The irony is that PEs exist largely because of pension funds. So to sum it up (not so nicely) we are transferring value from our current standard of living to pay for retirement checks for our old folks.
Pensions fund a significant part of PE and they do so because they need around a 7% return in order to look solvent. If they do not have the higher PE returns, they basically go out if cash in 10 years and everyone would scream bloody murder. But with the higher returns from PE they have 40-50 year runways and people can pretend everything is fine.
So PE firms exist to extract value from basically all high quality goods and services to show a high ROI to prop up pensions. They extract wealth by buying up companies and gutting the “extra” things in them - for luxury goods, it’s quality, customer service and warranties (like my venta humidifier or reformation dresses), for services it’s stripping the underlying excess risk management and quality control. One can argue that PEs make the business more efficient but in my opinion they just turn worker or consumer related benefits into profits (stakeholder and business benefits). It’s a transfer of value from worker and consumer to business and asset holders at a massive scale.
But sadly it’s not some evil dudes at the top doing this transfer, the market force behind it is because we promised old people way too aggressive paychecks when they retired. Pensions need to invest massive amounts of money into higher rates of return and PEs just happened to be the medium that is the most successful. Sure the people running the PE firm extract a ton of value drying up all luxury quality and robust services from the daily lives of working families, but their take home is a tiny fraction of the wealth they extract (but yes they take home a massive amount of wealth for an individual). Instead the wealth extracted shows up on a 1400$/m for some old person probably living in a retirement home somewhere.
We solved pensions. People have defined-contribution plans now. I would expect insurance float to dwarf pensions as a source of PE funding.
The real reason PE exists is because it charges high fees. The financial industry does not make products to serve customer needs, though by happy accident that sometimes happens. It makes products to charge fees. Index funds removed a big chunk of the fees that active mutual funds used to charge, so financiers went looking for a replacement.
Even if you snapped your fingers and all remaining pensions (and insurance float?) disappeared, PE is aggressively going after individual retirement accounts, now. Most insidiously, trying to work their way into the "target date" funds that are the defaults for most plans. So "solving pensions" will not make PE go away.
Looks like about 18 percent, although I would assume there's a particular demographic where this might be higher.
Do they have to be paid out in full, though? I remember cases in the past where a company went bankrupt and had to renege on some parts of pensions, so maybe you'll see that again?
...no. It doesn't even matter what the rest of the words in the question are. Just no, lol.
> They need to be paid out somehow.
No they don't. Lots of pensions, especially the not-gilded ones, go bankrupt.
In fact, that's precisely what happens to pensions of companies that are acquired by PE. The company gets stripped for parts, it goes bankrupt, and PBGC covers a fraction of the affected pensioners' payouts.
In other words, with or without PE, bloated pensions ultimately end up being the taxpayer's burden.
I find this characterization offensive. Who is to judge if the defined benefit pension if a primary school teacher or fireman, for example, is bloated? It's part of the negotiated pay package, nothing more or less.
At least here in NYC, a large part of a NYPD officer's pension is calculated based on a 3-year look back from their retirement date, so there is a huge incentive to work as much overtime as possible in order to bump that number in your last few years of service. There are lots of stories of NYPD handing out easy overtime in massive numbers for each other, particularly when they are about to retire.
Teachers are the easy ones to point to, it is hard to be mad at an underpaid teacher who receives a reasonable pension for life. We certainly can be mad at NYPD scamming the system to get $100-200k/year for life.
All seem trivial compared to the money sucked up by billionaires, who seem to do little good for society. I'm not going to get angry at a police officer trying to maximize their retirement when we live in a society that celebrates people like Elon Musk, Jeff Bezos and Mark Zuckerberg.
One of the tools we use was bought by PE last summer. When it was time to renew our support contract had tripled in price. I use it across 10 projects so our costs went from $200k to $500k. I let our account manager know this was unacceptable but even his hands were tied. Cancelled those contracts and let them know we were retooling with a competing tool and opensource to fill those gaps. The impression I got was we weren't the only ones. Sales were getting squeezed between customers bailing and PE management wanting to stay the course.
I've seen PE make businesses more efficient by reviewing all contracts and dropping or renegotiating ones that no longer align. Closing product lines that aren't profitable. But that is year 1-2. By year 3 they start the squeeze, layoffs, asset selloffs (stripping), and lowering quality, raising prices. That is where the real teeth of wolf are shown.
> When it was time to renew our support contract had tripled in price.
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.
Yes, that is typical for a certain kind of management. Only costs that are visible and easily measurable are taken into account. Invisible costs or costs that are hard to measure are ignored, even though they may amount to a whole lot, up to the ruin of the company. Employee motivation is one example for the second type of costs, while the 500 bucks per month for pizza were easily seen and cut.
This is just the design of a PE fund. They run on a fixed cycle, so early on they heavily invest into their portfolio with the aim of resolving that risk and maximising the sale value by the end of the cycle.
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?)
> how successful they have become at aggressively optimising for market value
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.
That's only possible if the financial system is valuing things systematically incorrectly.
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.
> That's only possible if the financial system is valuing things systematically incorrectly.
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.
“ In principle, I don't think there's anything wrong with this. All investment expects a ROI over some time horizon”
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?
Bringing morality into it opens a whole can of worms that I don't think we have the tools to answer.
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.
That is a baffling response, no one suggested corporations have consciousness.
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.
> By year 3 they start the squeeze, layoffs, asset selloffs (stripping), and lowering quality, raising prices. That is where the real teeth of wolf are shown.
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?
As long as customers choose services based on quality.
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.
Unless the new company ends up more competitive than the pre-PE company, does it matter? Thats not a good outcome, thats just a period of bad time between 2 good times.
A lot of markets can't support more than a couple of competitors. And in many cases, you can't easily open a new company because of upfront expenses. E.g.: an emergency room.
This is true but to use your example of an emergency room:
It's not uncommon in more rural areas to find a business that is essentially "more than an urgent care but less than an emergency room". e.g. they aren't doing trauma surgery but they can deal with broken limbs, severe lacerations etc that an urgent care couldn't handle.
My point is that while it's true that there are "step functions" in certain services, this is not always the case.
Seems like their might be an opportunity to start a private equity that buys extracted software businesses for pennies on the dollar and then revive those businesses with actually valuable (to the customer) practices
Or maybe by then nobody trusts the name of the original company and it's just useless
Medium / large companies won't take the risk on smaller operations selling a new focused tool unless it's a major pain point. They'll pay more for less risk, assuming the PE-managed company will go out of their way with account management to address all their concerns.
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.
Companies have finite attention. Taking on the risk of switching tools often has a higher cost than paying more for the existing tools. There is a significant opportunity cost offsetting the savings. Trying to compete on price with a tool a company already uses is usually an exercise in futility.
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.
Because capitalism and customer brand awareness don’t work like your Econ class told you. There is a lot more nuance, starting with the inertia of customer’s awareness of brand reputation. But don’t listen to my ramblings, this comment in this thread does a better job than I would:
sure. not just that. certainly part of the issue is that the market is not perfect information.
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.
> The irony is that PEs exist largely because of pension funds.
The irony goes way deeper than that.
A large part of PE clients are university endowment funds.
Harvard for instance has close to $60B in its endowment fund, 40% of which is invested in PE. At this point, Harvard is more an investment fund, with a university as side business.
I think, if you were to say there is a way where you can take $10b and have that money make more ROI with less risk than $1000 can, people would look at it and scream this is broken let’s policy this out of our economy. It defies all laws of a balanced economy (not a capitalistic one, a balanced one). It’s just like monopolies and we have strong laws against that.
But… if you were to say hey we need to pay our old people and we desperately need some way we can deploy massive amounts of money at higher rates of return, people will say… hmm well it’s broken but the alternative is worse so we’ll ignore it.
