alt Hacker News> Private equity aims for 3-5 year returns
I honestly don't understand how private equity makes money at all. The playbook is:
1. Borrow a ton of money and buy a company on an LBO
2. Load up the company with debt, often complicated, exploding debt, to repay the original loan. Possibly sell off assets like real estate to pay off the original loan; and
3. Here's the kicker: sell off the company for a profit.
But we've seen time and time again that PE is a death sentence. Toys R Us, Red Lobster, numerous others. The company seemingly always explodes under the debt after the original snake oil salesman have cashed out. But my point is: who keeps falling for this and buying a PE hollowed out husk?
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You are describing only 1 kind of private equity and only 1 subclass of that.
But there are lots of well publicized lbo success stories as well. Hilton, Safeway, Dell, Nabisco. The list goes on.
I've also wondered how banks get convinced to offer companies the debt in these LBOs. The only explanation I see is that failures (Toys R Us, etc.) become well-known while successful LBOs and sales of companies with long-term profitability are quiet
You've seen publicized examples (Toys R Us) where it played out like that, but that narrative doesn't generally pass the smell test–no counterparty would keep making bad loans. There are cases where companies are mismanaged, their value is as a real estate holding company, etc. and PE improves operations and creates a more investable business.
The other thing is that like VC, PE has become saturated, so the good opportunities just aren't there anymore.