Posted by NoRagrets 6 hours ago
Pensions fund a significant part of PE and they do so because they need around a 7% return in order to look solvent. If they do not have the higher PE returns, they basically go out if cash in 10 years and everyone would scream bloody murder. But with the higher returns from PE they have 40-50 year runways and people can pretend everything is fine.
So PE firms exist to extract value from basically all high quality goods and services to show a high ROI to prop up pensions. They extract wealth by buying up companies and gutting the “extra” things in them - for luxury goods, it’s quality, customer service and warranties (like my venta humidifier or reformation dresses), for services it’s stripping the underlying excess risk management and quality control. One can argue that PEs make the business more efficient but in my opinion they just turn worker or consumer related benefits into profits (stakeholder and business benefits). It’s a transfer of value from worker and consumer to business and asset holders at a massive scale.
But sadly it’s not some evil dudes at the top doing this transfer, the market force behind it is because we promised old people way too aggressive paychecks when they retired. Pensions need to invest massive amounts of money into higher rates of return and PEs just happened to be the medium that is the most successful. Sure the people running the PE firm extract a ton of value drying up all luxury quality and robust services from the daily lives of working families, but their take home is a tiny fraction of the wealth they extract (but yes they take home a massive amount of wealth for an individual). Instead the wealth extracted shows up on a 1400$/m for some old person probably living in a retirement home somewhere.
So if you wanna fix or ban PE, solve pensions.
We solved pensions. People have defined-contribution plans now. I would expect insurance float to dwarf pensions as a source of PE funding.
The real reason PE exists is because it charges high fees. The financial industry does not make products to serve customer needs, though by happy accident that sometimes happens. It makes products to charge fees. Index funds removed a big chunk of the fees that active mutual funds used to charge, so financiers went looking for a replacement.
Even if you snapped your fingers and all remaining pensions (and insurance float?) disappeared, PE is aggressively going after individual retirement accounts, now. Most insidiously, trying to work their way into the "target date" funds that are the defaults for most plans. So "solving pensions" will not make PE go away.
Like millions upon millions?
They need to be paid out somehow.
Do they have to be paid out in full, though? I remember cases in the past where a company went bankrupt and had to renege on some parts of pensions, so maybe you'll see that again?
I don’t see how it is relevant, unless the rate is close to 100%.
...no. It doesn't even matter what the rest of the words in the question are. Just no, lol.
> They need to be paid out somehow.
No they don't. Lots of pensions, especially the not-gilded ones, go bankrupt.
In fact, that's precisely what happens to pensions of companies that are acquired by PE. The company gets stripped for parts, it goes bankrupt, and PBGC covers a fraction of the affected pensioners' payouts.
In other words, with or without PE, bloated pensions ultimately end up being the taxpayer's burden.
Why are you replying to a comment where you believe the words “doesn’t even matter”?
I find this characterization offensive. Who is to judge if the defined benefit pension if a primary school teacher or fireman, for example, is bloated? It's part of the negotiated pay package, nothing more or less.
Teachers are the easy ones to point to, it is hard to be mad at an underpaid teacher who receives a reasonable pension for life. We certainly can be mad at NYPD scamming the system to get $100-200k/year for life.
[1] https://www.bloomberg.com/graphics/2021-nyc-police-overtime-...
[2] https://www.empirecenter.org/publications/newly-retired-nypd...
I've seen PE make businesses more efficient by reviewing all contracts and dropping or renegotiating ones that no longer align. Closing product lines that aren't profitable. But that is year 1-2. By year 3 they start the squeeze, layoffs, asset selloffs (stripping), and lowering quality, raising prices. That is where the real teeth of wolf are shown.
Currently in PE hell myself. Company I work for was bought out few years ago when the owner cashed out. Right out of the gate it was a numbers go up game. New sales person was hired and their first order of business was - drum roll please - triple prices! Customers balked. Some walked. In addition, some employee benefits evaporated, vacation time cut drastically, shitty health insurance switch, employee perks like the monthly pizza Fridays were canned as if ~$500/mo in pizza was going to bankrupt the company. Meanwhile, employee morale is at an all time low and quality has faded.
Perhaps there is good PE out there. Somewhere. All I see are vampires.
Or maybe by then nobody trusts the name of the original company and it's just useless
In principle, I don't think there's anything wrong with this. All investment expects a ROI over some time horizon. Public companies do the same thing. Anyone who founds a start-up is doing it too. The only real distinguishing feature of PE is how successful they have become at aggressively optimising for market value.
The issue is that the sale value at the end of the cycle can be massively influenced by cynical financial engineering. This seems to me to be more of an issue with how every institutional investor apparently now prices companies purely on reductive metrics like EBITDA x the industry standard multiple.
The cause of the rot is widespread over-confidence in dumb financialization models shaping the system.
(Or, since it's HN: if your machine learning model is training well, but misaligned with real life: do you blame AdamW?)
They use money to turn value into money, which they then use to turn more value, into more money. And in the end, they have a lot of money, and all of the value is gone.
IFF a company is truly, honest to god, less valuable than the sum of its parts, then it (or the subset that would have more value to someone else) SHOULD be dismantled, and those resources sold and reallocated to more productive use. You probably make these sorts of decisions in the capacity of your own personal finances without even thinking about it.
On the other hand (and what I believe is likely happening is) if cynical financial engineering is allowing you to turn a useful company that's valued poorly by the market into a useless company that's is paradoxically highly valued by the market, in the short term, and that keeps happening over and over again, then the tools used to calculate the market value are wrong.
