@@rohitrai6187 They can, but there’s a lot of reasons they will simply discount themselves versus the new market price rather than actually going back to the old prices. Some of those reasons are practical, but some are also government.
All the rules made to protect consumers end up protecting entrenched interests.
Worked for Sears for a decade and got out a few years after the Kmart buyout. Everyone that worked there felt that the executives intentionally drove the company into the ground to enrich a handful of people. The way they axed their pensioners was one of the saddest things I've had to witness in my lifetime. Best not to give a company loyalty these days, unfortunately.
No better way to enrich people who bought your company than to... destroy the company? JFC these comments.
short term strategy for shareholders profit is not even close to healthy long term strategy that developed the company to this piont in time. So they are like vampires sucking the blood of the company and leaving them looking good olnly on a paper, but the company will need to recover from this parasite for a long time after they already sold the shares, and disappeared with the money.
Sears was circling the drain for decades before Kmart acquired them. There are legitimate reasons to hate private equity, but people keep perpetuating these false narratives that they swoop in and kill perfectly healthy companies. Those guys were already doomed, just like Toys R Us was.
@del7896 These firms get paid their fees regardless. JfC maybe you should have known that genius.
They absolutely loaded the company up with debt to cash out & had no interest in the brand's future.
You’re missing how PE acquisition debt works. They acquire a company with it, but force the company to take on the debt. This is why they need to explain to their bank lender how strong the company is.
That debt usually has huge interest which the company must pay back, siphoning off profits that any remaining shareholders would get. It is also typically structured as preferred stock with a huge multiple, so it must be paid back (sometimes 2 or 3 times) before converting to common stock. That means no shareholders outside of the PE guys get money until the PE guys get paid back in spades.
It’s wild out there!
Majority of PE equity is pari passu with other shareholders or at most, 1X preferred return. 2x-3x is wild and is more on management for accepting such a shitty deal.
This is an interesting point I don’t know anything about. This could be a great video.
Well explained. It's important to mention that this time frame will usually be 5-10 years before the exit approaches for the PE firm.
What do you mean Twitter has more debt? How much it it? X is not a number...
Great summary. Most people think they come in when a company is on its last leg when in actuality, they are looking for profitable companies that show growth potential. Then they basically ruin it 😂
Private Equity is essentially companies that use loopholes to avoid risk and get all the reward. Once you are in the inner circle of Private Equity, you essentially have your own personal money printer that you print from other people's money and debt with almost no risk what so ever. It should be illegal but it isn't for whatever reason. The rules need to be changed to force private equity firms to be responsible for the debt they take out on behalf of other companies.
You would think that whoever is lending all that money would wisen up a bit.
“For whatever reason” more like cause no one calls it out
@@d33pblu3 What the video left out is how this was all so much easier in the ultra low interest rate environment. Once interest rates started getting jacked up and money is no longer free, the risks are much higher and we are starting to see a bunch of people without shorts on as the tide goes out.
Clearly, you have no idea how private equity works. Yes, yes big corporations bad we understand your brain is the size of a peanut.
@@d33pblu3 Most of the time they get paid back with interest.
the huge problem is private equity buying up nursing homes and medical groups . imagine the nursing home losing 1/2 the staff . now people will be helpless in their beds while the nursing home collects it's fees. then there is the problem of them buying hospitals , cutting nursing and other staff . the rate of infections in such hospitals is like double that of regular hospitals.
this should be illegal somehow.
I agree, private equity firms in the nursing sector are a dangerous road.
Yeah and they can threaten local government with the closure of said hospitals. Total win for the private equity, but at what cost ?
Just happened to my Grandma, nursing home she was living at got bought out, new company told everyone they had to be out within two months. Should be f*ing criminal.
If price and performance were more closely linked in our world, most private equity firms would never be able to make money. Their whole strategy is making sure the inertia of the price of services is greater than the inertia of cost. Cut costs, make bank, and sell before prices must come down to match the drop in quality. Or just find monopolistic markets like rural hospitals and be beholden to no market based price correction.
Private equity is the Bain of human existence.
*Bane. Yes, I agree. *Bain means 'bath'.
I see what you did there
@@HowMoneyWorks 😉
@@spicymemes7458Wait what? Did I miss something here? Is there a wordplay joke here? I wanna know.
@@THETRIVIALTHINGS Bain Capital is a private equity group closely associated with Mitt Romney.