But now imagine you have a way to deploy large amounts of money and get large returns off that money. Every large amount of money (endowments basically) will jump on it because why not? That’s literally an endowment dream scenario.
So pension funds are the moral reason these other huge chunks of money to get large returns. PE firms have become a streamlined business model because they continue to improve what they are good at doing, and it’s insane that we haven’t passed laws against it yet. Except of course we can’t mess with it because it touches government workers.
So yeah even if we wanted to policy it out of our society it’s practically impossible from a social point of view.
I think you have this pretty backwards. Private equity does not exist because of pensions. Private equity is investment that has not taken additional steps to be a part of regulated public markets.
It's true that private equity is dominated by institutional investors. One reason for this is that the investments are generally deemed to complicated, illiquid, and risky for retail investors (although the Trump administration is trying to change this).
Additionally, if we added the kinds of regulations, reporting requirements, standardization, etc, that would be necessary to scale this model to hundreds of thousands or millions of investors participating in an informed manner, we would simply recreate public markets.
I don't believe that's ironic. Harvard and other "elite institutions" are the places with massive endowments, not state colleges or anything. Frankly the more I think about it the more it's nothing particularly interesting, just a fractal representation of the privilege of wealth as far as you want to drill down.
Not entirely... U Mich's is ~$20 billion, UVA & OSU are both around $8 billion, UCLA's is ~$5 billion, the Texas + Texas A&M system have nearly $50 billion in AUM.
Lost in the commotion is the chaos that NIL is wreaking on universities and their donation funnels. The donations side of things seems to be rapidly drying up as a revenue source.
You often see them “monetizing the brand.” That’s a nice way of saying “betraying customer trust.” They buy a company that’s known for high quality and then cut the quality. They can keep charging the high prices for a while until people realize that it’s not what it once was. After a while, higher end customers realize what’s happened and stop buying. Then the brand typically becomes a mid market brand and they start selling on Amazon to a less affluent clientele who still associate the brand with quality but wasn’t in their price range before. They usually cut quality again at this stage.
Effectively it’s burning all of the trust built up with consumers as firewood by tricking them into buying mediocre products at high prices.
I don't get it. If pensions stopped existing, would people stop doing PE even though it's profitable? If it is possible to get outsized returns "because pensions need them" then isn't somebody gonna notice and get those returns anyway, pensions or not?
Slavery is profitable. People only stopped doing it when it was perceived as immoral.
Lots of things are profitable but immoral. People will do crazy immoral and illegal stuff for money, but we outlaw and slander the more abusive stuff, like monopolies and such.
If it wasn't pensions that were funding PE, I'm sure PEs would get a lot more criticism and would not be allowed to do what they do.
> Pensions fund a significant part of PE and they do so because they need around a 7% return in order to look solvent.
Pensions fund PE because PE can do a short term cooking of the books in order to smooth out the growth curve. So the return is usually positive each year, not raising problems.
Also what does significant mean? Pensions are the main mechanism non-wealthy people are investing in PE. Being that millions are involved, you would expect pensions would have a sizable portion of the market, but family offices and high net worth offices dominate. If it offers above average returns, why would they not invest? PE is like every other asset class other than housing, the top 1% own a large chunk, the top 20% own the majority, and the bottom 50% own very little. Decisions are not driven by sone fireman, they are driven by the wealthy like everything else. And the origin and continuation of pushing for retirement to come from capital investment comes from the wealthy as well.
> we are transferring value from our current standard of living to pay for retirement checks for our old folks
Well, yes, that's how any retirement (or any social benefit, really) system works: people who actually do work support the people who don't. Those latter include children, the elderly, pop-stars, politicians, etc. So unless you make people work until the day they die (which is possible, and have been done in the past, mind you — it just severely decreases the average life expectancy), we're going to transfer some of the created wealth to the elderly. The exact form of how this transfer is performed is a fascinating topic for discussion (make their direct descendants care for them! make a state-, or charity-funded fund to feed them hot soup once a day! make them save up for retirement themselves! lots of options, really) but it will still happen one way or another. After all, some people simply do have lots of money (and keep getting more) with doing no labour; some of them are retirees.
Because if you're hired as pension manager, and you just shove all the money into VTI, you're going to feel like you're doing nothing, and eventually someone will notice your job is redundant, even if you're outperforming your peers.
Relatively famously, the Nevada public pension investment manager relies entirely on indexed funds. He has one person he works with on the investment side, avoids the expenses of consultants and a large office, and maintains incredibly low fees.
And the people who hire pension managers are too stupid to see that active pension management is redundant? They haven't read A Random Walk Down Wall Street?
I have no idea how reliable this source is, but it looks plausible - from the "American Investment Council", which appears to be some kind of private equity trade association ( https://www.investmentcouncil.org )
- "Nearly 50 percent of the private equity investment dollars that make their way into American businesses come from public pension funds", which substantiates OP's thesis.
- "U.S. public pension funds invest 9% of their portfolios in private
equity, on a dollar-weighted basis." 46% is in public equity, so obviously the lion's share is in still in public markets.
This isn't surprising. Public companies tend to be lower risk (and therefore offer lower returns) than PE investments and pension funds want a mix of both. They want the juicy returns of PE deals, but a portfolio invested completely or mostly in PE would be unacceptably risky. Most pension fund mandates will set % limits on how much can be invested in different asset classes, with lower limits for riskier asset classes.
I've been saying pensions should not exist, as they are contradictory to our political system. Some politician 40 years ago can promise everyone the moon, and never force the next generation to figure it out. I'm from Chicago which has a nightmare pension system that's keeping me from ever buying a home in the city I love, because my property tax increases just go to retired people who moved to Florida.
I really appreciate this perspective as It helps fill in gaps in my mental model of where our economy has gone wrong the last 50 years. Unrelated but - I've read an interesting paper on how allowing private banks to create money has led to the infinite profit growth goose chase...
I own a house in Chicago and my property taxes are much lower than my friends in the suburbs.
I live in a working-class southside neighborhood. The people who are complaining about property taxes for SFUs in the city are people in neighborhoods with skyrocketing home values.
Those people stand to receive a massive windfall when they sell. And while it may be annoying for them if they find themselves having to sell when they didn't want to, the they're vastly better off than all then renters in that neighborhood who got priced out much faster with no windfall.
Nah. I own a property in the gold coast area, and my property values have barely changed in the last 20 years. I only see an insane increase in real estate taxes and assessments. These are the things that price renters out, plus the Chicago housing regulations that leave the landlords without any leverage under pretty much any circumstances and force the risk to be reflected in the rent.
Currently net profit from rental properties in that area is close to the interest on the equivalent amount of 10y bonds, without all the headache.
Well, I personally prefer having physical assets a lot more than cash. Just mentioning that to show that math does not favor ownership, provided that the rates stay high.
Note though that there is no shortage of demand for rentals either, so I'll keep increasing the rent following increases in property taxes and assessments, and people will pay. If anyone has a problem with that, let them bring this up with the City of Chicago and the Cook County.
The stuff that old people need in their retirements to live is getting more expensive due to the types of shenanigans that PE firms are doing. So their pensions appear solvent now but when those old folks actually retire, their money won't go as far? Doesn't add up. I think the people who are really benefitting here are the usual suspects - the ultra rich, and the PE guys at the top doing this transfer really are evil.
> So their pensions appear solvent now but when those old folks actually retire, their money won't go as far?
The pension people aren't being scored on doing well for their clients. They're scored on money. They don't care.
Ain't no different than some jerk in an insurance/regulator office cooking up a rule about PPE based on first order assessment of a bunch of crappy data. The guy who gets mashed by a forklift he couldn't hear coming doesn't hurt their KPIs. He didn't suffer occupation related hearing loss. MissionAccomplished(TM)
Pretty much every industry that deals at the statistical level whether it's PE making investments or something else runs in this manner.