This is illustrated by how PE commonly trashes trusted brands. A brand doesn't show up in your EBITDA. If you trash a brand quickly enough by cutting costs and quality, some institutional sucker will buy the company because they haven't clocked that the current EBITDA is elevated due to asymmetry in how quickly the costs come off and how quickly the revenue falls off after burning the brand.
They've simply valued the company wrong.
Well… yeah. I mean, it seems clear that the market is pretty bad at valuing companies. At the very least, valuations are based on a combination of (a) measurable attributes, and (b) vibes. (a) will always be incomplete, and runs into all of the same measurement problems that everything else does. And (b) is really unreliable.
Plus, PE companies are not especially interested in long timelines, whereas companies can eventually provide a lot more value that they’re worth right now.
And that’s not even getting into situations where they own enough of the market to not care about losing customers.
...have you looked around? Some of the biggest companies in our economy basically just serve ads...
Huh? Why is there nothing wrong? Yes they wouldn’t make the investment if they didn’t think they had a way to get ROI, but how does that entitle them to one at any cost or make it necessarily moral?
As an extreme example, If I invest to create a company that is clearly exploitive and addictive, nothing is wrong in principle and I’m entitled to my roi?
My view is companies don't have a conscience, and any expectation that they are going to independently act with moral righteousness is unrealistic. Any perceived conscience is either for marketing (green/pinkwashing), or the sum of the morals of their owners multiplied by their willingness to exert any moral authority over the company.
Besides, if you try to imagine a company having an independent conscience, what even would that conscience be based in? I'm vegetarian and think it's immoral to eat meat, but obviously I'd be insane to expect companies to divest from meat based on my peculiar moral position.
In most cases, people do not exert any moral authority over anything they own. Do you actively select your pension investments based on your morality and vote in the shareholder meetings? If you do, I'm genuinely pleased and happy that someone is. But the reality is most people don't give their investments any thought beyond "line goes up", so companies end up acting as ROI maximisers.
So: the main way we enforce morality on companies is ultimately the government. If you want companies to act morally, you set the rules such that an ROI depends on following our democratically agreed set of regulations. Maybe that even harms economic growth but we still consider it worth it (which is typically how we think in Europe, but look at our economies are doing!). However, the company and its investors are still acting as ROI maximisers.
The poster said “I don’t think there’s anything wrong with this” are they a corporation? If they are, apparently they do have consciousness because they say “I think”
And yes some people do in fact try to vote with their dollars. Canadians are doing it plenty right now for an easy example.
That companies’ sole purpose is to maximize shareholder value, usually near term, is basically a toxic social construct and fairly recent. It’s not grounded in anything other than greed.
To play devil's advocate:
Doesn't this also open the market to new entrants?
e.g. young person looking to start a HVAC company in the old days couldn't compete with the established firm that already had contracts and the local market wasn't big enough for two players.
If the established firm gets bought by PE and driven into the ground, wouldn't the newer more nimble firm now have a better competitive market position?
The HVAC for example - the large firms around you do not run HVAC/plumbing/electrical, they run marketing companies that happen to schedule and bill H+P+E service appointments.
That being said I've never heard or encountered a single services company in the US that can't find business, in fact it's the opposite. They're trying not to drown themselves in front of a fire hose.
A core function of enterprise sales is figuring out where that opportunity cost threshold is. PE often targets industries that are currently (in their estimation) priced well below that threshold.
AVGO/Broadcom in some way acts like a big PE firm, rolling up other software companies, integrating them into their huge suite of offerings, ousting the new integrated offering's competing tools from the customers environments and selling the increment, and cutting off smaller customers not willing to subscribe to the huge suite.
Moved right in with the same old price so I didn't even have to expand the budget and they threw in training for free!
but there are plenty of other reasons as well.
starting a new venture, whether from the foundation of an existing company or doing a new one takes investment and carries risk. maybe the sales relationships the existing company had were the results of decades of investment. maybe the ownership or the employees had a specific skillset or maybe they used tooling that could be bought easily anymore. maybe they had an important and established relationship with suppliers.
maybe PE moved in because the business was viable, but not really growing and there isn't sufficient upside to motivate investors.
or the business only existed because the owner just loved that thing so much and funded it at a near-loss out of family money.
or the business was based on a huge capital investment or ownership of property in a key location that happened 20 years ago and isn't possible to replicate because of changes in the environment.
there are 1000 reasons why these things aren't spherical cows.
The irony goes way deeper than that.
A large part of PE clients are university endowment funds.
Harvard for instance has close to $60B in its endowment fund, 40% of which is invested in PE. At this point, Harvard is more an investment fund, with a university as side business.
But… if you were to say hey we need to pay our old people and we desperately need some way we can deploy massive amounts of money at higher rates of return, people will say… hmm well it’s broken but the alternative is worse so we’ll ignore it.
But now imagine you have a way to deploy large amounts of money and get large returns off that money. Every large amount of money (endowments basically) will jump on it because why not? That’s literally an endowment dream scenario.
So pension funds are the moral reason these other huge chunks of money to get large returns. PE firms have become a streamlined business model because they continue to improve what they are good at doing, and it’s insane that we haven’t passed laws against it yet. Except of course we can’t mess with it because it touches government workers.
So yeah even if we wanted to policy it out of our society it’s practically impossible from a social point of view.
https://en.wikipedia.org/wiki/List_of_colleges_and_universit...
Lots of things are profitable but immoral. People will do crazy immoral and illegal stuff for money, but we outlaw and slander the more abusive stuff, like monopolies and such.
If it wasn't pensions that were funding PE, I'm sure PEs would get a lot more criticism and would not be allowed to do what they do.