Years ago I toiled at a company that was bought by KKR. Little was known of PE strategies at the time, but their behavior followed this pattern to a T - going from bad to worse. All they cared about was their EBITDA, for which we received no reward beyond our below-market-rate-pay. A few years after I got out, the company ceased to exist.
Is PE still exist, but the prey company bankrupt?
@@aquaken00Not only does KKR still exist, but they have half a TRILLION dollars of assets under management.
During the pandemic, private equity bought considerable stakes in publicly traded companies that they saw were vulnerable. I guarantee they will load them up with debt and go out of business, putting workers again on the unemployment line as usual.
Co ops ftw
Explain to me how someone profits from buying equity in a company going out of business.
@@evans8488The private equity owners can force the company they acquire to pay huge dividends to the private equity owners/partners. In order to fund these dividend payments, the private equity owners also force the company to take out huge debt. This debt may be unsustainable in the long term for the company, and eventually the company will file bankruptcy. But the private equity group is shielded from this bankruptcy, so they just walk away after they extracted all the money in the form of low tax dividends
@@evans8488 You definitely wouldn’t want your company to go bankrupt. That’s not how it works.
That’s NOT how money works. That’s not how any of this works.
But you CAN make money creating disinformation agitation trash videos on RUclips.
@@evans8488 depends on what assets those companies have. the debt private equity uses to buy businesses becomes the businesses' debt, not the private equity firm's debt. being the owners of the business, they can pay dividends to themselves while the business pays the debt. the PE firm can sell assets the business owns like real estate to another company the PE firm owns at below market rates using the excuse that the asset sale is to quickly pay down debt. when they've extracted everything they can, they can let the business go into bankruptcy. at the end of it, they'll walk away with a profit since they didn't use their own money for the initial buyout anyways.
I was in M&A for four years. Private equity is a death sentence for most companies. Not always, but usually. PE is not a "business" in the usual understanding of that word. Their only purpose is to maximize the value of the assets, and pay their investors. How that happens is usually unpleasant for the employees of the acquired firms.
Totally Agree. 9/10 they destroy quality for clients, customers, partners and employees, and it signals no more expansion of their market reach.
Aren’t buyouts usually only considered for debt consolidation?
Private equity would buyout candy from a baby
As long as the shareholders get paid, I guess.
so they are in fact the good ones cause babies shouldnt have candy? :)
How to become rich while producing absolutely 0 value yourself.
Providing liquidity is king 🤷♂️
That's trading. PE at least has to hold on to the asset long enough to cash out.
I thought that was realtors.
All the groups taking their money would disagree with you.
Risking your wealth isn’t providing 0 value.
Tbh, everyone who buys stocks produces nothing.
Only those who invest at the IPO or buy bonds in fact help the company to grow.
My only question is how the hell can a cook pot company get away with voiding its warranty on chefs salting their water. That pretty much a requirement for many if not most dishes.
True
Because a "LLC" makes them not liable for it. Same principle as a corporation being a legal person.
It's not your debt, Joe blow company owes it.
Private equity is the aftermath of extreme inequality. Rich people have so much money, that they don’t know what to do with, that they use private equity as a way to try and make more money from their already insane hoard. They’ve ran out of ways to capitalize their own money themselves, and now look to businesses to get a cut of something people may need or utilize. If something big like AI or green innovation is going to be used by people, then they want a cut of that. That’s also why all these businesses encourage rising inflation and raising the CPI because it just better ensures that anyone starting a business will need a loan from them or the banks.
All economic transactions need to be reduced to quantifiable physical and mental labor and time, tracking how much actual useful physical and mental labor each individual does and what benefits of that labor they receive in return. Reduce all transactions to essentially barter. Then make the laws based on that: no useful labor, not allowed to receive goods and services.
@@theultimatereductionist7592That's the thing though. *How does one quantify physical and mental labor?* *Who's word on said value holds more credibility?*
Who determines how "beneficial* the end product of the labor is?
I'm not completely disagreeing with you, but devil is in the details.
@@thespectator5259 labour time is the only metric to see how much work is done. To determine how much should an average worker produce, you calculate it from the average amount of products a definite industry produces in a definite time, eg average worker produces 1 coat in 1 hour in coat industry and 1 average farmer produces 1kg of carrot in 1 hour therefore 1 coat = 1 kg of carrot.
What decides what is to be produced is planning, and this production plan obviously should be determined democratically, probably representive democracy or some kind of other social system.
