I was under the impression that private equity was mainly a vehicle for the rich to get richer. Serious question: Do companies have no choice but to go this route or why are they doing this?
Not really. PE is mainly a vehicle for smart Wall Streeters to fleece credulous and incompetent pension fund managers.
But the latest boom in PE is a function of: higher than usual levels of credulity around private vs public performance (but PE funds have lower volatility???), and the wave of free money coming out of the Fed. In 2010, lots of PE funds got bailed out after making unbelievably bad bets with no economic rationale (the worst being Blackstone Real Estate, they should have gone bust, they now manage $250bn in RE).
Tech companies are hot right now because of Vista Equity's numbers. Tech companies appear nominally attractive in cash flow terms because so many tech companies pay staff non-cash. So you can acquire at an unreasonable multiple, load up with debt, and then leave employees holding your bags if it goes wrong...self-evidently though, no actual value is being created here beyond playing the capital cycle.
Most of the growth in PE is correlated to the growth in investors (both in the funds, and financing) who don't understand what they are doing. If you look at Europe, private equity activity has exploded higher with money-printing from the ECB and the growth in direct lending/leveraged loan markets (these have gone from 20bn to 150bn in five years or so...where it was in 2007, and lots of very unsophisticated private debt funds with poor incentives). Shadow banking all over again, no-one knows where the money is coming from, no-one knows where it is going.
Many struggling technology companies will go private to all them to substantially invest in RnD. This allows then to make those expenditures without having the overhead and distractions of having to be a public company where investors are expecting short-term returns. Further, these private equity companies may then roll up several related businesses in an attempt to create synergies through sales or product.
Yeah, I think there's a pretty big difference between tech companies going private (often to double-down R&D investment) and mature consumer brands going private (which is usually a way to extract profits and milk the carcass dry, see: Toys r Us, Olive Garden).
this +100. You see the later in manture enterprise software a lot more these days and it is not fun to be a part of it. You get to watch software development transition from a profit generator to a cost center, which changes the game completely.
I'm not an expert so below is only my personal take on the matter.
Being private allows for less accountability to people who might not be acquainted with the business, want short-term profits, or do not share the owners long-term vision for the company. All of these allow for more freedom in movements and limit the damages to those who understand the risks. On the other side, the company has more limited pool of liquidity sources and each of the investors might have stronger voice in shareholder meetings.
As a result, the public investor might not share the profits of the business, but it might not incur losses because of it as well. Therefore, private equity is just another business organization model which has its pros and cons.
Stock markets only look a quarter or two in the future. It's hard to do anything long-term like invest in R&D unless your numbers are so spectacular you can slip it in there. Very few public companies have numbers that good.
>Stock markets only look a quarter or two in the future.
How does this square with the valuations of companies like Amazon and Tesla whose share price performance is certainly not based on the next quarter or two worth of earnings.
Or pick any other top companyies' stocks which are collectively driving the market, presumably because they are expected to deliver years of more growth and cash flow.
The people with the authority to make the deal get paid huge sums for pulling the trigger. After that it doesn't matter to them that the company gets digested from the inside out.
