Private Equity

[ShoeshineBoy]

Looks like private equity has dried up and here's what I don't understand:

How do these LBO's, where there's substantial debt involved, make money? Of course, if the new debt-riddled corporation goes IPO I understand. But let's say the LBO doesn't go IPO. That means they only have these two ways to make money, right?

1.) Sell off its pieces and repay the debts. If the value of the pieces is greater than the business as a whole, the buyer makes a profit.
2.) Buy the company and manage it more efficiently. As long as the company can be managed so that it generates enough cash flow to pay the interest on bonds, the buyer will profit.

And that leads to my question: isn't #1 and #2 highly unlikely considering the fact that a) they're saddling the company with 70+% debt and b) they are entering industries and businesses that they have no experience directing??? For example, who in their right mind would pay a premium for a company or a piece of a company that has just been saturated with debt?? How can anyone make money doing this?

One side question: do you think this reduction in private equity will hurt investors, i.e. further take the steam out of the market as a whole?

 

[vectors101]

the whole point of private equity is to make the commissions.

less shares in the market. free up cash.

there is a study saying the conglomerates due to mergers and acquistions actually make the corporation less efficient and less competitive and they break apart in the future.

Quote from ShoeshineBoy:

Looks like private equity has dried up and here's what I don't understand:

How do these LBO's, where there's substantial debt involved, make money? Of course, if the new debt-riddled corporation goes IPO I understand. But let's say the LBO doesn't go IPO. That means they only have these two ways to make money, right?

1.) Sell off its pieces and repay the debts. If the value of the pieces is greater than the business as a whole, the buyer makes a profit.
2.) Buy the company and manage it more efficiently. As long as the company can be managed so that it generates enough cash flow to pay the interest on bonds, the buyer will profit.

And that leads to my question: isn't #1 and #2 highly unlikely considering the fact that a) they're saddling the company with 70+% debt and b) they are entering industries and businesses that they have no experience directing??? For example, who in their right mind would pay a premium for a company or a piece of a company that has just been saturated with debt?? How can anyone make money doing this?

One side question: do you think this reduction in private equity will hurt investors, i.e. further take the steam out of the market as a whole?

 

[vjay]

You get a bridge loan to buy the company.
Then you have the company sell bonds.
Out of the proceeds from the bond sale,you pay a special dividend that covers the bridge loan plus a couple of hundred million to the private investors. Hopefully, at some time in the future, you have an IPO or the company continues as a going concern. If it doesn't, the banks have made their fees,you have your xxxmillion $ and the the rest are bagholders

 

[nazzdack]

It's more likely to "work" with smaller deals that are done earlier in a bull market, not at the end. It takes more time for the biggest deals to be done......generally at market peaks when confidence is highest.

 

[Bogan7]

Quote from vectors101:

the whole point of private equity is to make the commissions.

less shares in the market. free up cash.

there is a study saying the conglomerates due to mergers and acquistions actually make the corporation less efficient and less competitive and they break apart in the future.

You really shouldnt be commenting on issues you obviously have no idea about you just look like an idiot. Remember Oscar Wilde and you will do better.

 

[S2007S]

Those deals werent going to go on forever.....

BX IPO marked the top......

 

[maxpi]

Quote from vectors101:


there is a study saying the conglomerates due to mergers and acquistions actually make the corporation less efficient and less competitive and they break apart in the future.

General Electric is pretty much a conglomerate. They are enabled to play in bigger games due to their overall size and seem to do pretty well...

 

[ShoeshineBoy]

Quote from vectors101:

less shares in the market. free up cash.

Sorry - my email didn't inform me of any responses.

I get the idea of less shares in the market since they're getting control of a large block of shares. So are you saying that while it generally makes the company less efficient, it does actually tend in the short term to increase stock price because there are less shares out there and so it has somewhat the same effect as a stock repurchase??

 

[ShoeshineBoy]

Quote from Bogan7:

You really shouldnt be commenting on issues you obviously have no idea about you just look like an idiot. Remember Oscar Wilde and you will do better.

Can you say more? How do you think he is wrong?

 

[ShoeshineBoy]

Quote from vjay:

You get a bridge loan to buy the company.
Then you have the company sell bonds.
Out of the proceeds from the bond sale,you pay a special dividend that covers the bridge loan plus a couple of hundred million to the private investors. Hopefully, at some time in the future, you have an IPO or the company continues as a going concern. If it doesn't, the banks have made their fees,you have your xxxmillion $ and the the rest are bagholders

This is interesting. I think this explains why they don't really care if the company does well on an ongoing basis then? Because all they have to do is sell bonds for a value greater than their initial investment in buying a controlling amount of shares?

Also, I thought the money to buy the initial shares came from the investors?? Are you saying that these LBO companies get money from other sources as well?