I wonder if this creates opportunity for spinning up competitors to these PE owned companies. If they are underinvesting in their products in order to extract value eventually their offerings will not be competitive.
I think in theory it does, but in practice the customers of PE-bought companies don't update their priors fast enough.
If a company being purchased by PE meant that they lost the vast majority of their customers as soon as contractually possible, then the possible value extracted by PE would drop off a cliff.
This isn't necessarily the fault of the customers - we're all dealing with a lot of information to process.
And, up until recently, it was reasonable to attach reputation to brand instead of to owners.
And I think that's a lot of what PE exploits - the gap between people's belief about a brand's reliability/reputation, and the fact that the actual reliability has been a function of who the actual owners of the company are for many years - but people are still attached to the old mental model.
(there may also be some value for PE to extract from assets aside from customer relationships and the higher-order "brand value", but I suspect that that's secondary - if I'm wrong please correct me)
If you read the article it provides a good example. Fire truck businesses with a 4 year backlog and high margins. This is less competitive than the situation prior to PE consolidating it when it had much lower backlog and ~3% margins. Seems like a clear market opportunity.
Ah, okay. Sorry, I misread what you had said. I missed the “owned”, and thought you were saying the PE companies themselves would be uncompetitive—and wasn’t sure what you meant.
1. If you assume that P.E is uncorrelated/has a low correlation to the stock market (subject of many years of diatribes), then you decrease volatility of your portfolio by adding it.
2. Because a pension fund has a lot of years until they need start to paying out, then it is natural for it to attempt to harvest the illiquidity risk premium.
3. The (edit: removed extra words) "high required rate of return problem" is really a defined benefit problem. A DC plan can (and probably should) just be in mostly straight indices unless it's so big it can negotiate a good fee with asset managers for other classes.
My State is essentially screwed for budgeting, because for years, our public retirement system garunteed "AT LEAST 8%" to accounts. Some years was much higher. I have a parent that make more, 10 years after retirement, then they ever did working.
They moved around the year 2000 to accounts that don't have the AT LEAST clause, and they earn what they earn, but due to the backlog of people still retiring that were grandfathered in, its wrecking our state.
My city has a huge budget deficit, but 24% of its total payroll budget goes to the public retirement system to 'catch up' from years when it did not make 8%. Next year or two, that is supposed to jump to 28% of payroll.
Problem won't start getting better until something like 2034 when the boomers start 'leaving the retirement system'
The "advantage" for pensions is that they get to "keep the principal" (unless it's setup even more insane than normally) whereas with a 401(k) the residual gets inherited.
This reads as apologia, blame-shifting, "I was just following orders".
People have to eat. They need water. They need a roof over their head. Nobody has to buy out all the veterinarians in an area at rates they can't say no to, have them sign non-competes and them jack up all the prices by 300% because, hey, you now own all of them. Nobody has to buy up all the trailer parks, which are normally peopple's last stop before being homeless, and then jack up the ground rent because, hey, where else are they going to go? Nobody has to buy up utilities, spend big on capex because legally you can pass on that charge and effectively double people's electricity bills.
Hannah Arendt coined the term "banality of evil" [1] decades ago and, in all honesty, I think it applies to the predatory nature of PE. It also goes for working for Palantir and a bunch of other companies. "I need to pay my student loans", "I'm just doing data science", "I'm just writing AI software that identifies when somebody is home" and on it goes.
PE serves no useful function in society. It's pure rent-seeking and incredibly predatory in many cases. ~15 years ago, there was a story about Goldman Sachs invented a derivative on the price of wheat and then essentially conspired to jack up the price of wheat [2]. This wasn't just manipulating a ticker on a Bloomberg terminal. It had real-world consequences. People starved and died because of this decision.
Yet I'm sure there were people who argued "I'm just doing legally allowed financial engineering here".
Worse than vets is hospital system and medical offices. In our area there are about 6 hospitals within reasonable driving distance. 1 is a mayo and the 5 others are split between the two major mega-providers. One of those also partnered with CVS/Aetna to provide marketplace insurance, until they decided that didn’t have high enough margins so they dropped 100k (28%) subscribers.
The healthcare system is just rent-seeking upon rent-seeking. PBMs are another big one where the PBM gets to decide after the fact what your rebate is. No conflict of interest there when United Healthcare owns Optum, which I think is the biggest PBM.
I see the healthcare system's bloat as a symptom, not a cause of the expense.
It's kind of like the university system. It's a (mostly) privately run industry that gets massive injections of cash from the government because of both campaign promises (everyone needs healthcare, everyone goes to college and, bonus, everyone gets a house) and it being an incredibly unpopular position to either remove that funding or make the program entirely public which would, imo, alleviate both problems (but have their own unique drawbacks). The hybrid model we have is the worst of both worlds.
The hybrid system we have now of massive injections of public money into private industry is like blood in the water for do nothing intermediaries. PBMs are just the assistant dean of underwater basketweaving for medicine.
To clarify the main point is it is wrong but because it affects old people no one wants to crusade against it. It has the perfect moral excuse to hide behind.
I've been thinking about that comment and I don't think it makes sense. When it comes down to it, PE is really just doing two things:
1. Taking advantage of a pricing inefficiency; and/or
2. Using local monopolies, inelastic demand and regulation to jack up prices.
But what powers PE is the LBO (leveraged buyout). That is, you buy csome company with borrowed money and then you borrow against the assets of that company to repay your original loan.. That... shouldn't be allowed. Obviously that company is saddled with debt and it's usually structured to explode at some future point when the buyers won't actually own it anymore. I think of it like subprime lending in a way.
Now passive funds kind of have to buy sufficiently large companies. This has been an issue with the SpaceX IPO because SpaceX is doing a small float (~5%) and NASDAQ has changed the rules to essentially force passive funds to buy SpaceX where up until now that wasn't the case unless at least 25% of the company was available to buy. It's so nakedly corrupt.
Anyway, if a LBOed company saddled with complicated debt gets re-listed it kind of has a captive market of buyers with passive funds.
So going back to (1) there is long historical precedent for pricing inefficiencies. I'm speaking about the corporate raiders of the 1980s. The movie Wall Street was about this era (well that and insider trading). Essentially ailing companies would be trading below their book value. The book value was simply the value of assets (real estate, etc) so you could buy the company, sell it for parts and make a profit. All the lost jobs be damned.
The companies that tend to get targeted for PE own real estate. This has been a competitive advantage because yet other rent-seekers can't exploit them by jacking up rents. But real estate is an easy asset to sell to pay back your LBO and you can even split the real estate into a separate company and lease it back from that company. It's just financial hocus pocus.
Most (if not all) gov't pensions still have the defined benefit part as the "optimal" choice even when they offer defined contribution plans.
They can also offer some really nice benefits like accessing your pension income at 55 which can be a substantial portion of your last year's salary, and you can keep working elsewhere if you want.
> we are transferring value from our current standard of living to pay for retirement checks
Isn’t this just what happens when you have an inverted pyramid (older population is larger than the younger population)?
> One can argue that PEs make the business more efficient
I’ve never seen it (I agree with you). To improve something they’d have to understand the business and do a bunch of work. Mostly they show up at quarterly meetings and want spreadsheets that measure some number that will go up (regardless if that number means anything).
I was thinking that Covid and widespread antivaxxer mentality would have.
But no. This will be the latest ladder-pull by the boomers and silents to extract the last bit of wealth from all the younger generations. And this will impoverish gen-x and all younger generations even more so than we already are.
It goes beyond boomers (the boomerdoomer is already in full swing) - as they're dying off, most new employees do not have pensions (instead having defined contribution plans which have their own issues) - except for a few very large swaths, namely government and education.
lol we know that the vaccine did not stop the spread and didn’t even prevent contraction. I was double vaxxed but they did have some things correct that we were in fact lied to about.
