My firm supports 100's of PE acquisitions every year and I can tell you that your experience is far more the norm than what the parent comment has suggested.
The idea that PE comes in and sets eight figures of their own money on fire and ruins a business, shooting themselves in the foot makes no sense, yet every other story online is about them doing exactly that.
Of course there are LBO scams going on (more historically rather than currently) but these billion dollar firms don't come in and lose a ton of their own money along with money of their outside investors on a regular basis.
A startup going from being VC backed to PE is one that is greatly reducing its expectations of the future value of current work.
I can see how it would feel like the PE firm is ruining the business to a current employee. Projects that you worked on, saw a lot of money poured in to, that you personally still believe in; get shut down and you think "why would these idiots buy that just to shut it down? Must be finance shenanigans involving write offs and shell companies" when really they valued those projects at $0 or less when they bought the company.
> The idea that PE comes in and sets eight figures of their own money on fire and ruins a business, shooting themselves in the foot makes no sense, yet every other story online is about them doing exactly that.
On How I Built This, they frequently talk to companies that were bought out by PE. Some had negative experiences, but the majority were positive.
PE wouldn't be around for long if they always shot themselves in the foot and made terrible business decisions. They have a bad rap for taking over failing companies (or companies that are just well past their prime) and extracting as much value as they can out of them, but acquiring a startup is generally different I'd think.
They come in, reduce costs as much as possible, keep revenue coming in as long as they can while having huge dividends to said PE until they get so far into debt they are not sustainable. They'll swap to service providers that they either own or get a cut from and pay themselves.
Then their purchased company gets bankrupted, sells their assets to cover their debts (including said PE's 'debts' of services provided.)
They probably make 200-300% of their initial investment back by paying for the initial purchase with debt that is tacked onto the purchased organization and simply drain them dry. PE doesn't make a ton of money by being dumb, they make a ton of money using any and all tactics necessary to make big stacks in short time. Obviously not all PEs operate like this and there are likely many loopholes and strategies.
They bankrupt it by basically pumping it full of debt while taking money out and dumping it once it's out of money - zero liability with a LLC right?
Who’s the one offering them the debt in the first place? You’d think if it were so easy people would wise up to it and stop offering debt to PE owned firms.
This is very, very true. There is a huge proliferation of PE firms now too and many who are very unsophisticated, especially when dealing with smaller, family run businesses.
> yet every other story online is about them doing exactly that.
That's because this strategy is only normally utilized by the biggest PE firms (Apollo, KKR, etc.) who acquire large businesses (Toys R Us, Instant Brands, etc.) and those sell headlines. Net on net returns, it's much harder to turn a $1B biz into a $2B, versus a $10M business into a $20M business. So the large funds typically do a ton of creative financing to achieve returns and hence how they essentially bankrupt the companies. Sub $1B acquisitions usually this strategy doesn't make much sense.
LBO is how the PE firm finances the acquisition. Think of almost exactly like a mortgage. The bank ( = investment bank) doesn't want to maintain/manage the house ( = company) so they help fund the acquiring cost. Typically it's 50/50 (50% the PE firm uses its own fund and 50% it uses a loan from an investment bank "mortgage).
Post close, they might utilize a credit facility (usually a bank loan) where they can put debt on the company's books for specific initiatives (add-on acquisitions, hiring, etc.). There are some huge advantages to this because they usually can get loans at way better rates than a company could get if they went to a bank and got an SBA loan, venture debt, etc.
Not anymore, and almost never at small scale. It was massively abused in the 1970s to early 1990s but it's generally associated with the 1980s and specifically the book Barbarians at the Gate (which is an awesome read).
Today I would guess it's most associated with the Toys R Us and Sears failures, but surprisingly no one tends to talk about the Best Buy LBO for some reason...
No, it's one of many PE strategies. Almost all private equity firms utilize leverage in some form, but it's not universal and certainly not as extreme in all cases as the LBO shops.
What's also funny is the general certainty that the CEOs of Microsoft, Google, Apple, and every other large company are eager to destroy the company for short term profits.
Not that I don't believe you, but my personal experience dealing with outfits (as a customer) that have been acquired by PE firms is that they have ruined the thing they acquired approximately 100% of the time.
Growth equity blurs the line between traditional PE, on one hand, which spans buying and responsibly operating good companies to LBOs, which require cuts, and venture capital, on the other hand, which is more hands off but also more brutal if you don't look like you're flying moonwards. This ambiguity as to what "private equity" is might be clouding the data.
That's true. I equate Growth PE with "minority interest, positive profitability", VC as "minority interest, growth at all costs" and PE is simply "majority acquisition, typically profitable".
