It seems like a lot of lenders should be sued for irresponsible investing then. How much interest can you charge when you get so little of the actual capital back? Is it 100% or more?
Like with VC investing, lenders don't always need every pitch to end up a home run. In the case of business lending something like 90+% of loans get paid off. For PE-owned businesses, just over half get paid off, which justifies the risk on the half that don't, but since this risk is far greater than with normal loans the interest rate is higher for PE-owned businesses. It's just basic finance. It doesn't require caricatures, just a knowledge of how this stuff works.
Lenders are also not all banks, and in the case of PE-owned businesses, most lenders are not banks (but would be characterized as financial institutions), because most banks simply won't lend to PE-owned businesses, having been burned in the past. For some PE firms, business flow is highly dependent on finding new lenders to finance their debt-financed purchases because their old lenders won't lend to them anymore.
PE firms aren't the caricatures that HN thinks they are. They're worse. You want to know why small town America can't afford to go to their small town doctor or dentist or veterinarian anymore? (Hint: the PE firms bought most of the small practices.) Want to know why it costs 10x as much to send grandma to the retirement home or hopsice? (Hint: PE firms bought nearly all of the retirement homes and hospices.) Want to know why insurance keeps rising by double-digits every year despite a corresponding lack of insurance payouts? (Hint: PE firms either own or are now major investors in most insurance companies). Want to know why dozens of major PE-owned retailers survived COVID but then died despite being cash-flow positive on an EBITDA basis? (Hint: the "I" in EBITDA from the PE debt financing overwhelmed everything else.)
Banks are not taking huge losses because a huge fraction of loans to PE work out.
Imagine believing PEs are just constantly scamming banks out of their money. Yeah sure.
Its just that people have this carricature of PE in their head plus we are on HN where there are a huge fraction of Dunning-Krugers when it comes to topics about economy. Thats why you get these internally inconsistent arguments
Banks aren't the primary lenders to PE firms, but yes, the general PE business model for debt-financed acquisitions is entirely premised on using the collateral of acquired businesses to take out loans to pay themselves "dividends" and then letting the business fall into bankruptcy. This has been covered in extensive detail by WaPo, WSJ, The Economist, and the NYT. Mark Levine has some good articles on this.
It's okay for you to admit that you don't understand how PE firms work. I've been on both sides; as their tax advisor and at a PE-owned company and I've got firsthand experience with it.
I only contest the claim that lenders are the dumbasses that keep on taking losses. It's nonsense.
Despite having been a tax advisors apparently you don't understand that. That is suprising. Kinda shows that your role doesn't necessarily translate into knowledge about how companies operate.
My claim is not that lenders are dumbasses that keep taking losses, that's your claim.
Lenders are not some homogeneous static group like you imagine them to be. There are many different kinds of lenders (including "creditors" that lend no money at all), and there are constantly new lenders coming into the market all the time, many of whom are not yet sophisticated enough to grasp the risks of lending to PE-owned companies.
My claim was that individual lenders either stop lending to PE firms outright or jack up the interest they charge to PE owned businesses once they have suffered PE-related losses of the kind I described above.
Lending is about risk management, and interest rate pricing is based on the estimated risk of a loan not being repaid. PE-owned companies are considered extremely high risk by most lenders due to the types of shenanigans PE firms pull on a regular basis. It can take over a decade for a PE firm to develop the reputation that would allow the companies it owns to get debt financing on terms anywhere close to what a non-PE-owned company can get. This is part of what killed Toys'R'Us; the interest it had to pay for its debt financing post-PE acquisition exceeded was materially greater than the interest it paid for the same amount of debt financing prior to the acquisition.
As a followup, Saks declared bankruptcy this week, after a sequence of events that began with their PE investors ladling up Saks with debt to pay themselves dividends, added more debt to acquire another company (which resulted in the PE firm getting paid management fees for the "successful" acquisition), and then spun out the debt-ridden conglomerate so it was no longer their problem. In this case, the financial institutions that funded the PE shenanigans mostly got paid off after Saks had to sell one of its most valuable, landmark locations a few weeks ago. The "lenders" that got screwed this time were their suppliers that provided them inventory on credit (like Chanel, etc). Many of them had already stopped providing new inventory to Saks due to the unpaid balances.
Look you keep putting words in my mouth in a quite rude fashion.
You make this situation confusing by basically arguing against a strawman. Where did I say lenders are a homogeneous group? Where did I say that lenders dont understand risks and interest rates? Im pushing back against the prevalent notion that PEs are somehow hoodwinking lenders into constantly taking losses. Its not happening. Thats it. Feel free to show me data that proves otherwise.
If you just want to do a monologue about PEs and their shenanigans then please by all means do so but dont do it as a reply to my comment. Thank you.