It lowered the chances, and in case of getting sick it also massively lowered the chances of getting the worst side-effects, exactly like any other vaccine does.
It's a shame that even highly educated populations do not understand a basic fact of immunology.
"The durability of protection against infection and hence transmission was relatively limited."
— Fauci, 2024 congressional testimony
Anybody that questioned the religious dogma that the vaccines were super effective and that healthy people needed to get endless boosters were crucified and in many cases, fired from their jobs for refusing an unnecessary medical procedure.
There are so many things that went wrong during the pandemic. You were not lied to, that means someone has intent.
The lesson was not that vaccines are bad imho. I do not live in the US, so I just find it tiresome to listen to you guys blaming everything on people. There was no right way.
Everyday I am infinitely grateful I have the ability to understand nuance, and the mental firepower to be able to comprehend data coming from sources rather than tiktoks, twitter, and hyper-partisan news orgs.
No one ever said the vaccine would prevent transmission. What they said was that it !could! prevent transmission. But no one would know before studies were done. What they did say is that it would lower mortality rates. Which it did in fact do. But the factors of transmission and spread were dice rolls. And everyone with first hand knowledge knew that from day one.
But, you are in fact correct, you were lied to. But not by anyone with knowledge of the vaccines, but by the grifters you hold up has being "a beacon of truth". The grifters who read "Vaccine has a chance it could slow or stop transmission" and turn around and say "They are promising it will stop transmission!" just so they can tear it down later as "another victory for TRUTH!".
‘“So even though there are breakthrough infections with vaccinated people, almost always the people are asymptomatic and the level of virus is so low it makes it extremely unlikely — not impossible but very, very low likelihood — that they’re going to transmit it,” Fauci said.‘
Extremely unlikely is a lot stronger than reduced. Calling it breakthrough implies that the norm is prevention. Obviously nothing is 100%.
Preface: I have been in favor of the COVID vaccine and disease mitigations (and wish we would have used this opportunity for clean indoor air...).
I'm willing to accept my memory is wrong here with evidence, but I remember a very strong narrative in the early period claiming that the vaccine did in fact prevent contraction and transmission, to the point where it was supposedly surprising when "breakthrough" cases started being reported.
It's possible there was some loose language around "prevent" as I did see that especially later on, but I have trouble finding reliable information on what they actually believed and if they actually reported this accurately to the public.
There is the unfortunate mark against where they knowingly promoted misinformation around masks - persistent through today - that they were ineffective, in an effort to direct uncontrolled distribution of masks to medical professionals most in need.
Exactly. IN cases of national or world-level event, governments and government related bodies (WHO) will do whatever they can as not to cause a widespread panic. And if that means lying, they will absolutely do that.
A world-level 6 week pause would have burned covid and a whole lot of other diseases out. But no. Poor capitalists need their 3rd yacht, 13th vacation home, etc etc etc.
As for me, my SO worked in health care. And Covid is a SARS. We have decades of effects and response. The shit's airborne. WHO knew that. CDC knew that. But they lied and lied and lied.
We take our healthcare in our own hands. I'll critically listen to the "experts" and deal with med doctors for prescription drugs. And Im definitely interested in my own manufacture of pharms https://fourthievesvinegar.org/ . But yeah, the wider and general the message, the more propaganda it likely is.
And we also have a good stock of PPE now, including a few tyvek suits. And everclear is 95% alcohol and $30 here for a handle. Best sanitizer you can easily acquire and food safe to boot.
EDIT as comment to WarmWash:
No. The WHO and CDC lied about Covid being an airborne infection. They refused and refused, up to then redefining what an "airborne infection" is.
Covid is a SARS. Airborne. SARS requires BSL3 to handle properly. https://en.wikipedia.org/wiki/Biosafety_level#Biosafety_leve... "Biosafety level 3 is appropriate for work involving microbes which can cause serious and potentially lethal disease via the inhalation route."
I dont need international experts to tell me a stream of bullshit, when I can look at the type of disease and go "wellll fuck, airborne. time to wear masks outside the home and no parties or events. and go to store when its not busy."
Was Covid as bad as SARS? No. But is SARS response something that can be compared to what we should have did for Covid? Hell yeah.
No, if you wanna fix or ban PE, ban PE. PE is just a really easy and safe way for financiers to make extra cash, with huge externalities that everyone else pays for. The people benefiting from this are those who already have a lot of capital, and while it is true that old people generally have more than young people, don't fall for this simplistic generational warfare narrative. PE is also going after retirement homes and elderly care services.
It's just a ploy for the wealthy to extract even more wealth from the rest of us, while stripping the country for parts and dooming the actual economy for years to come.
If the government guaranteed basic human needs are met for every person (food, shelter, healthcare) there would be less of a need for giant pools of public money (pensions, insurance) sloshing around.
Mass index fund investment is basically socialism but stupid. My retirement money is going to get invested in the SpaceX IPO against my will. The market is not efficiently allocating capital, it's structured to allow elites to skim off the top while forcing middle class people to subsidize them.
Huh, that somehow reminds me of Crassus from Rome [1]
> The first ever Roman fire brigade was created by Crassus. Fires were almost a daily occurrence in Rome, and Crassus took advantage of the fact that Rome had no fire department, by creating his own brigade—500 men strong—which rushed to burning buildings at the first cry of alarm. Upon arriving at the scene, however, the firefighters did nothing while Crassus offered to buy the burning building from the distressed property owner, at a miserable price. If the owner agreed to sell the property, his men would put out the fire; if the owner refused, then they would simply let the structure burn to the ground. After buying many properties this way, he rebuilt them, and often leased the properties to their original owners or new tenants.
TLDR: Got over his skis and mad with power and money. Decides to invade Parthia. Gets wrecked by horse archers. That ends up being typical for Romans, but this was the first-ish time that happened. Some of those captured legionaries may have ended up in China, though it is unlikely.
Not going probably never even crossed his mind. Social status in Roman society was very strongly influenced by military success. He was a previously successful general.
Historically (with all the accuracy you get when you summarize all of history) raising an army and not leading it was effectively telling everyone that you should be replaced by whoever did lead it.
>Upon arriving at the scene, however, the firefighters did nothing while Crassus offered to buy the burning building from the distressed property owner, at a miserable price.
Article doesn't really dig into the angle I personally find most horrifying, strip-mining social capital.
In my area PE is gobbling up mom-and-pop apartment complexes, plumbing companies, restaurants, and generally making customers and employees alike pretty miserable.
Hard-working founders should be able to cash out, but there has to be a better system than this one. Succession, maybe. Not that we should push an unmysterious destiny on our children, but maybe more ought to consider pulling one?
> Hard-working founders should be able to cash out, but there has to be a better system than this one. Succession, maybe.
The large PE buyouts that came from the ridiculous ZIRP period could deliver better financial stability than handing the business down.
I know two families with businesses that attracted huge PE offers in the past few years. One of them took the buyout and the family members slowly left their jobs at the company because they effectively been early retired by their buyout.
Now the kids are looking at new businesses to buy and start for themselves with this new financial freedom that has come to the family. One of their considerations is starting another business in or around their old line of work that was sold off. They have to wait until the contractual non-compete expires, but if the PE owners are really making both the employees and customers miserable then it becomes a golden opportunity for experienced operators to come in and run a good business in the vacuum. Even many of the old employees have expressed a desire to join.
The bad PE phenomenon buyout is annoying, but businesses that become miserable for the customers and employees are not stable long-term businesses. When they decline because competitors show up to do a better job and retain better talent, it becomes a transfer of money from the lenders to the old owners and an annoying churn in the local business scene. As we see more of these failures, the willingness of banks to lend for these buyouts will go down.
I knew of a family-run hoagie shop that sold to "investors" (not sure if it was PE, probably was) three times, each time they ran it to shit amazingly quickly, and they were able to buy it back for a song and fix the damage.