Effectively it’s burning all of the trust built up with consumers as firewood by tricking them into buying mediocre products at high prices.
Pensions fund PE because PE can do a short term cooking of the books in order to smooth out the growth curve. So the return is usually positive each year, not raising problems.
Also what does significant mean? Pensions are the main mechanism non-wealthy people are investing in PE. Being that millions are involved, you would expect pensions would have a sizable portion of the market, but family offices and high net worth offices dominate. If it offers above average returns, why would they not invest? PE is like every other asset class other than housing, the top 1% own a large chunk, the top 20% own the majority, and the bottom 50% own very little. Decisions are not driven by sone fireman, they are driven by the wealthy like everything else. And the origin and continuation of pushing for retirement to come from capital investment comes from the wealthy as well.
Well, yes, that's how any retirement (or any social benefit, really) system works: people who actually do work support the people who don't. Those latter include children, the elderly, pop-stars, politicians, etc. So unless you make people work until the day they die (which is possible, and have been done in the past, mind you — it just severely decreases the average life expectancy), we're going to transfer some of the created wealth to the elderly. The exact form of how this transfer is performed is a fascinating topic for discussion (make their direct descendants care for them! make a state-, or charity-funded fund to feed them hot soup once a day! make them save up for retirement themselves! lots of options, really) but it will still happen one way or another. After all, some people simply do have lots of money (and keep getting more) with doing no labour; some of them are retirees.
I really appreciate this perspective as It helps fill in gaps in my mental model of where our economy has gone wrong the last 50 years. Unrelated but - I've read an interesting paper on how allowing private banks to create money has led to the infinite profit growth goose chase...
I live in a working-class southside neighborhood. The people who are complaining about property taxes for SFUs in the city are people in neighborhoods with skyrocketing home values.
Those people stand to receive a massive windfall when they sell. And while it may be annoying for them if they find themselves having to sell when they didn't want to, the they're vastly better off than all then renters in that neighborhood who got priced out much faster with no windfall.
The Gold Cost isn't suffering a shortage of landlords.
https://www.psprs.com/uploads/sites/1/AIC_PublicPensionRepor...
Some interesting details:
- "Nearly 50 percent of the private equity investment dollars that make their way into American businesses come from public pension funds", which substantiates OP's thesis.
- "U.S. public pension funds invest 9% of their portfolios in private equity, on a dollar-weighted basis." 46% is in public equity, so obviously the lion's share is in still in public markets.
And like FIRE devotees, maybe they should model a lower withdrawal rate.
He has been in the role over a decade.
The pension people aren't being scored on doing well for their clients. They're scored on money. They don't care.
Ain't no different than some jerk in an insurance/regulator office cooking up a rule about PPE based on first order assessment of a bunch of crappy data. The guy who gets mashed by a forklift he couldn't hear coming doesn't hurt their KPIs. He didn't suffer occupation related hearing loss. MissionAccomplished(TM)
Pretty much every industry that deals at the statistical level whether it's PE making investments or something else runs in this manner.
If a company being purchased by PE meant that they lost the vast majority of their customers as soon as contractually possible, then the possible value extracted by PE would drop off a cliff.
This isn't necessarily the fault of the customers - we're all dealing with a lot of information to process.
And, up until recently, it was reasonable to attach reputation to brand instead of to owners.
And I think that's a lot of what PE exploits - the gap between people's belief about a brand's reliability/reputation, and the fact that the actual reliability has been a function of who the actual owners of the company are for many years - but people are still attached to the old mental model.
(there may also be some value for PE to extract from assets aside from customer relationships and the higher-order "brand value", but I suspect that that's secondary - if I'm wrong please correct me)
How so?
There are also many benefits you don’t notice because they don’t bother you
1. If you assume that P.E is uncorrelated/has a low correlation to the stock market (subject of many years of diatribes), then you decrease volatility of your portfolio by adding it.
2. Because a pension fund has a lot of years until they need start to paying out, then it is natural for it to attempt to harvest the illiquidity risk premium.
3. The (edit: removed extra words) "high required rate of return problem" is really a defined benefit problem. A DC plan can (and probably should) just be in mostly straight indices unless it's so big it can negotiate a good fee with asset managers for other classes.
People have to eat. They need water. They need a roof over their head. Nobody has to buy out all the veterinarians in an area at rates they can't say no to, have them sign non-competes and them jack up all the prices by 300% because, hey, you now own all of them. Nobody has to buy up all the trailer parks, which are normally peopple's last stop before being homeless, and then jack up the ground rent because, hey, where else are they going to go? Nobody has to buy up utilities, spend big on capex because legally you can pass on that charge and effectively double people's electricity bills.
Hannah Arendt coined the term "banality of evil" [1] decades ago and, in all honesty, I think it applies to the predatory nature of PE. It also goes for working for Palantir and a bunch of other companies. "I need to pay my student loans", "I'm just doing data science", "I'm just writing AI software that identifies when somebody is home" and on it goes.
PE serves no useful function in society. It's pure rent-seeking and incredibly predatory in many cases. ~15 years ago, there was a story about Goldman Sachs invented a derivative on the price of wheat and then essentially conspired to jack up the price of wheat [2]. This wasn't just manipulating a ticker on a Bloomberg terminal. It had real-world consequences. People starved and died because of this decision.
Yet I'm sure there were people who argued "I'm just doing legally allowed financial engineering here".
[1]: https://aeon.co/ideas/what-did-hannah-arendt-really-mean-by-...
[2]: https://theecologist.org/2011/sep/13/how-goldman-sachs-start...
