Ready for a fun conspiracy theory? Guess where most PE guys start (i.e., where their base professional network is developed, where their expertise is, etc.). If you correctly guessed "Ivy League undergrad and business schools" and "investment banking", you can probably tell where I'm going with this. The gameplan is simple: lend your buddy the money to buy the business. Now you have a line to the person who has the most access to data about, if not control over, the direction of the business. Wherever it happens to go, you can be ahead of the market. Long if it's going to survive and grow; short if it's doomed. He's happy because the decision to be lenient or aggressive about repayment lies with his own contact - you.
How do you get businesses to agree to your terms? Well, they hired consultants at some point. Oh, those guys are your buddies, too. You have acquaintances on the BoD, too.
Why go through all the trouble? Besides the fact that you're becoming filthy rich, you also have the opportunity to remove rivals and consolidate markets under an n-opoly. More money. More control.
>"Unpleasant things are happening, we need some sort of regulation" doesn't seem like a sufficient basis for socially beneficial action.
How about fraud and insider trading?
I realize that this is a simplistic and somewhat paranoid take on the matter, but in a society with a broad and continuous history (distant and recent) of corruption at elite levels, maybe securities violations and revolving door employment aren't just for our politicians. I wonder if we're dealing with Occam's Razor: how are PE firms achieving phenomenal profits while the businesses they use to do so die? Easy: they're cheating.
> The gameplan is simple: lend your buddy the money to buy the business. Now you have a line to the person who has the most access to data about, if not control over, the direction of the business. Wherever it happens to go, you can be ahead of the market. Long if it's going to survive and grow; short if it's doomed. He's happy because the decision to be lenient or aggressive about repayment lies with his own contact - you.
But if the business is privately held (because the borrower used the loan to buy the business), then what market is the lender going long/short against in this hypothetical conspiracy? Other (public) businesses in the market? Potential investors when the PE firm sells and takes the business public?
That. Or, you have been shorting the company for some time, because you know it has been targeted for demolition. A PE takeover is the signal that you no longer need to hedge those shorts; the company, loaded with the debt used to purchase it, will soon go bankrupt, and you will be absolved of closing your short positions, for all practical purposes.
This may not apply to the subject of the article (PE firms buying medical establishments), but it may speak to the character of their new strategy. Perhaps they won't kill this goose because they payer has endlessly deep pockets.
> A PE takeover is the signal that you no longer need to hedge those shorts; the company, loaded with the debt used to purchase it, will soon go bankrupt, and you will be absolved of closing your short positions, for all practical purposes.
I think it's just the opposite: you'll be forced to close your short position when the PE company buys. When PE firms "take over" a public firm, they generally take it private, and the takeover involves buying all outstanding shares, typically at a premium over current share prices.
I don't know if that's necessarily the case, in practice. Aside from the cases where a PE firm does keep the company public, there's at least one case where short-sellers weren't made to close out their positions when a company was taken private (Next Bridge Hydrocarbons, if you're curious).
How did that work? The company became privately owned, but somehow someone was still betting on the price of some public shares in that company? How's that possible?
IIRC, public trading was halted several days early due to an "extraordinary event." It was never restarted, CUSIP was removed a few days later. Short positions weren't closed and long positions are sitting in brokerage accounts.
How do you get businesses to agree to your terms? Well, they hired consultants at some point. Oh, those guys are your buddies, too. You have acquaintances on the BoD, too.
Why go through all the trouble? Besides the fact that you're becoming filthy rich, you also have the opportunity to remove rivals and consolidate markets under an n-opoly. More money. More control.
>"Unpleasant things are happening, we need some sort of regulation" doesn't seem like a sufficient basis for socially beneficial action.
How about fraud and insider trading?
I realize that this is a simplistic and somewhat paranoid take on the matter, but in a society with a broad and continuous history (distant and recent) of corruption at elite levels, maybe securities violations and revolving door employment aren't just for our politicians. I wonder if we're dealing with Occam's Razor: how are PE firms achieving phenomenal profits while the businesses they use to do so die? Easy: they're cheating.