This is surprisingly common. I know a few people that recycle their businesses through PE, getting a payout each time.
The trick is that the business owner has a good relationship with his customers. After the PE investors run it into the ground, they can credibly reach out to customers directly, assure them that the adults are back in charge, and basically be a hero to the old customers who hate what the business became.
Yep! These situations are annoying for the customers, but an amazing opportunity for people trying to run good businesses. Let the bad operators run a company into the ground and then buy the pieces at an amazing discount.
Agree. I think that's what "Owner Operated" used to mean. Would be interesting to have a certification for these businesses. I've also started collecting related links:
I think part of the problem with the succession idea is that a lot of people in these positions worked these hard jobs to try and give their kids a better life. They encouraged their kids to go to school for their passions and now those kids are in careers far removed from what their parents did.
Instead of succession, I wonder if there is a way to make it easier for these people to sell their company when its time to retire to someone who is looking to start the next step of their career. A lot of software engineers joke about becoming farmers, but if they could instead make an easy transition into a small business by buying a small business, we could prevent PE from raiding things.
The vast majority of people can’t just go out and buy a machine shop or laundromat and then start running the business. It’s a risky asset, not like a house where you put down 20% and any bank will loan you the rest. I’d love to own a small franchise restaurant or something in my town but they cost millions that I don’t have.
And that’s before you even make it to the question of “can the person that manages to buy it actually live off of it as a lifestyle business?”
sure but a restaurant is always going to be a risky asset. I am thinking more in terms of a plumbing business. It's a business that will always have a need, no matter the economy because a bursting pipe doesnt care if its a recession or a booming market.
I guess what I would like to see is a pathway to making it easy to buy or start up crucial businesses like a plumbing business, HVAC company, etc. As the current generation of owners want to sell and retire, we should make it easier for people to be able to get in there and buy these companies before PE can.
A plumbing business doesn't have "assets" though; it's valuable because the owner is good at their job. You can't durably "sell" that brand value unless the new owner is also known to be great at their job, at which point they don't really need to buy your business.
Family businesses handle this by slowly getting the next generation involved, such that the intangible value has been transferred by the time the owner wants to retire. That works less well with a stranger. You really need high levels of trust to make that work fairly for both parties.
I wonder what would make it easier for a regular person to buy a mom-n-pop plumbing business, besides financial help? If the owner wants $5M for it, and you (or a PE firm) walk up to him with $5M, it's yours. The mechanics of buying the business aren't particularly hard--the hard part is obtaining the capital.
The thing is those businesses can't really be "sold" because they make enough money to support a few families, but they can't do the same AND carry the debt-load necessary to buy it.
So they can only really be inherited or given away (and they often are).
But if it's not to kids on death, it's moderately difficult to give away a business that has "paper value".
Yea, I occasionally go to estate sales, and a machine shop going out of business popped up on my radar. Went down there to buy a few power tools, chatted up the elderly owner, and asked him why he was selling everything. The shop had everything, and would have been a really cool business to own and operate! He said 1. his adult kid had no interest in running the business, and 2. he couldn't find anyone willing and able to buy it for more than he could get by "parting it out" and selling all the assets.
I'm sure there are tons of people in my local area who could happily and successfully run such a business, but nobody can swing it financially. The initial financial hurdle of going from "not a business owner" to "a business owner" is real.
Yep, and if you're starting on your own, you might as well get new equipment and such built and made for you.
Same thing happened with a restaurant - nobody wanted to buy the business so it shut down, even though you could have bought the whole business for the cost of the building, basically.
(There's a path for entrepreneurial "youngsters" - identify these businesses 10 years before, and become a valuable employee in such; I've seen them given away for a song to such. Of course, in some of them they also ended up with the daughter, so ...)
I think the other thing is the older generation are of the opinion that a steady paycheck is somehow safer than owning your own company, mostly because most of them never sat in the other side of the table.
This leads to them pushing their kids to be employees even though that's...really contradictory to their actual lived experience.
yea the side of the table they sat on is one that fluctuates month over month, year over year. They recognize that it can work out, but its a gamble whereas working for a steady company (pre 2026 I guess) is the better option for their kids.
Succession is hard for businesses with a majority "intangible" value. Think private practice doctors: your patients are with you because they like you as a doctor, so the "value" of your business is tied directly to your continued involvement.
Family businesses have traditionally gotten around this by having their children involved for 10+ years prior to taking over. That way, you slowly transfer your "social capital" to the new owner (in this case your kid). This is understandably harder to manage with a stranger, because you can't transfer the value before they buy it, but they won't buy it if they can't guarantee you'll help them transfer the value.
> Hard-working founders should be able to cash out
Why? Operating a successful business should be remunerative on its own, or else it's not successful. Owners who don't want to do it anymore can let it become worker owned. If they don't want it, it can dissolve. What else do you need? The very concept that the end of a successful business is a big payday for its creator is itself the poison here. There is no end just another workday, success is ongoing not final. This is natural and correct.
When my parents started farming they had about a half dozen large loans for the base farm, land, equipment, buildings and an operating loan to purchase seeds and other inputs in the spring.
When they retired they didn't have any money in the bank besides the proceeds from their final harvest, but all their loans were paid off. That's where the profits went -- paying off the loans.
The farm was their retirement savings. They sold it off for high six figures, and that's what funded their frugal but comfortable retirement.
The neighbor's son bought the farm; I hope he's pretty much paid off the loan he took out to buy it.
But that's how it is supposed to be. You "just" need to have a system that incentives banks and small entrepreneurs to take on that risk, and makes it not a good investment for PE.
What makes that system rare is that there's a buyer who knows the business available. The new owner needs to understand the industry and convince the bank that they know how to run it as a successful business. PE do their homework on the business before they buy it and don't have to convince the bank that they know what they are talking about. The neighbors son isn't usually an expert on the your business.
I generally agree, but this point of view shifts the blame from one big, evil, soulless PE firm to thousands of small shops owners that just wants to "retire comfortably". It's not easy to sell because one can easily sees oneself as that small owner, but not as a big evil PE.
It's the same with gentrified zones: yes there are some dark patterns going on as well, but mainly is previous, smaller owners that want to make big bucks by selling to someone with money from outside rather than someone local like themselves for less money.
Sorry you're right, I should have been more careful with the phrasing there. The structures, risks, and incentives that make business owners believe and act like this are real, and that's the poison I was pointing at.
I'm not trying to put all of the blame on individuals responding to the pressures being applied to them. But neither am I accepting their abdication of the responsibility to act with honor and courage in the face of those pressures.
My guess is owner-operator selflessness is a key ingredient in a lot of beloved small businesses. I don't know for certain that the winning personality for getting a business off the ground on all the bad days is the same one that raises rates proportionally with their success.
So it becomes all-or-nothing. It's my friends and neighbors when I'm working, when I sell-out it's purely business. No in-between.
I agree. It's a major problem that people who are usually, not always, already very well off decide to do a final "fuck you I got mine" and sell their business to a company they damn well know is going to strip it for all it's worth.
This scene from Ubik has been coming back to my mind very often recently:
The door refused to open. It said, “Five cents, please.”
He searched his pockets. No more coins; nothing. “I’ll pay you tomorrow,” he told the door. Again he tried the knob. Again it remained locked tight. “What I pay you,” he informed it, “is in the nature of a gratuity; I don’t have to pay you.”
“I think otherwise,” the door said. “Look in the purchase contract you signed when you bought this conapt.”
In his desk drawer he found the contract; since signing it he had found it necessary to refer to the document many times. Sure enough; payment to his door for opening and shutting constituted a mandatory fee. Not a tip.
“You discover I’m right,” the door said. It sounded smug.
From the drawer beside the sink Joe Chip got a stainless steel knife; with it he began systematically to unscrew the bolt assembly of his apt’s money-gulping door.
