Private equity's usefullness to the economy is zero. It is malinvestment. It is like smashing all of the windows in 1,000,000 buildings , and then claiming that the work done to repair them is econominc growth. Basically ,what the U.S. economy has specialized in since 2001.
Where does "Private Equity" get the money to do these huge buyouts?
- Thread starter thriftybob
- Start date
In LBO, the financing is the liability on the fund, not on the company.
I mean that the fund normally create a holding co. that holds all businesses, access, companies, as well as all the outstanding shares of the holding co. So it looks like from the outside that the liability of loans are on the company, but the fund holds both access and liability of the company.
I mean that the fund normally create a holding co. that holds all businesses, access, companies, as well as all the outstanding shares of the holding co. So it looks like from the outside that the liability of loans are on the company, but the fund holds both access and liability of the company.
No, you are wrong. The PE fund gets the financing for the company and the debt obligations are put on the company and secured by the company's assets. The financing decision is influenced by the "reputation" of the PE team, but if you think the investor's money is held as collateral, well, you are wrong in most of the cases. I'm sure some exceptions here and there are made, some collateral liability is put on the actual investor money in certain situations, depending on how good the "reputation" of the PE team is.
I'm not talking out of my ass here, far from it. I will abstain from going into details. You can do a wikipedia search to confirm that I am correct, although that is not my source.
It only takes a little research and some critical thinking to see how the scheme works. Not only was it spelled out by other ET posters (myself included), there are a couple articles from financial newswires (like Bloomberg) which also went into detail.
Yes, it was understanding they collateralize the assets of the company they are acquiring, and use that to obtain financing, piling the debt obligation back onto the company's books.
I think that's what Hydroblunt is saying.
Quote from Pa(b)st Prime:
I think that's what Hydroblunt is saying.
Pretty much.
But that's only the first half of the scheme.
humm... I may not word it properly.
Normally, not the fund, but the company or so-called borrower gets financing. And yes, the debt obligations are put on the company and secured by the company's asset, many times, also by the company's parent or subsidiaries as well, whatever a lender requires.
The borrower often gets hold by an entity created by the fund, many times, through a layer of entities between, for whatever the tax purposes.
Yes, the company or so-called borrower is the one which is liable for the debt. But if the company is 100% owned by an entity that is 100% owned by the fund. It's alternately the same thing, not legally speaking. And that' why the fund use the layer of entities.
Before this buy-out structure takes place, share exchange, M&A, acquisition take place. Through these transactions, many time, inside people already get to take money out of the company in exchange of shares at the M&A transaction right before the financing transaction take place. The board member of the company changes before and after the transactions. The members of the fund often sits in the board of directors after the transaction. You cannot simply draw a line and said it's the company or the fund.
Normally, not the fund, but the company or so-called borrower gets financing. And yes, the debt obligations are put on the company and secured by the company's asset, many times, also by the company's parent or subsidiaries as well, whatever a lender requires.
The borrower often gets hold by an entity created by the fund, many times, through a layer of entities between, for whatever the tax purposes.
Yes, the company or so-called borrower is the one which is liable for the debt. But if the company is 100% owned by an entity that is 100% owned by the fund. It's alternately the same thing, not legally speaking. And that' why the fund use the layer of entities.
Before this buy-out structure takes place, share exchange, M&A, acquisition take place. Through these transactions, many time, inside people already get to take money out of the company in exchange of shares at the M&A transaction right before the financing transaction take place. The board member of the company changes before and after the transactions. The members of the fund often sits in the board of directors after the transaction. You cannot simply draw a line and said it's the company or the fund.
I personally hope that these investments will actively continue....
But I am wondering what would happen to some of the funds which use high leverage once something starts going wrong....
It's like people were buying bunch of houses with little down. As long as everything go smooth, they all make money and happy. Once the bank tightens their standard, and starts calling for payments based on the higher standard....Scary.
But I am wondering what would happen to some of the funds which use high leverage once something starts going wrong....
It's like people were buying bunch of houses with little down. As long as everything go smooth, they all make money and happy. Once the bank tightens their standard, and starts calling for payments based on the higher standard....Scary.
Sigh,
Believe whatever you want. I'll stick with my firsthand knowledge of the subject. That's why it is not at all surprising to me what is going on with these PE firms and the LBO mania.