@@grandioso3507this woulda done numbers in industrial society (it did actually, its in a little book called Das Kapital).
But we've gone so far from industrial society, oppresion of the worker class has evolved into the control of what is available in our minds, rather than what is physically available.
Yanis Varoufakis has some good books on the topic
Oh how I love this video, now when people ask me why so many companies are dying, bought, sold, allowed to crash I can send them this video. Thank you for making my life so much easier lol
I worked for a Karl Icahn acquisition. He bought the company cut costs sold assets then sold us for a profit.
Wow
You should spell his name right… CARL Icahn
The problem with private equity is that eventually you run out of other peoples' companies.
Exactly!
Simple solution, fund startups...
Groom startups...
Grow startups...
Buy startups...
Liquidate Startups...
Profit...
Wash... Rinse... Repeat...
Blackrock has been doing this for years.
You dont
Yup
and that's when they start looking abroad to find other countries' companies to suck dry.
I worked for a boutique PE a firm fresh out of college, it took me like 2/3 months to figure out that they were actually stripmining companies. It was kinda gut wrenching but also interesting.
what was the name of them i'd like to follow them
@@bluecrystalpalace they firm has changed names a couple times over the years.
Your explanation about private equity is really comprehensive and insightful. Your breakdown of complex concepts especially the 2 and 20 structure and the carried interest loophole were particularly helpful and easy to understand.
is this written by a bot? lol
It really does sound like it for some reason😂😂@@NA-tu7nt
@@NA-tu7nt like legit 🤣🤣 it's gotta be chatgpt, the dude probably runs a bot that scans transcripts of videos then feeds that to chatgpt, chatgpt writes the comment and then he autocomments to thousands of vids per month to gain traction on his channel.
@@TheSimpleDudeOne Yeah, this comment sounds exactly like those kids who used ChatGPT for online discussion posts that were required for the course. lol
Oh look, a totally sustainable business that would normally be able to profit and provide market value with it's current operations. How about I leverage a ridiculous investment or lend an ungodly amount of cash to buy it out completely... Oh look at that, we got so many investors to pay back, looks like our operations are too expensive, I can't believe how inefficient this company is. Looks like benefits have to go, and our valued employees salaries are too high, we gotta replace them with cheaper people, or just cut head count entirely. Wow, we're still aren't making money back for investors, guess we got to liquidate, I totally didn't plan for this.
Thankyou for a one paragraph summary of the rort that is Private Equity and Leveraged Buy-Out.
Private equity took over one of the companies I worked for. That company made acquisitions of several similar companies, making it the largest of its kind.
I saw how much the company makes--basically money on their services--and bought a few shares; nonetheless, I also saw the decline in product and personnel, and basically walked.
But being I have experience in the field--a lot of experience--I think there might be a big opportunity to create competition.
Thanks for this great video.
This is why I love HMW, 13 minutes ago I knew nothing behind the veil of how PE works - now I feel like I can do it myself. Gutting worker's livelihoods here I come!
Oh they grow up so fast. He's Capitalism Incarnate!
he said that is only a portion of private equity . then you have companies like berkshire hathaway that buy good companies and invest in them to improve them which improves profits as well. they can provide capital that lets the companies expand - so they end up hiring workers.
@@ronblack7870private equity literally is just any private investment company of all kinds lol
You think greed cant exist without a somewhat free market?
I also recommend listening to other videos supporting this type of strategy behavior. HMW is extremely biased, which is fine but he dude flat out hates capitalism
It was NOT suggested by Starboard Capital to not salt the pasta water - they said that Olive Garden made that choice and wanted them to salt it again! Just pause the video at 10:36.
The book Plunder by Brendan Ballou highlights the faults of private equity pretty well
You mean evils
I'm tempted to refer to Private Equity as Vultures, but vultures usually only prey on the already dead -- Private Equity, instead, preys on the living! A better analogy would be that Private Equity are more like biting flies that go after living animals to extract as much from then as possible before they die. But even this analogy misses the mark because the percent of animals preyed upon by biting flies or mosquitoes that are killed by them is small whereas the percent of companies preyed upon by Private Equity that die is very high.
PE is basically like a vampire!
I hope I'm not the only one who sees this as absolutely monstrous.
sadly yes youre so unique
Thanks, it's better to be all alone than on your team. @@mugnuz
@@andrewcopple7075 was more of a joke about many normal people thinking the same and the video frames it as predatory but we live in a system were many nieches for exploitation excist. but sure it was a joke about your naive comment aswell...