It's kind of like the university system. It's a (mostly) privately run industry that gets massive injections of cash from the government because of both campaign promises (everyone needs healthcare, everyone goes to college and, bonus, everyone gets a house) and it being an incredibly unpopular position to either remove that funding or make the program entirely public which would, imo, alleviate both problems (but have their own unique drawbacks). The hybrid model we have is the worst of both worlds.
The hybrid system we have now of massive injections of public money into private industry is like blood in the water for do nothing intermediaries. PBMs are just the assistant dean of underwater basketweaving for medicine.
I find it very hard to believe that if pensions didn't exist, nobody would have come along and exploited the same loopholes.
1. Taking advantage of a pricing inefficiency; and/or
2. Using local monopolies, inelastic demand and regulation to jack up prices.
But what powers PE is the LBO (leveraged buyout). That is, you buy csome company with borrowed money and then you borrow against the assets of that company to repay your original loan.. That... shouldn't be allowed. Obviously that company is saddled with debt and it's usually structured to explode at some future point when the buyers won't actually own it anymore. I think of it like subprime lending in a way.
Now passive funds kind of have to buy sufficiently large companies. This has been an issue with the SpaceX IPO because SpaceX is doing a small float (~5%) and NASDAQ has changed the rules to essentially force passive funds to buy SpaceX where up until now that wasn't the case unless at least 25% of the company was available to buy. It's so nakedly corrupt.
Anyway, if a LBOed company saddled with complicated debt gets re-listed it kind of has a captive market of buyers with passive funds.
So going back to (1) there is long historical precedent for pricing inefficiencies. I'm speaking about the corporate raiders of the 1980s. The movie Wall Street was about this era (well that and insider trading). Essentially ailing companies would be trading below their book value. The book value was simply the value of assets (real estate, etc) so you could buy the company, sell it for parts and make a profit. All the lost jobs be damned.
The companies that tend to get targeted for PE own real estate. This has been a competitive advantage because yet other rent-seekers can't exploit them by jacking up rents. But real estate is an easy asset to sell to pay back your LBO and you can even split the real estate into a separate company and lease it back from that company. It's just financial hocus pocus.
They moved around the year 2000 to accounts that don't have the AT LEAST clause, and they earn what they earn, but due to the backlog of people still retiring that were grandfathered in, its wrecking our state.
My city has a huge budget deficit, but 24% of its total payroll budget goes to the public retirement system to 'catch up' from years when it did not make 8%. Next year or two, that is supposed to jump to 28% of payroll.
Problem won't start getting better until something like 2034 when the boomers start 'leaving the retirement system'
It's just a ploy for the wealthy to extract even more wealth from the rest of us, while stripping the country for parts and dooming the actual economy for years to come.
On the subject, if you have 50 minutes to waste: https://youtu.be/tyNFosOFUDM?is=hwDH5tFCAYc7soHG
Who do you think is buying .. everything? They're holding substantial fractions of both the whole stockmarket and national debt.
It's the corporate businesses that have gotten rid of pensions in favor of 401k plans.
They can also offer some really nice benefits like accessing your pension income at 55 which can be a substantial portion of your last year's salary, and you can keep working elsewhere if you want.
Isn’t this just what happens when you have an inverted pyramid (older population is larger than the younger population)?
> One can argue that PEs make the business more efficient
I’ve never seen it (I agree with you). To improve something they’d have to understand the business and do a bunch of work. Mostly they show up at quarterly meetings and want spreadsheets that measure some number that will go up (regardless if that number means anything).
> if you wanna fix or ban PE, solve pensions
How does one solve pensions?
I was thinking that Covid and widespread antivaxxer mentality would have.
But no. This will be the latest ladder-pull by the boomers and silents to extract the last bit of wealth from all the younger generations. And this will impoverish gen-x and all younger generations even more so than we already are.
It's a shame that even highly educated populations do not understand a basic fact of immunology.
This is what was claimed.
"You become a dead end to the virus." — Fauci, 2021
This was the reality
"[Vaccines against respiratory viruses produce] decidedly suboptimal protection." — Fauci, Cell Host & Microbe journal article, 2023
"The durability of protection against infection and hence transmission was relatively limited." — Fauci, 2024 congressional testimony
Anybody that questioned the religious dogma that the vaccines were super effective and that healthy people needed to get endless boosters were crucified and in many cases, fired from their jobs for refusing an unnecessary medical procedure.
No one ever said the vaccine would prevent transmission. What they said was that it !could! prevent transmission. But no one would know before studies were done. What they did say is that it would lower mortality rates. Which it did in fact do. But the factors of transmission and spread were dice rolls. And everyone with first hand knowledge knew that from day one.
But, you are in fact correct, you were lied to. But not by anyone with knowledge of the vaccines, but by the grifters you hold up has being "a beacon of truth". The grifters who read "Vaccine has a chance it could slow or stop transmission" and turn around and say "They are promising it will stop transmission!" just so they can tear it down later as "another victory for TRUTH!".
Also you don’t know anything about me and what media I consume. You can’t quote me on something I didn’t say. They did say it would stop transmission.
Extremely unlikely is a lot stronger than reduced. Calling it breakthrough implies that the norm is prevention. Obviously nothing is 100%.
I'm willing to accept my memory is wrong here with evidence, but I remember a very strong narrative in the early period claiming that the vaccine did in fact prevent contraction and transmission, to the point where it was supposedly surprising when "breakthrough" cases started being reported.
It's possible there was some loose language around "prevent" as I did see that especially later on, but I have trouble finding reliable information on what they actually believed and if they actually reported this accurately to the public.
There is the unfortunate mark against where they knowingly promoted misinformation around masks - persistent through today - that they were ineffective, in an effort to direct uncontrolled distribution of masks to medical professionals most in need.