“I’ll sue you,” the door
said as the first screw fell out.
Joe Chip said, “I’ve never been sued by a door. But I guess I can live through it.
The classic example is airline deregulation which happened under Carter. The real cost of flights is way, way down since then. But this doesn't stop people from complaining about how "flying is a worse experience now" and wishing for a return to inane regulations.
> The US economy generally did very well with those standards
Spurious correlation. Few experts (economists) think old regulations caused economic growth.
If we really want to recreate post-war growth, we should destroy half our infastructure and fight a world war. Then, in the years following the end of that war, we can experience catch-up growth.
Statutory antitrust regulation would be fantastic. Instead of litigation, the regulators, corporations, and shareholders know when a business must split or divest. The firm files a plan, it gets approved, everyone wins except monopolists.
Not a bad idea honestly. Would be interesting to see how it affects tech companies since they rely on hypergrowth. My one worry is that instead of divesting they would just play shell games with complex ownership structures.
free market capitalism will always end like this though. the end goal of capitalism is the consolidation of all things into a megacorporation or oligarchy that controls everything, creates nothing, and earns infinite money
Why is this downvoted? To me, it seems like a self-evident conclusion. Even the supporters of the current system would probably agree with it. When you have a system that encourages endless growth at absolutely all costs, while placing no limits at the amount of power a single entity can hold, what other outcome can there be but the biggest players absorbing everything into themselves and using their influence over people and governments to guarantee their dominance?
We haven't had a free market in the United States in awhile. It's public-private partnered market fixing. Which is good for the consumer, many times, though not all the time.
Is there a difference in terms of outcomes? In the final form of a complete 'free market' without a government, the biggest entity would simply replicate the same levers of power that a government has through private militias, issuing scrip, having their own private courts and so on. But, since the US has a powerful government, it's much cheaper, simpler and more stable for them to just buy out as much of it as possible and use the same power through a proxy. Admittedly, the US government is not completely controlled by them, so it could still get much worse.
I had the pleasure of growing up around gray markets (relatively free, bribes were predictable & reasonable enough for an average noodle seller) in Southeast Asia in the 90s. It's quite different from large corporations getting Federal agencies and municipalities to lock out any potential competition. The enforcement of the US govt is far stronger than the enforcement of a handful of corrupt cops, as each precinct is essentially its own feudal regime, and within the department you have individuals mostly loyal to their families. A corrupt cop in a corrupt system driven by loose associations of extended families & fictive kin groups, one of five in a neighborhood say, can be pressured by a group of aunties and uncles serving street food or pirated goods through a web of personal relationships. This was much easier for them than hiring a lobbyist here would be.
I'm not saying it's better, rule of law has many benefits, but it is an example of where there were markets which were more free, that did not have cyberpunk outcomes, and they were quite different.
I'll say that I don't know anything about 90s SEA, but I know a bit about gray markets. One thing that stands out to me in your description is that all the corruption is incredibly localized and small-scale. Everything happens at the scale of individuals. And I don't deny that living under these conditions won't be that bad (a single corrupt official's power can only go so far), but what's stopping it from eventually becoming more organized? With us encouraging endless growth of wealth and influence, corrupt individuals are bound to form groups, then rings, then whole organizations. To me, what you're describing seems like a transitory state caused by societal factors, instability and simply not having had enough time. What the thread is all about is end states. We're already in a place where removing government regulation would turn our biggest players into those same cops, except with trillions of dollars, offices in every country and an ability to get their hands onto anything that money can buy.
I'm saying that those biggest players and our governments already work hand in hand to do that. Which is to say, the government is used as the enforcement arm for corporate interests. This is less "free" market, and more market commanded by interests.
These mega-strong players always kill themselves and collapse. We can see this on the global geopolitical scale (which fundamentally acts as a true free market), where all the empires have always fallen.
The stressing part is when they are at their peak, so people would like to use regulation to short-cut right to the collapse part.
The only example we have a true free market victor that hasn't collapsed is humans, who have totally and completely dominated all other life on Earth, but man, it's certainly not looking good for us right now.
But does that collapse happen because of some universal axiom about controlling humans, or were those empires merely limited by what was possible in their era? This is the first time in history we have so much military power, ways to exert influence that's truly world-spanning, the most sophisticated technology and the most thorough surveillance ever - all at the same time. Whatever barrier there might be, who's to say that today's megacorporations won't be able to push past it?
I'd say the axiom is that as your system becomes larger, more complex, the number of stable states it can exist in shrink. Which is something that is just generally true about systems.
We can envision a future with an ASI controlled super corporation that owns everything with omnipresent micromanagement, but then why would the ASI even bother with humans. That event right there would be our "got to powerful for our(humans) own good" moment.
In my experience, most self-proclaimed "capitalists" either lap up the scholastic propaganda that capitalism is the 'bestest' economic system in the world, or are a real capitalist and don't have to give one fuck about what others say.
And most of these types NEVER read past, say, page 20 of https://www.gutenberg.org/files/38194/38194-h/38194-h.htm , Adam Smiths treatise on capitalism. Here's a few failures that Smith wrote back in his initial treatise in 1776. I think so far, we're failing every one of these, and basically speedrunning all the terrible warnings Smith wrote about as accomplishments.
Gross inequality was even mentioned there as something to significantly avoid. Book I, Ch. X, Part II; ~p. 50
Principal-agent problems in joint-stock companies. Managers of other people's money "cannot be expected to watch over it with the same anxious vigilance" as owners, leading to waste and negligence. Book V, Ch. I, Part III; ~p. 312-313
Mercantilist policy distortions. Protectionism, export bounties, and import restrictions enrich narrow merchant interests while reducing national wealth by intentionally misallocating capital. Book IV, Ch. II-V; ~p. 183-213
Underprovision of public goods. Markets fail to supply infrastructure (roads, bridges, canals, harbors) and institutions that benefit society broadly but yield no direct profit to private actors. Book V, Ch. I, Part III, Art. I; ~p. 303-305. https://www.independent.co.uk/news/world/americas/us-cities-...
Dehumanizing effects of extreme division of labor. Repetitive specialized labor "renders [the worker] as stupid and ignorant as it is possible for a human creature to become," impairing civic and moral capacities. Book V, Ch. I, Part III, Art. II; ~p. 324 . Even in the 1800's this got so bad that Karl Marx wrote about this in both of his critique of capitalism AND the communist manifesto.
Merchant collusion and monopoly power. Smith warns that "people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices". Book I, Ch. X, Part II; ~p. 54 . Hello, eggs, meat packers,oil products (gasoline), grocery chains, electronics (RAM), health care. Collusion after collusion, and almost no enforcement.
Im not communist, and probably not socialist. But its clear as day as to the failures of capitalism. And as a stopped clock is right 2x a day, capitalism does handle some problems better than any previous system. But we can do better. Lots better. But the entrenched power holds on to capitalism as fervent as a religion, and not dispassionate analysis.
How will that work - for example Y Combinator classes. They cannot be acquired? What about acquihires? Cant stop that - employees have their own agency.
> How will that work - for example Y Combinator classes. They cannot be acquired?
For the record: national economic policy shouldn't revolve around Y Combinator classes and similar startups.
I'm totally fine if it turns out a sensible antitrust policy completely destroys the acquisition exit pathway for tech startups. I'm not saying one will, but I'm saying that's a cost I'm willing to pay.
YC startups could just become mature businesses. Nothing wrong with providing a good service, earning a good profit, and employees maturing into stable careers.
I think the really important question is HOW this will happen. If you mean for the state to buy them at fair market value, nobody will object to that, not even if it closes the door to private equity.
But that's not what you're talking about, is it?
How about doing what America used to do? Provide seed funding for a new fire truck company in trade for condictions. Can we agree to do that? Fund 3 companies to make fire trucks, fast-track whatever certification and approvals they need. Create the companies we need, risking (and in fact expecting to lose) a bunch of the capital used for this.