You are. We sleep while they live. Fight back. The middle class is already dead.
In the vast majority of cases PE firms don't bankrupt companies that they acquire. They do layoff many workers though, damaging workers lives.
Thanks for an excellent video.
....From a former hedge funder,
not in any way related Private Equity, rather in the Muni Bond Arb space :)
I was approached countless times to construct and market Private Equity into a hedge fund product,
and always politely declined.
The only experience I've had with private equity was when one of the co-founders of the company I worked for wanted to sell his portion. Company didn't have enough funds, since his portion was half the value of the company, which was worth hundreds of millions. So, a PE company stepped in, paid the leaving founder his money, and basically took his place. The PE company began to re-arrange the company, meaning entire depts that didn't align with long-term goals were gone. From what I hear, they gave a decent severance. Eventually, the company went public and a bunch of people got rich, including long-time employees of the company, as they were given equity to ensure they stayed with the company. Overall, the company isn't as great as what it was, since it's now beholden to stockholders, instead of a privately ran company. That said, the PE did a great job of making the company more efficient and bringing in experienced leadership. They definitely knew how to run a large company.
"Overall, the company isn't as great as what it was, since it's now beholden to stockholders, instead of a privately ran company."
The company isn't as great because it is beholden to more people? Elaborate please, I don't understand your reasoning.
@@squabdiggity743 Often, as bad as PE companies are, being publicly traded is even worse; the PE firm might have some strategic vison, and care about the longer term health of the company, either because they want the profits it generates, or want to increase the value to sell it. Publicly traded companies are often at the mercy of short term investors that only care about juicing the stock price to make a quick return, so the long term health of the company is of no concern. Stock buybacks are a major example; it's not uncommon for companies to cut R&D spending, while spending down their cash reserves on stock buybacks, putting them in a bad position when their products become outdated, or there is a slowdown in their business.
@@squabdiggity743it probably became a worse place to be an employee. The problem with shareholders is that you are legally required to try to benefit them which often comes at the expense of the employees
@@badart3204 "The problem with shareholders is that you are legally required to try to benefit them which often comes at the expense of the employees"
Yes this applies to both private and public companies so I don't understand the distinction that is being made here? Private companies still have shareholders, except the "shareholders" of a private company is a closed club, invite only. The big difference between private and public companies is that it is much, MUCH harder for a public company to exploit and abuse its resources than a private company, because there is significantly less oversight, regulatory efforts, and scrutiny on private companies. Private companies don't have to report on business operations with any where near the same level of detail as Public ones. So again what's the point here? There are plenty of totally shit private companies, you just don't know about them because they are private.
@@badart3204 I don't understand your or OP's point. Private companies have shareholders, the boards of private companies have legal responsibilities to those shareholders. The maximizing of value for those shareholders can just as easily be at the expense of employees for private companies. The big difference here is two things: 1. Being a shareholder of a private company is not an inclusive club, it is invite only. Private companies are not required to report publicly who there shareholders are, what percentage of ownership those shareholders have, or how they are compensated. 2. Public companies face MUCH greater scrutiny than private ones, and are much more heavily regulated.
They took over MotoGP a few years ago and ever since the sport has been struggling
These are the topics I really love from you; stuff like this and the investment banking video!
These videos are so good. I always learn something before he even hits the midroll ad.
OMG...to simplify PE LBO firms primarily use money from pension funds like weapons of mass destruction to extract equity from acquired companies. The acquired company is responsible for the loan that was used to acquire them and any additional loans taken out to pay investors. Cost cutting, off shoring, layoffs and other strategies are used to pay for the debt (leverage). Sometimes companies are targeted for hard assets like the infrastructure they own outright which can be sold then leased back to the company that used to own it. Sometimes the real value is liquidation where the company is worth more dead than alive. Yellow Freight was a case study.
Nice and succinct explanation.
If you have not already done so, it would be interesting to have the same type of presentation on publicly-traded Business Development Companies ("BDCs"), and contrast the business models for BDCs with those of private equity companies.
I work for a company owned by private equity. In a Q&A session of a business meeting during the pandemic, they were asked, "why can't the owning firm loan the business money to keep things going rather than firing employees?"
The answer was, "we can't because it's not structured that way."
Pretty much told me everything I needed to know about the situation.
