Mitts Pick

[erfalf]

I don't "fail to understand".  Bain operates on a far grander scale, with a more complex service offering, and answers to stockholders. They, however, play by the same rules and operate under the same laws.  What they do is necessary and noble.  

They are the mechanics.

Having an understanding of PE cannot be gained from reading the newspaper (written by people who have little if any clue on how PE works).

[nathanm]

Read the descriptions of the deals. They don't work like VC does. They don't work like small fry PE does. They're not on the hook for the debt beyond what they put in, and if they can get cash out before it becomes plainly obvious the business is going into bankruptcy, it can't be clawed back. The wonder of limited liability. Absolutely necessary for our economic system to function, but abused to the ends of the privileged. The small fry has to personally guarantee the debt used to buy the target company, so he or she is most decidedly not operating on the same playing field.

Even if it goes to zero at some point after they've gotten their actual contribution back, they don't actually lose anything on a cash basis, but they "lose" whatever value the equity stake had when they bought it. Since the dividends through which they get their money back are capital gains, the capital losses can offset real income from other deals. Yes, they have lost the opportunity to see a gigantic return from selling the company or taking it public or what have you, but on a cash basis they've lost nothing. The loans are secured by the purchased company, not by the PE firm, so they don't take a hit there.

The banks don't give a smile because they sold the debt on to some other schmuck long before it had time to blow up.

A real disaster is when they lose the small slice they put in to begin with, but that's pretty hard to do if they do even the smallest bit of due diligence.

[erfalf]

Read the descriptions of the deals. They don't work like VC does. They don't work like small fry PE does. They're not on the hook for the debt beyond what they put in, and if they can get cash out before it becomes plainly obvious the business is going into bankruptcy, it can't be clawed back. The wonder of limited liability. Absolutely necessary for our economic system to function, but abused to the ends of the privileged. The small fry has to personally guarantee the debt used to buy the target company, so he or she is most decidedly not operating on the same playing field.

Look, I've worked for both VC and LBO firms and let me tell you, they both can loose money with the best of them. There is not some magic formula that only big PE plays by where they make money on every single deal. TRUST ME ON THIS!

[heironymouspasparagus]

Paul Ryan is the epitome of a born-on-third-base-and-thinks-he-hit-a-triple child of privilege and an "I got mine, screw you" child of capitalist entitlement...

Thanks for that!  Love it.

Truthiness!

[nathanm]

There is not some magic formula that only big PE plays by where they make money on every single deal. TRUST ME ON THIS!

I'm telling you there is. You wouldn't know about it because you didn't work for a firm so advantaged. Small companies have to have guarantors of their debt. Big ones don't. If you can't get yourself into deals that large, you don't get the special treatment. Would that it be so; my income would be much larger this year.

[erfalf]

I'm telling you there is. You wouldn't know about it because you didn't work for a firm so advantaged. Small companies have to have guarantors of their debt. Big ones don't. If you can't get yourself into deals that large, you don't get the special treatment. Would that it be so; my income would be much larger this year.

I worked for the second largest PE firm in all of Texas. I do know. I did the books.

Trust me, they did plenty of deals where they lost plenty of money.

[Gaspar]

I worked for the second largest PE firm in all of Texas. I do know. I did the books.

Trust me, they did plenty of deals where they lost plenty of money.

You know you can't win this, right?

It's Nate, he's smarter than everyone.  In his world everything is so complex that no one but him can understand it.

[nathanm]

I worked for the second largest PE firm in all of Texas. I do know. I did the books.

So you're saying that they were liable for the debt used to acquire the companies they purchased?

Of course they lose money on an accounting basis if a deal goes to zero. The equity stake had value. However, GAAP basis is not tax basis is not cash basis. It's perfectly possible to have a massive accounting and tax loss on a deal but still come out ahead on a cash basis if you're not liable for the acquisition debt.

[erfalf]

Ok, I was wrong, the firm I worked for was not the second larges in Texas, it was the second largest in the DFW metro, largest in Dallas and one of the 50 largest in the world. I think I have a clue about it. That's for sure.

[nathanm]

In his world everything is so complex that no one but him can understand it.

If it couldn't be understood, I wouldn't bother talking about it.

[nathanm]

Ok, I was wrong, the firm I worked for was not the second larges in Texas, it was the second largest in the DFW metro, largest in Dallas and one of the 50 largest in the world. I think I have a clue about it. That's for sure.

You didn't answer the question.

[erfalf]

So you're saying that they were liable for the debt used to acquire the companies they purchased?

Of course they lose money on an accounting basis if a deal goes to zero. The equity stake had value. However, GAAP basis is not tax basis is not cash basis. It's perfectly possible to have a massive accounting and tax loss on a deal but still come out ahead on a cash basis if you're not liable for the acquisition debt.

Maybe in government accounting. I understand the difference. I do tax/accounting for a living. But more than a few bad deals will sink any fund. And cash flow schedules within a fund include servicing debt. They are not above paying back loans.

[erfalf]

You want PE to be so bad so bad that you ignore not only laws but the fact that lenders want to be paid back, no matter who the borrower. Don't pay back a couple of loans in PE and you never borrow again.

[nathanm]

You want PE to be so bad so bad that you ignore not only laws

Limited liability, ever heard of it? Whatever the lender may think, they're not entitled to the PE firm's money without a guarantee. Romney deals place the debt on the books of the acquired company. Lenders are too interested in the fees they can extract to not go find some schmucks to buy the debt, at least when you're dealing with the TBTF crowd.

[erfalf]

Limited liability, ever heard of it? Whatever the lender may think, they're not entitled to the PE firm's money without a guarantee. Romney deals place the debt on the books of the acquired company. Lenders are too interested in the fees they can extract to not go find some schmucks to buy the debt, at least when you're dealing with the TBTF crowd.

So you're saying that lenders are so stupid, they will just lend millions to people with no guarantee/lien whatsoever.

Generally a PE firm will set up an LLC to make each deal. Let's say we set up AA, LLC to do an LBO of American Airlines (obviously this is hypothetical). The LLC borrows $3 for every $1 invested and buys AA for $40. AA goes under (well this may not be hypothetical), but not after AA, LLC received $20 in dividends. You are correct that the lender has no rights to any of PE firms other assets, however, there will be a claw back of some sort. PE firms can't just go along burning bridges on every deal that goes bad. It doesn't work like that. They will get as much money as they can.

Pretty much every "home run" investment involves adding significant value to an acquired company.

Again, there is no magic formula for PE firms to make money when the target sells for less than they paid for it. That's not to say that a PE firm can't make money when a company goes out of business. Of course the only way that happens is if the real assets are worth more than the purchase price, which rarely happens anymore due to extreme competition in the PE field that keep prices closer to real value. There are no more easy bets.