The OP explicitly answers this: go back to pre-80s antitrust policy. Companies can be bought and sold but not if it creates concentrations of economic power that allow them to dictate prices to vendors or customers.
And they want to do it again and enforce anti trust laws? I don't see any contradiction here. Break up faang and keep a close eye on all these acquisitions the ai companies are doing and why they need to own package management and code editors and etc.
Yes, breaking up things wasn't bad, it was the completely lax failure to continue this action and to regulate corporations that got us rafts of stupid ass legislation culminating in citizens united. "Too big to fail" companies are just government entities that are not regulated properly.
> It did not work though. Bell and Standard Oil are notable examples. What else?
That's pretty unfair. IIRC, Standard Oil was on of the companies that was the impetus for antitrust law (and broken up by it), and AT&T was broken up (famously) in the 80s.
Basically, your "argument" is a troll or a deep and basic misunderstanding. Especially in the case of Standard Oil. You're basically saying the law doesn't work because it didn't work before it existed (Standard Oil became dominant in the 1870s or 1880s and the Sherman Antitrust act wasn't passed until 1890).
1. If you are proposing something even stricter than previous antitrust rules, great. But getting back to antitrust itself is actionable is step 1.
2. You don’t have to prevent every case before it happens so much as just stochastically go after the worst ones to make it less economical for people to go take on debt to have huge swaths of consolidation. Letting the market work, after pricing in that egregious monopolies will be broken up, is kinda great and better than minutely scrutinizing every tiny deal for long-term consequences.
If you want to move the goalpost of the conversation that's fine, but it's different from what the previous person was talking about, and why it doesn't make sense to blow up at them for it.
> You are a troll. There's nothing left to say. Bye.
is a wildly disproportionate response to the post, IMHO.
> Should Microsoft and Amazon have been able to buy Anthropic and OpenAI 5 years ago?
Antitrust enforcement can be done retroactively as well, if it appears that a large company abuses its financial firepower to undercut competitors or a marketshare gets too dominant.
It was absolutely actionable and implemented as policy for decades, what are you even talking about? Your phrasing pretends this isn’t exactly how antitrust enforcement worked before the much more recent approach began.
You're alluding to some second order effects which are real but also able to be dealt with, and have been.
Montgomery Ward thought it was "too big to fail" and too powerful to regulate.
So, what happened?
If the US government wants to, and it has in the past, it just takes your business at gunpoint.
4 soldiers walked into the ultra-conservative owners office and made him leave. Two of them picked up his arms and legs, took him outside, and deposited him on the sidewalk.
> a major U.S. CEO being physically evicted from his own company by armed troops became one of the most famous news photos of the home-front war
If the acquirer has too big or dominant position already in the specific sector no. They should not be able to sweep the board of all companies doing single thing.
If the acquirer attempts to acquire a startup (regardless of investor) for anti trust reasons, or there are anti trust concerns, the M&A activity is disallowed by regulators. A recent example is Figma and Adobe.
What definition of success are we using that having over $7 billion in net income after expenses in 2025, and nearly $2 billion so far this year, is "doing very poorly"?
It really is sad that any disagreement with “pe is bad” means i am concerned trolling. Ever consider the guidelines are actually vague which is why usa keeps failing in attempts to enforce?
Don’t confuse the nature of the feedback you’re receiving here. Your comments in this thread are so obstinate and so far from this forum’s standards of good faith argument that community members can’t help but perceive you as a troll.
Nobody likes this state of affairs so we are asking you to stop strawmanning and start steelmanning the posts you are responding to.
You are clearly not dumb, so stop responding to the dumbest possible and easiest to dismiss interpretation of other people’s comments and instead go deeper
> Ever consider the guidelines are actually vague which is why usa keeps failing in attempts to enforce?
Your cause and effect is wrong.
The US doesn't fail to attempt to enforce, the gov representatives often get paid to not enforce by said corporations who have been allowed to put money into their campaign for election/reelection.
I am not an anti trust enforcer or scholar, so I'm going to defer to experts in the field: Lina Khan, Matt Stoller, etc. That is the point of experts in a domain.
Quite clearly the word "consolidation" is referring not to acquisitions, but to M&A activity that achieves a certain level of, you know, consolidation.
Generally you don't hold a market dominant position in any sector that anti-trust regulators care about at 15 employees?
Frankly this stuff is impossible to talk about in the abstract. The details of every individual case matters. If you're actually curious (instead of just playing a shell game), you can go look up the types of analysis that FTC does to evaluate market dominance and whether a given transaction will excessively consolidate a market.
What's rarely addressed in these articles is the question: if the product/service is so bad relative to the cost, where's the competition? Specifically in this article about fire trucks, they say that margins have tripled... ok, why isn't anyone jumping on that?
I simply don't understand why leveraged buy-out(LBO) is allowed in the first place. It is like paying for the company with the money from the company you are buying.
As a business owner, if you want cash today because you are done with a business. You could go to a bank and get a loan to pay dividends. This is a bad deal for the bank as you have no incentive to operate the business after you cash out the loan. A private equity firm comes in and operates the business on the model that they still keep some of the profits after the loan value.
The crappy side comes in as a customer, the PE firm can do this to an arbitrary number of firms in the area and raise prices on each/cut services. PE firms can trivially build out monopolies. Many of these monopolies will be invisible as they leave the existing branding etc. in place.
That in itself is reasonable. However governments choose to encourage it with tax systems that mean you pay less tax by increasing debt. This is the main thing that breaks capital structure irrelevance: https://moneyterms.co.uk/capital-structure-irrelevance/
> As a business owner, if you want cash today because you are done with a business. You could go to a bank and get a loan to pay dividends.
If you are a business owner you could borrow yourself using the business as security.
but then you would need to keep running it, what if you don't want to do that anymore? how do you incentivize someone to keep it going to pay off the debt you just borrowed outside of the llc.
Private parties are allowed to make bad business decisions: Lenders can give loans that might not pay back. Businesses can take on a lot of debt and cash out the owners if allowed under the terms of the loan. A PE buyout isn’t even necessary to do this. The owners could load the company up with debt and pay themselves a lot of money if they negotiated the right loan terms. One of the suppliers I used for a while did exactly this, enriching the owner and then collapsing.
One correction is that it’s not like paying for the company with money from the company you’re buying, because that obviously wouldn’t benefit the sellers. The money comes from a lender and they get terms to take the business if the loan terms aren’t meant. The lenders are the effective new largest owners of the company with the PE firm being a smaller owner but the expected primary operator.
LBOs are much worse than that. It's like buying a rental property where the mortgage is owed by the a shell corporation that owns the property. The shell corporation, not the purchaser, owes the debt.
It's like taking out a mortgage on a house, but letting the house owe the debt.
When you put it like that, you make it sound reasonable! The house being collateral for the debt seems in a blurry way to be "the house owes the debt".
That's not especially different from the typical LLC/SPE holding structure where individual properties in a large real estate portfolio are not held directly, but rather by a single-purpose entity that holds each property and then is owned by a larger but distinct entity. You don't want an issue in a single company/property to be able to take down your entire holding company. If someone will lend you money without cross-collateralization, why wouldn't you prefer that?
If PE firm A wants to buy company C using an LBO, it could do so by having C borrow money and then A purchase C, or by creating an entity B that borrows money and then purchases C. Whether B or C owns the debt doesn't change anything meaningful for A, and it's pretty clear that you're allowed to form company B (and really hard to imagine how you'd make that illegal without effects that would be worse than current).
>If someone will lend you money without cross-collateralization, why wouldn't you prefer that?
I would prefer that! I'd prefer even more strongly that the debt be owed by someone else entirely, so a default isn't associated with me at all. If you're up for it I'd also prefer to use your credit card number to buy stuff on Amazon. But for whatever reason the law doesn't always seem to follow my preference.