I *knew* that Bartholomew Banks guy was trouble! 😂
I too love Dr. Glaucomflecken
The goal is to gain control of the company, sell off or mortgage all the assets. Once it's leveraged to max and becomes insolvent they flush it with bankruptcy. The same thing there doing to our country USA Inc.
I like how you did this as scenario based learning.
"You will own nothing, and you'll be happy"...
Why do you keep repeating the same phrase? I know where it’s from but now you sound like a bot
@@its9333 Lol. What? This isn't really a saying I use too much.
This quote was never said that way and you´re a sheep repeating stupid stuff.
Why do people keep saying this?
@@zunedog31 Because it's a constant self-evident truth in quite a bit these days. Business relationships around finance and tech have become quite adversarial, I presume companies twisting their business into knots for fake customers on Twitter is one reason.
that's a great video, many kudos and thanks Sr! Tomorrow I'll start my Private Equity company, and by the next weekend will be in my pleasure boat enjoying the billionaire life.
Hope this video shows people they should “run” when they get recruited for roles at a “VC or PE backed company”
Also, don’t take a role as operations in a PE firm. They use those people as the fall guy if the deal does not make money. It gives the investors in the PE firm a rationale to keep their jobs and continue to raise funding.
This is maybe the first video of yours that I thought was incomplete. I'll delete this comment later because I'm a huge fan and don't want to minimize the enthusiasm you deserve on this but I want to make my feedback known (do you have an email address to which I can send this sort of thing instead, going forward?):
1. A private equity explainer should include the fact that the debt borrowed to purchase a portfolio company is, inextricably to most laymen, placed on the balance sheet of that portfolio company and is *not* guaranteed by the private equity principals/executives or even the fund through which they are making the investment. the fact that this debt is non-recourse and is an obligation by the company, not the people who took out the debt to begin with, is a huge detail that most of the public does not understand.
2. You mentioned the management company but did not mention that this is a huge way by which private equity firms get value from companies that fail: by charging huge amounts of money in consulting fees to help the company make the interest payments on the debt that the PE firm saddled the company with to begin with. This is part of how PE companies make money on portfolio companies that fail -- they charge them exorbitant fees prior to failure.
3. No mention of dividend recapitalizations as a way to extract value from companies that end up failing: by taking the cash on the portofolio company's balance sheet and issuing a dividend with those funds to the private equity funds through which the PE firm has vested their equity interest. Taking your 90% LTV example (which sounds a little rich; I'm unaware of this kind of leverage being possible, but whatever), this means that a private equity firm only needs to pull out $10mm in management fees and dividends before the investment is profitable even if it ends up going bust and the lender loses everything.
i think what you said has gone 99% over most peoples heads. email the channel email and do a full essay style. maybe he will make a part 2
@@markk3453 Agreed but it won't go over the head of the channel creator who undoubtedly knows this stuff already but for some reason chose not to include it. I don't think every PE video should have every detail but if you're covering the carried interest loophole (which has nothing to do with how private equity *firms* make money), then it makes sense to include management fees and dividend recapitalizations since those are ways in which PE firms do make money. And the non-recourse debt is what makes it all possible so that's even more important in an explainer video.
I'll follow your advice and email him. Thanks.
Thank you so much for your information 😊! I love this video
Always interesting, thank you.
really insightful video
I have worked at 4 companies that were privately owned, were bought by VC and within 5 years had been wound up. They have a model, and it involves asset-stripping, redundancy, crippling debt and then walking on to the next business. I have watched the same thing happen each time.
Buyout funds are tough, I've been involved in selling a business to a buyout fund - they are no longer in business. Our contact explained alot about private equity and jeeesh it's a racket.
That's the word I was looking for, thank you.
Homie literally almost fumbled the bag😂😂 7:14
a result of this cutting costs can also lead to rivals in the industry, either existing or up coming companies trying to get in your niche with an easy pitch. "remember when X business was good, before private equity firm Y got to them, we're basically offering that. may not be as cheep but doing business with us is you saying 'screw them' and getting better service." also yeah, this will inevitably crash, since you are rapidly acquiring consolidating, and often destroying so many companies per firm. eventually this will outpace the recovery of new companies entering the game so there will be issues in the industry.
Private Equity. Two of the worst combined words in the English language, alongside Leveraged Buyout and SPAC Merger.
this was extremely useful!
When you explain it in a way that makes sense, it all sounds really dumb and damaging to a society.