And because the capitalists run the show in a lot of countries, https://ruinmyweek.com/wp-content/uploads/2020/07/live-laugh... is a good image that explains why lots of things kept going on as usual.
A world-level 6 week pause would have burned covid and a whole lot of other diseases out. But no. Poor capitalists need their 3rd yacht, 13th vacation home, etc etc etc.
As for me, my SO worked in health care. And Covid is a SARS. We have decades of effects and response. The shit's airborne. WHO knew that. CDC knew that. But they lied and lied and lied.
We take our healthcare in our own hands. I'll critically listen to the "experts" and deal with med doctors for prescription drugs. And Im definitely interested in my own manufacture of pharms https://fourthievesvinegar.org/ . But yeah, the wider and general the message, the more propaganda it likely is.
And we also have a good stock of PPE now, including a few tyvek suits. And everclear is 95% alcohol and $30 here for a handle. Best sanitizer you can easily acquire and food safe to boot.
EDIT as comment to WarmWash:
No. The WHO and CDC lied about Covid being an airborne infection. They refused and refused, up to then redefining what an "airborne infection" is.
https://www.bmj.com/content/385/bmj.q985
Covid is a SARS. Airborne. SARS requires BSL3 to handle properly. https://en.wikipedia.org/wiki/Biosafety_level#Biosafety_leve... "Biosafety level 3 is appropriate for work involving microbes which can cause serious and potentially lethal disease via the inhalation route."
I dont need international experts to tell me a stream of bullshit, when I can look at the type of disease and go "wellll fuck, airborne. time to wear masks outside the home and no parties or events. and go to store when its not busy."
Was Covid as bad as SARS? No. But is SARS response something that can be compared to what we should have did for Covid? Hell yeah.
[0]: https://fixedincome.fidelity.com/ftgw/fi/FIYieldTable?popupM...
Mass index fund investment is basically socialism but stupid. My retirement money is going to get invested in the SpaceX IPO against my will. The market is not efficiently allocating capital, it's structured to allow elites to skim off the top while forcing middle class people to subsidize them.
(it's a blog summary of a much longer, and rather esoteric, academic article)
> The first ever Roman fire brigade was created by Crassus. Fires were almost a daily occurrence in Rome, and Crassus took advantage of the fact that Rome had no fire department, by creating his own brigade—500 men strong—which rushed to burning buildings at the first cry of alarm. Upon arriving at the scene, however, the firefighters did nothing while Crassus offered to buy the burning building from the distressed property owner, at a miserable price. If the owner agreed to sell the property, his men would put out the fire; if the owner refused, then they would simply let the structure burn to the ground. After buying many properties this way, he rebuilt them, and often leased the properties to their original owners or new tenants.
I wonder if the incidence of fires increased during this time.
For the curious, above is how Crassus died.
TLDR: Got over his skis and mad with power and money. Decides to invade Parthia. Gets wrecked by horse archers. That ends up being typical for Romans, but this was the first-ish time that happened. Some of those captured legionaries may have ended up in China, though it is unlikely.
I don't think the Western Romans ever really learned from it did they? The Huns ended up wreaking them pretty hard.
I know the Eastern Romans did learn at some point out of necessity by creating their own professional units and hiring mercs.
in some sense I even respect that decision
sigma
In my area PE is gobbling up mom-and-pop apartment complexes, plumbing companies, restaurants, and generally making customers and employees alike pretty miserable.
Hard-working founders should be able to cash out, but there has to be a better system than this one. Succession, maybe. Not that we should push an unmysterious destiny on our children, but maybe more ought to consider pulling one?
The large PE buyouts that came from the ridiculous ZIRP period could deliver better financial stability than handing the business down.
I know two families with businesses that attracted huge PE offers in the past few years. One of them took the buyout and the family members slowly left their jobs at the company because they effectively been early retired by their buyout.
Now the kids are looking at new businesses to buy and start for themselves with this new financial freedom that has come to the family. One of their considerations is starting another business in or around their old line of work that was sold off. They have to wait until the contractual non-compete expires, but if the PE owners are really making both the employees and customers miserable then it becomes a golden opportunity for experienced operators to come in and run a good business in the vacuum. Even many of the old employees have expressed a desire to join.
The bad PE phenomenon buyout is annoying, but businesses that become miserable for the customers and employees are not stable long-term businesses. When they decline because competitors show up to do a better job and retain better talent, it becomes a transfer of money from the lenders to the old owners and an annoying churn in the local business scene. As we see more of these failures, the willingness of banks to lend for these buyouts will go down.
The trick is that the business owner has a good relationship with his customers. After the PE investors run it into the ground, they can credibly reach out to customers directly, assure them that the adults are back in charge, and basically be a hero to the old customers who hate what the business became.
https://privateequityvet.org/vet-list/ https://whoownsmydentists.com/ https://ledger.worseonpurpose.com/
Instead of succession, I wonder if there is a way to make it easier for these people to sell their company when its time to retire to someone who is looking to start the next step of their career. A lot of software engineers joke about becoming farmers, but if they could instead make an easy transition into a small business by buying a small business, we could prevent PE from raiding things.
And that’s before you even make it to the question of “can the person that manages to buy it actually live off of it as a lifestyle business?”
I guess what I would like to see is a pathway to making it easy to buy or start up crucial businesses like a plumbing business, HVAC company, etc. As the current generation of owners want to sell and retire, we should make it easier for people to be able to get in there and buy these companies before PE can.
