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.
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.
Or maybe by then nobody trusts the name of the original company and it's just useless
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.