Thank you for clearly explaining this. I finally understand at least one fundamental aspect of a PE company.
I worked for a company that was owned by a PE. Major pet retailer. They eliminated the HR and payroll department and sent it to India. I never worked for a company more obsessed with making money.
The most focused on the product and quality work with best ee compensation was employee owned.
Great video 🎉
The Brilliant ad ends at 5:35.
The last few minutes you switched over to Critical Role's low-fi tunes for the background and it had me scrambling for a second to see where my music playlist was coming from. lol
Great video as usual.
I feel like I have missed something here. How exactly do we get to the point where a corporation gets liquidated and sold? And how they end up with a ton of debt?
The way corporations intrinsically work, for them to grow and expand debt is necessary. If for some reason or another they fail to reach the projected level of growth, well, they still have to pay their debt on time. They can do so, by taking further debt, which is susceptible to initiate a vicious cycle that if not addressed would lead to bankruptcy. From then, the company being liquidated is one of the possible outcomes.
@@AAhmou that can happen without private equity, though. I was referring to the practice of vulture capitalists to buy a corporation, rack up their debts, pay themselves a ton of money from these debts, and then liquidating the corporation. The whole reason I watched this video was to get some deeper insights about how that happens. The structure of the private equity was informative, but the connection wasn't made... unless I missed it somehow
@@NelsonGuedesI think you’re right, it wasn’t explained at all. Probably because he doesn’t know or it went against his video
When the company pays outrageous management fees, the CEO of the company takes out huge debts to pay it off. The private equity firm can also swap out profitable assets the company has with unprofitable assets the PE has.
You: This is my body... It is priceless, and I must keep it intact for decades...
PE Firm: We have a buyer for the heart, lungs and liver... They lowballed us on the brain, so we are going to lease that for 10 years and then sell it to recover any residual value... The eyes are going to our JV partner in Asia but they will be on our balance sheet unless we go underwater... Then we'll stitch up what's left and see if we can convince someone to take it off our hands...
this is the best channel youtube has to offer ! TO THE MASSES NOW
Private equity bought the company that bought my startup, then decided they didn't actually want us, fired the executives who bought us a year ago, and got rid of my whole team as well. But our team is at a much better aligned company now.
I love your videos
I have worked for two companies that got bought up this way and wow does this explain those aspects sooo well.
Extractive middle management 101. A plague of locusts.
I hope you talk about Sealy and Serta in the US mattress industry.
This channels lessons and advice is priceless. Seeing how things actually work and how you're not going to get rich will save people tons of money and time. They will probably feel better about their current situation as well. Thanks my man, keep these great videos coming.
I literally know a exec/head of private equity from
the mentioned companies in this vid and lemme tell you this , his house in comparison to those of top-athletes is like castle vs mudhouse .
so yeah , private equity is basically late stage capitalism and like not sustainable at all but atleast some people make some big money off it 😅😂
can you recommend some private equity funds i should look out for, I wanna buy stock or watch the stock of the companies they buy thanks
The irony of a video on the downsides of private equity being sponsored by a private equity owned company(Brilliant) as a sponsor ..........
I heard a pretty unique solution: an investor looks to local small businesses and offer a 7-year zero-interest loan for the small local business.
Investor gets their money back, smaller local businesses get untethered from the high-interest usury of bank lending, and communities grow stronger because local small businesses grow stronger (which means the community has a more robust economic system where revenue stays in the community instead of funneling profits out of the community to a giant corporate HQ)
Yes, it doesn’t profit-maximize the investor’s ROI, but I think this is the only way right now to do “ethical investing”
Edit: the 1919 Dodge v Ford decision destroyed America. Basically declared “the purpose of a business is not to improve its product/service or to serve its customers, but simply to grow the value of the shareholders”
HAHAHAHAH "it doesn't profit-maximize ROI" has te be the understatement of the decade. It literally makes the investor 0 profit. Actually the REAL ROI is negative because of inflation. What kind of investment makes you LOSE money???
@@iamlegq Yeah. The only way I can see that happening would be if the business owner happens to have a really wealthy friend or relative and asks for a bail-out.