Family businesses handle this by slowly getting the next generation involved, such that the intangible value has been transferred by the time the owner wants to retire. That works less well with a stranger. You really need high levels of trust to make that work fairly for both parties.
So they can only really be inherited or given away (and they often are).
But if it's not to kids on death, it's moderately difficult to give away a business that has "paper value".
I'm sure there are tons of people in my local area who could happily and successfully run such a business, but nobody can swing it financially. The initial financial hurdle of going from "not a business owner" to "a business owner" is real.
Same thing happened with a restaurant - nobody wanted to buy the business so it shut down, even though you could have bought the whole business for the cost of the building, basically.
(There's a path for entrepreneurial "youngsters" - identify these businesses 10 years before, and become a valuable employee in such; I've seen them given away for a song to such. Of course, in some of them they also ended up with the daughter, so ...)
This leads to them pushing their kids to be employees even though that's...really contradictory to their actual lived experience.
Family businesses have traditionally gotten around this by having their children involved for 10+ years prior to taking over. That way, you slowly transfer your "social capital" to the new owner (in this case your kid). This is understandably harder to manage with a stranger, because you can't transfer the value before they buy it, but they won't buy it if they can't guarantee you'll help them transfer the value.
Why? Operating a successful business should be remunerative on its own, or else it's not successful. Owners who don't want to do it anymore can let it become worker owned. If they don't want it, it can dissolve. What else do you need? The very concept that the end of a successful business is a big payday for its creator is itself the poison here. There is no end just another workday, success is ongoing not final. This is natural and correct.
When they retired they didn't have any money in the bank besides the proceeds from their final harvest, but all their loans were paid off. That's where the profits went -- paying off the loans.
The farm was their retirement savings. They sold it off for high six figures, and that's what funded their frugal but comfortable retirement.
The neighbor's son bought the farm; I hope he's pretty much paid off the loan he took out to buy it.
It's the same with gentrified zones: yes there are some dark patterns going on as well, but mainly is previous, smaller owners that want to make big bucks by selling to someone with money from outside rather than someone local like themselves for less money.
I'm not trying to put all of the blame on individuals responding to the pressures being applied to them. But neither am I accepting their abdication of the responsibility to act with honor and courage in the face of those pressures.
My guess is owner-operator selflessness is a key ingredient in a lot of beloved small businesses. I don't know for certain that the winning personality for getting a business off the ground on all the bad days is the same one that raises rates proportionally with their success.
So it becomes all-or-nothing. It's my friends and neighbors when I'm working, when I sell-out it's purely business. No in-between.
The door refused to open. It said, “Five cents, please.”
He searched his pockets. No more coins; nothing. “I’ll pay you tomorrow,” he told the door. Again he tried the knob. Again it remained locked tight. “What I pay you,” he informed it, “is in the nature of a gratuity; I don’t have to pay you.”
“I think otherwise,” the door said. “Look in the purchase contract you signed when you bought this conapt.”
In his desk drawer he found the contract; since signing it he had found it necessary to refer to the document many times. Sure enough; payment to his door for opening and shutting constituted a mandatory fee. Not a tip.
“You discover I’m right,” the door said. It sounded smug.
From the drawer beside the sink Joe Chip got a stainless steel knife; with it he began systematically to unscrew the bolt assembly of his apt’s money-gulping door.
“I’ll sue you,” the door said as the first screw fell out.
Joe Chip said, “I’ve never been sued by a door. But I guess I can live through it.
- Philip K. Dick, Ubik
"In developing countries, everything is possible and nothing works. In developed countries, everything works and nothing is possible."
The "consumer harm" standard is idiotic.
Most of the R&D that laid the future of the world happened during that period. The middle class grew to its largest portion during that period.
I don’t think the economy was hamstrung in the least
The US economy generally did very well with those standards, maybe the best it ever did, especially considering distribution of benefits.
I am somewhat more inclined to some socialist policies now though.
I'm not saying it's better, rule of law has many benefits, but it is an example of where there were markets which were more free, that did not have cyberpunk outcomes, and they were quite different.
The stressing part is when they are at their peak, so people would like to use regulation to short-cut right to the collapse part.
The only example we have a true free market victor that hasn't collapsed is humans, who have totally and completely dominated all other life on Earth, but man, it's certainly not looking good for us right now.
We can envision a future with an ASI controlled super corporation that owns everything with omnipresent micromanagement, but then why would the ASI even bother with humans. That event right there would be our "got to powerful for our(humans) own good" moment.
And most of these types NEVER read past, say, page 20 of https://www.gutenberg.org/files/38194/38194-h/38194-h.htm , Adam Smiths treatise on capitalism. Here's a few failures that Smith wrote back in his initial treatise in 1776. I think so far, we're failing every one of these, and basically speedrunning all the terrible warnings Smith wrote about as accomplishments.
Gross inequality was even mentioned there as something to significantly avoid. Book I, Ch. X, Part II; ~p. 50
Principal-agent problems in joint-stock companies. Managers of other people's money "cannot be expected to watch over it with the same anxious vigilance" as owners, leading to waste and negligence. Book V, Ch. I, Part III; ~p. 312-313
Mercantilist policy distortions. Protectionism, export bounties, and import restrictions enrich narrow merchant interests while reducing national wealth by intentionally misallocating capital. Book IV, Ch. II-V; ~p. 183-213
Underprovision of public goods. Markets fail to supply infrastructure (roads, bridges, canals, harbors) and institutions that benefit society broadly but yield no direct profit to private actors. Book V, Ch. I, Part III, Art. I; ~p. 303-305. https://www.independent.co.uk/news/world/americas/us-cities-...
