Private equity profiting from failure

[Acsenray]

When you do that are you then drawing all your profits from debt that you then make someone else responsible for and leave the house a worthless pile of shit?

[msmith537]

@Acsenray

When you do that are you then drawing all your profits from debt that you then make someone else responsible for and leave the house a worthless pile of shit?

Again, do you have a specific example of a private equity transaction where this happened?

[OldOlds]

I have to be careful about detail, as I could give enough away to get in hot water with my employer.

But, I have witnessed this first hand. I am a sr. manager (salaried employee) at a company which has been purchased by a private equity firm. The entity is (was) profitable. They borrowed huge money and used it to pay a dividend to themselves, and now the company is failing under the debt load.

I am at a high enough level to see glimmers of the glee with which they rape and pillage. They fully expect things to get worse, but will sell off the bits and pieces when things get too bad, and let what’s left sink.

Back to the house analogy: They bought the house, took out an equity line for 150% of the value, and are ripping out the copper and fixtures to sell. When they’re done they will let the bank forclose. Layoffs, cuts in product quality, you name it they are all happening.

It’s sad, it’s not not moral or ethical, and as far as I know it is legal. I wish I could tell you who it was, but I don’t dare.q

[John_Mace]

Sounds like the lenders didn’t do due diligence. Or the PE firm committed fraud.

Of course, if this were a significant proportion of what PE firms do, then banks would no longer lend them money.

[septimus]

@msmith537

Again, do you have a specific example of a private equity transaction where this happened?

I gave SFDC example above; there are more in a report I link to below.

@John_Mace

Sounds like the lenders didn’t do due diligence. Or the PE firm committed fraud.

Are these mutually exclusive? If a case can be made that a lender did not “do due diligence” does that mean the borrower did not commit fraud?

@John_Mace

Of course, if this were a significant proportion of what PE firms do, then banks would no longer lend them money.

Just like with home mortgages, venture capital gets sliced and diced. Banks are happy to participate in profitable ventures, as long as any fraud is non-prosecutable. Junk bonds are passed to those with an appetite for junk.

Here’s another article that sheds light on capital impairment committed by leveraging capitalists:

When a trio of private investment firms acquired Burger King Corp. in late 2002, the chain was unprofitable. But immediately, it started paying off for the investors.

… Burger King paid its new owners – Texas Pacific Group, the private-equity arm of Goldman Sachs Group Inc. and Bain Capital – … a total of $448 million in dividends and fees from Burger King – approximately what they initially invested. All that took place before the May stock sale, which valued their remaining stakes at $1.8 billion – more than triple their original investment…

Since 2003, companies have borrowed $69 billion primarily to pay dividends to private-equity owners, according to Standard & Poor’s Corp. That compares with $10 billion in the previous six years. The resurgence of the buyout investors, and their new skill at quickly extracting money long before any turnaround bears fruit, are signs of the ascendance of private money and its broad impact on the world of finance. The new power players are private financiers – hedge funds, buyout firms and venture capital firms – that often operate with limited scrutiny from the public and regulators…

But the payouts to private-equity firms that often follow deals come at the cost of mounting debts for the acquired companies. One caution sign: Two-thirds of the loans issued to pay dividends to private-equity firms are rated single-B or lower, a highly speculative rating, according to S&P. Historically, more than a quarter of loans rated single-B have defaulted after five years, S&P says. If interest rates keep rising or the economy stumbles, many of those companies could find themselves in trouble. Some might be forced to cut jobs or capital spending to manage their debt burden. Some could go bankrupt…

Among private-equity firms, Bain is one of the largest recipients of dividends from its own companies, according to S&P. The firm, co-founded by Massachusetts Governor Mitt Romney, is also one of the most aggressive funds in the field. Last year, it bid for the entire National Hockey League…

… Dade Behring considered filing for bankruptcy protection… Some creditors formed a committee that examined the conduct of Dade’s owners, directors and advisers, including Bain and Goldman. According to a company securities filing, they considered bringing claims relating to “illegal dividends, illegal stock redemption and impairment of capital,” among a long list of items…