@@iamlegqhonestly, it LOOSES money
Unfortunately that doesn’t make financial sense for the investor. If they put 1 million in today and take out 1 million in 7 years they lost money due to inflation. The only way something like that would make sense is if there were incentives (like low income housing tax credits, revitalization tax credits etc)
I might have spaced out but I didn’t hear anything about EBITDA and the EBITDA/valuation multiple. There are lots of ways you can increase the apparent value of a company or a portfolio of companies besides cost cutting and “creative efficiencies”. Getting your entire portfolio onto a single backend computer system, for example, is one way to do it. It’s expensive as hell and fairly risky, but it can drive the multiple way up if you take older companies with little to no digital infrastructure and haul them into the 21st century as a group.
great video!
Glad you enjoyed it
Two words: rent seeking. extracting as much money from whatever can be bought. period.
Was that Chris Williamson bouncing the door?! 🤣
So basically nothing.
They're just vampires
That’s why they exist. To kill companies for the and assets they have. Basically they are glorified liquidators who buy companies on the brink of bankruptcy to kill off to pay back any outstanding debts the company still owes its suppliers. They screw over everyone and no one likes them.
I felt our last accounting was working on the side with the goal to sell out our unlisted family company. We do our own accounting now. It is hard to find an honest accountant if you have one give him a raise. If you're company has too much tax debt start to do your own accounting and do your own audit. Take time out. or ask your wife to do it for example. Maybe the tax debt are prepayments for example you were forced to do by your accountant and they plan to use those assets to
this was so informative it taught me more about private equity than some books lool
This video just made so many disparate topics click for me all at once. Thank you !!
Good content as usual but may I suggest that you try to normalize your final audio track to make your own voiceover levels match with your external clips better and hopefully this will help with the overall flow and consistency of your videos.
A great book on these crooks is "Plunder" by Brendon Ballou. Pretty eye opening.
Learn so much as always thank you!
My pleasure!
Fun fact, creating a shit startup that gets venture capital is the fastest way to take money from the rich and give it to the middle class.
10:35 isn't putting salt in a pot part of cooking food?
It a known fact. That’s why bankers are so despised. They would sacrifice a company which actually produces and contributes to GDP in order to fill their own wallets
PE guys aren’t bankers
True to the name 99 cent had zero debt before being sold. As soon as private company acquired it they took out billions in debt.
The irony of calling it Delaware limited partnership.
(Any company registered in Delaware, Panama, or the Bahamas is sketchy)
Most US corporations are incorporated in Delaware due to the extensive home corporations law which is more developed than other states and companies are governed in their internal activities by state law of their home state. Being a tax haven doesn’t hurt either lol
Basically, every company in the US is registered in Delaware
You missed that PE CO’s get their same mgmt fee off any leverage they use in acquisitions or even if capital not utilised! Also PE GP’s can get salaries for being on boards of their portfolio companies. PE is truly one of the great legal grifts available
conclusively… AI and robotics will accelerate the PE way of doing things- it seems to be complimentary w the model
This video was TOTALLY AWESOME!!! 😀👍
I'm trying to write a fiction story for a videogame where Private Equity Companies are the main antagonists.
No need, it reality. Dystopian fiction fell off the radar when it became reality.
@@Lonovavir Is that why Cyberpunk was the most hyped game of the past 5 years?
Marantz rants doing a bit on pe lmao.
Main ones are like Bain Apollo Goldman etc
The idea is more that the community and unions eventually overcome the Private Equity Companies.
I mostly just want to make a videogame about property violence, because destructible environments are fun to design.@@Lonovavir
2:22 well that sounds easy to break.
I’ve worked for an ALF that was owned by a private equity company and that is why I have decided to stop working in healthcare.
Will you make a video about taxes and teach us how money Works in that way?
Private equity is yet another genius way of making lots of money out of thin air.
why dont private equity firms just sell the company to the employees. offer share purchase agreements and have them buy out your stake in the firm seems like a good way to get good pr as well while also allowing you to pay off your investors much faster than if you were just going to sell it
Employees are usually woefully uneducated about this kind of thing. Even big tech employees during the 2010s bull run would sell as soon as they got their equity not knowing what they had. That's kind of what happens when your heads down on engineering and not finance.
Here is the short version of this explanation. Private equity helps the monarchs in foreign countries control America. Like the WEF. Private equity limits your freedom to succeed so monarchs maintain their strangle hold on our necks! The American government helps them and thats called special interest.
The first thumbnail was* better.
Go into pizza hut. Their pizza was delicious. I still remember the day I had the pizza and I asked my parents if they put oven baked pizza from Walmart into the pizza hut box
HAHA warrantee on cooking pots