Dehumanizing effects of extreme division of labor. Repetitive specialized labor "renders [the worker] as stupid and ignorant as it is possible for a human creature to become," impairing civic and moral capacities. Book V, Ch. I, Part III, Art. II; ~p. 324 . Even in the 1800's this got so bad that Karl Marx wrote about this in both of his critique of capitalism AND the communist manifesto.
Merchant collusion and monopoly power. Smith warns that "people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices". Book I, Ch. X, Part II; ~p. 54 . Hello, eggs, meat packers,oil products (gasoline), grocery chains, electronics (RAM), health care. Collusion after collusion, and almost no enforcement.
Im not communist, and probably not socialist. But its clear as day as to the failures of capitalism. And as a stopped clock is right 2x a day, capitalism does handle some problems better than any previous system. But we can do better. Lots better. But the entrenched power holds on to capitalism as fervent as a religion, and not dispassionate analysis.
For the record: national economic policy shouldn't revolve around Y Combinator classes and similar startups.
I'm totally fine if it turns out a sensible antitrust policy completely destroys the acquisition exit pathway for tech startups. I'm not saying one will, but I'm saying that's a cost I'm willing to pay.
And it should also prevent the acquihire.
But that's not what you're talking about, is it?
How about doing what America used to do? Provide seed funding for a new fire truck company in trade for condictions. Can we agree to do that? Fund 3 companies to make fire trucks, fast-track whatever certification and approvals they need. Create the companies we need, risking (and in fact expecting to lose) a bunch of the capital used for this.
People always give these vague guidelines (and even the guidelines in the 80s were) and wonder why they are easily circumvented.
No, because if we had proper anti-trust they already would have both been broken up years ago.
The information is captured the same way as most policy - via statute and precedent, and guidelines for enforcement agencies.
None of this is confusing, or even hard, except insofar as it's hard to fight against well funded opponents.
That's pretty unfair. IIRC, Standard Oil was on of the companies that was the impetus for antitrust law (and broken up by it), and AT&T was broken up (famously) in the 80s.
Basically, your "argument" is a troll or a deep and basic misunderstanding. Especially in the case of Standard Oil. You're basically saying the law doesn't work because it didn't work before it existed (Standard Oil became dominant in the 1870s or 1880s and the Sherman Antitrust act wasn't passed until 1890).
How are you allowed to continue to post every 2 seconds? dang
The policy in question (as stated) should have prevented Ma Bell and Standard Oil from getting to the point of being broken up.
2. You don’t have to prevent every case before it happens so much as just stochastically go after the worst ones to make it less economical for people to go take on debt to have huge swaths of consolidation. Letting the market work, after pricing in that egregious monopolies will be broken up, is kinda great and better than minutely scrutinizing every tiny deal for long-term consequences.
> You are a troll. There's nothing left to say. Bye.
is a wildly disproportionate response to the post, IMHO.
I've read enough of the pre-Borkian (ie, pre-1980s) history of antitrust law to know this was very actionable.
They were not easily circumvented in that it required decades of funding and activism to nerf the Sherman Antitrust Act and its successors.
Antitrust enforcement can be done retroactively as well, if it appears that a large company abuses its financial firepower to undercut competitors or a marketshare gets too dominant.
Montgomery Ward thought it was "too big to fail" and too powerful to regulate.
So, what happened?
If the US government wants to, and it has in the past, it just takes your business at gunpoint.
4 soldiers walked into the ultra-conservative owners office and made him leave. Two of them picked up his arms and legs, took him outside, and deposited him on the sidewalk.
> a major U.S. CEO being physically evicted from his own company by armed troops became one of the most famous news photos of the home-front war
It sure is.
> and it inevitably will result in the same situation
Why?
https://hn.algolia.com/?dateRange=all&page=0&prefix=true&que...
2025 numbers: https://www.sec.gov/Archives/edgar/data/796343/0000796343250...
2026 Q1 numbers: https://mlq.ai/stocks/ADBE/q1-2026-earnings/
Nobody likes this state of affairs so we are asking you to stop strawmanning and start steelmanning the posts you are responding to.
You are clearly not dumb, so stop responding to the dumbest possible and easiest to dismiss interpretation of other people’s comments and instead go deeper
Your cause and effect is wrong.
The US doesn't fail to attempt to enforce, the gov representatives often get paid to not enforce by said corporations who have been allowed to put money into their campaign for election/reelection.
Lots of success during the last admin for those paying attention.
https://www.ftc.gov/news-events/news/press-releases/2025/01/...
https://www.economicliberties.us/press-release/lina-khans-tr...
https://www.economicliberties.us/our-work/factsheet-the-ftc-...
Frankly this stuff is impossible to talk about in the abstract. The details of every individual case matters. If you're actually curious (instead of just playing a shell game), you can go look up the types of analysis that FTC does to evaluate market dominance and whether a given transaction will excessively consolidate a market.
As a business owner, if you want cash today because you are done with a business. You could go to a bank and get a loan to pay dividends. This is a bad deal for the bank as you have no incentive to operate the business after you cash out the loan. A private equity firm comes in and operates the business on the model that they still keep some of the profits after the loan value.
The crappy side comes in as a customer, the PE firm can do this to an arbitrary number of firms in the area and raise prices on each/cut services. PE firms can trivially build out monopolies. Many of these monopolies will be invisible as they leave the existing branding etc. in place.
> As a business owner, if you want cash today because you are done with a business. You could go to a bank and get a loan to pay dividends.
If you are a business owner you could borrow yourself using the business as security.
One correction is that it’s not like paying for the company with money from the company you’re buying, because that obviously wouldn’t benefit the sellers. The money comes from a lender and they get terms to take the business if the loan terms aren’t meant. The lenders are the effective new largest owners of the company with the PE firm being a smaller owner but the expected primary operator.
Even 3% or 0% down mortgages?
That's why the parent is saying "It is like paying for the company with the money from the company you are buying.".
It's like taking out a mortgage on a house, but letting the house owe the debt.
Isn't that a non-recourse loan, which in some states is the default for the initial loan to acquire the housel
Most small-time single family landlords actually go above and beyond that and "pretend" the rental is a house they're buying to live in (or actually is, for a time) and get a "home owner's mortgage" which is even easier.
Large commercial real estate is sold and loaned based on future rental income, pretty formulaically.
*Coverage of 1:1 is an accident waiting to happen, but otherwise sure.
If PE firm A wants to buy company C using an LBO, it could do so by having C borrow money and then A purchase C, or by creating an entity B that borrows money and then purchases C. Whether B or C owns the debt doesn't change anything meaningful for A, and it's pretty clear that you're allowed to form company B (and really hard to imagine how you'd make that illegal without effects that would be worse than current).
I would prefer that! I'd prefer even more strongly that the debt be owed by someone else entirely, so a default isn't associated with me at all. If you're up for it I'd also prefer to use your credit card number to buy stuff on Amazon. But for whatever reason the law doesn't always seem to follow my preference.
I'm sensitive to your point about restricting formation of new corps. The system can't just be changed randomly without extremely careful thought. And often not even then.
It’s possible to “understand” mortgages by understanding that conditions for stable home markets don’t arise by themselves—we collectively make them possible because the outcome is desired—then wonder WTF because what social function is creating conditions for private equity getting us.
Not only is that politically attractive, I think it’s more good than bad as public policy.
Turning back to PE/LBOs:
Having limited liability entities (companies) also serves good public purposes. Having companies being able to borrow money also does. Having companies being able to own other companies also does. I think that’s the only three ingredients you need for the PE model to operate and I don’t think that the public is helped by barring any of those three things.
If the company wasn’t able to borrow money for itself, a wrapper company could which would still have very closely the same effect as being an asset-poor borrower.
Which would increase the rate of defaults (if they are authorized in the first place) and in turn increase interest even further. I guess the PE is always maxxing out the leverage on every deal at _just_ the projected break-even point for loan repayment? But that leaves no room for error or changing market conditions which also increase the rate of defaults and so on.
That's exactly what happened famously with Red Lobster. PE sold off all the underlying real-estate to get the initial sugar-high and replaced it with a leasebacks. Those leases had escalating costs and fixed terms, which made it difficult to adapt to changing trends, and was a big contributor in what ultimately sunk it all.
And everyone gets their management fees until people start asking their money back...
Great another financial crisis.
Pure parasitism.
Note that from the lender's perspective, the risk is the same and in a perfect-information universe could be mitigated by charging higher interest. The problem for society is the externality that the business's services get worse.
Sounds like a problem for whoever is providing the financing. Not really my concern unless you're saying there's some systemic problem it causes like with mortgage securitization during 2007. The lender will charge a high interest rate if what you're saying is true.
It’s literally a way to extract revenue from our broader social institutions by spreading the pain across so many people that individuals don’t complain (or, in some cases, don’t even understand how it harms them).
Has everyone forgotten the social contract? We do not exist as communities to make a small number of people richer. If the trade doesn't work for all involved, we change the rules.
In fact, they'd much rather single-action foreclose as they'll likely get a house than force you into bankruptcy where they might not even get that.
Some modern economists have suggested this should work theoretically if properly implemented. See Helmut Creutz, Das Geld-Syndrom (1993) and “The Natural Rate of Interest Is Zero” — Mathew Forstater & Warren Mosler.
There's also a strong argument that charity transfers to the poor does far more harm than good. How do you price a field worth of wheat, a mill, or even a local grocery when an airdrop of processed flour and food rations can arrive at any moment with no warning? And how do you get the capital to start one of those when it's illegal to get a loan?
Of course there are solutions if you have enough tenacity, but the overall result is far fewer businesses started because the friction is just so much higher.
You can take the cash flow, take debt against the companies own cash flow to buy it, pay yourself back, consolidate, then raise the prices on a captive market.
I (and leaders at my PE-owned company) cannot say enough bad things about private equity. How anyone who managed to make money in their life decides PE is a good investment blows my mind.
We are now on our 5th PE firm in 10 years, and just completed a "PE lifecycle" of buy -> merge -> sell -> part out -> merge.
None of these PE firms bring anything to the table. Even the hundreds of billions AUM giants. They have zero interest in tangibly improving the company, and lots of interest in cheap window dressings meant to fool other PE firms. Not that they could do much else, because it's mostly business grads with minimal real world exposure, and hunger to be rich above all else.
The most critical thing to understand is that they pay themselves "advisory and oversight fees" for the incredibly difficult work of increasing sales targets 300%. These fees can eat 10% of our revenue, and is one click above theft. Trust me, they will lay-off 75% of the company before even considering cutting back their personal take. Never mind the fees they take from investors too. They bill both sides.
Also, if they kill some of the companies they acquire, it's the investors loss. It is not their loss. They still collect all their fees just the same.
There is a total misalignment between investors and PE firms, where PE firms just want to maximize their looting while investors think they are actually trying to improve the acquired companies. If the invesotrs do see gains, it's mostly because the firm successfully conned another firm into overpaying.
Run from investing in PE, run as fast as you can. Recently they changed the law to allow regular people to have PE in their retirement. They are running out of useful idiots, and want access to the general public. DO NOT FALL FOR IT