I'm sensitive to your point about restricting formation of new corps. The system can't just be changed randomly without extremely careful thought. And often not even then.
That's exactly HOW rental properties are (supposed to) be bought!
Most small-time single family landlords actually go above and beyond that and "pretend" the rental is a house they're buying to live in (or actually is, for a time) and get a "home owner's mortgage" which is even easier.
Large commercial real estate is sold and loaned based on future rental income, pretty formulaically.
Yes, those exist in industrialized countries as a result of public policy decisions. We do not have 3 or 0% mortgages because that’s what the market naturally bears or produces: we have it because mortgage debt is backstopped by the state.
It’s possible to “understand” mortgages by understanding that conditions for stable home markets don’t arise by themselves—we collectively make them possible because the outcome is desired—then wonder WTF because what social function is creating conditions for private equity getting us.
In residential real estate, I think stems in large part from a desire to help people who don’t come from money to own personal real estate (which is one of the best ways to go from $0 or negative net worth to positive six figure net worth).
Not only is that politically attractive, I think it’s more good than bad as public policy.
Turning back to PE/LBOs:
Having limited liability entities (companies) also serves good public purposes. Having companies being able to borrow money also does. Having companies being able to own other companies also does. I think that’s the only three ingredients you need for the PE model to operate and I don’t think that the public is helped by barring any of those three things.
This was called corporate raiding in the 1980s and even Reagan era America looked upon the practice as horrific, vilifying it in books/movies. That it's now an acceptable norm even after 40 years of it making things worse says a lot about the state of our nation. 'Money above all else' is more believed today than 1980s Reagan America.
It is analogous to a mortgage, you put down X% and the house itself secures the loan, along with PMI if your equity is below 20%. The assets of the business secure the loans in the same way a house secures a mortgage.
It is not analogous because if you sell your house and the sale money is not enough to cover your mortgage you are still on the hook for what's left of the principal.
A leveraged buyout is exclusively on the purchased company's books, so if the company goes to zero the PE parent company is not on the hook for a single penny.
That varies by state. Twelve states are fully non-recourse states (lenders can’t go after borrowers beyond the loan security); in other states they may be able to, but borrowers who default on their mortgage may not be particularly asset-rich targets in the first place.
If the company wasn’t able to borrow money for itself, a wrapper company could which would still have very closely the same effect as being an asset-poor borrower.
What I don't understand is how the cost of banks repossessing these companies in case of default don't make the math unviable. Unless the company have a lot of fairly stable semi-liquid assets (like real estate) banks should be charging fairly high interest on these loans which would make most of these business unprofitable.
Which would increase the rate of defaults (if they are authorized in the first place) and in turn increase interest even further. I guess the PE is always maxxing out the leverage on every deal at _just_ the projected break-even point for loan repayment? But that leaves no room for error or changing market conditions which also increase the rate of defaults and so on.
> Unless the company have a lot of fairly stable semi-liquid assets (like real estate)...
That's exactly what happened famously with Red Lobster. PE sold off all the underlying real-estate to get the initial sugar-high and replaced it with a leasebacks. Those leases had escalating costs and fixed terms, which made it difficult to adapt to changing trends, and was a big contributor in what ultimately sunk it all.
Non-bank entities being in play is likely part of the problem. If you can sell the bad debt to some other entity say a fund that got investment from pension you win. For fund managers these things can look great on paper and that is everything that matters. Even if things do not workout they can on paper extend and pretend or take payment-in-kind. Meaning well you are short on interest payments so you just tack it on the principal.
And everyone gets their management fees until people start asking their money back...
Ah so it is related to that whole private debt markets, the loans these PE companies take are not with banks. It is related to that whole thing with Trump opening those kind of loan investments to ordinary americans and pension funds.
Most fun thing is that even if bank can't led to these sort of companies they can lend to companies that lend to them... So added fun. And well this has been going on for long time and cracks have started properly showing up more recently.
Check the other comment, apparently these loans don't come from banks, but rather from private debt markets. And most likely they don't know these loans aren't viable.
Yes, it's using bankruptcy and limited liability to extract value from companies that may well be completely solvent and functional with little/no downside or risk to PE.
Yes, this is the crucial distinction. (I wish that articles criticizing PE were framed in terms of LBOs + bankruptcy-law instead, because that's the root of the policy problem.) Corporations can go bankrupt without risk to the human beings who are owners/investors in the corporation.
Note that from the lender's perspective, the risk is the same and in a perfect-information universe could be mitigated by charging higher interest. The problem for society is the externality that the business's services get worse.
> so if the company goes to zero the PE parent company is not on the hook for a single penny.
Sounds like a problem for whoever is providing the financing. Not really my concern unless you're saying there's some systemic problem it causes like with mortgage securitization during 2007. The lender will charge a high interest rate if what you're saying is true.
It’s the shareholders of the purchased company that provide the financing, in the form of debt in the company’s books. Then they exit, and the company lays off people to service the debt, and you and I as taxpayers cover unemployment and other social harms.
It’s literally a way to extract revenue from our broader social institutions by spreading the pain across so many people that individuals don’t complain (or, in some cases, don’t even understand how it harms them).
It's the concern for the community who pays in higher prices, and the employees in their job stability.
Has everyone forgotten the social contract? We do not exist as communities to make a small number of people richer. If the trade doesn't work for all involved, we change the rules.
Some of those are for purchase and not refinance, but the reality is in almost all states (even those that are not single-action by statute, where single-action is "they can go after you, or the house, but not both") are practically single-action.
In fact, they'd much rather single-action foreclose as they'll likely get a house than force you into bankruptcy where they might not even get that.
The Abrahamic religions have a natural safeguard against excessive wealth concentration: ban interest-based loans to private individuals (usury is shunned in the Bible and the Koran) and instead encourage a wealth tax on hoarding that directly transfers charity from the wealthiest to the poorest (tithe or zakaat).
Some modern economists have suggested this should work theoretically if properly implemented. See Helmut Creutz, Das Geld-Syndrom (1993) and “The Natural Rate of Interest Is Zero” — Mathew Forstater & Warren Mosler.
And which countries does this work for? They all still somehow still manage to have palaces.
There's also a strong argument that charity transfers to the poor does far more harm than good. How do you price a field worth of wheat, a mill, or even a local grocery when an airdrop of processed flour and food rations can arrive at any moment with no warning? And how do you get the capital to start one of those when it's illegal to get a loan?
Of course there are solutions if you have enough tenacity, but the overall result is far fewer businesses started because the friction is just so much higher.
I (and leaders at my PE-owned company) cannot say enough bad things about private equity. How anyone who managed to make money in their life decides PE is a good investment blows my mind.
We are now on our 5th PE firm in 10 years, and just completed a "PE lifecycle" of buy -> merge -> sell -> part out -> merge.
None of these PE firms bring anything to the table. Even the hundreds of billions AUM giants. They have zero interest in tangibly improving the company, and lots of interest in cheap window dressings meant to fool other PE firms. Not that they could do much else, because it's mostly business grads with minimal real world exposure, and hunger to be rich above all else.
The most critical thing to understand is that they pay themselves "advisory and oversight fees" for the incredibly difficult work of increasing sales targets 300%. These fees can eat 10% of our revenue, and is one click above theft. Trust me, they will lay-off 75% of the company before even considering cutting back their personal take. Never mind the fees they take from investors too. They bill both sides.
Also, if they kill some of the companies they acquire, it's the investors loss. It is not their loss. They still collect all their fees just the same.
There is a total misalignment between investors and PE firms, where PE firms just want to maximize their looting while investors think they are actually trying to improve the acquired companies. If the invesotrs do see gains, it's mostly because the firm successfully conned another firm into overpaying.
Run from investing in PE, run as fast as you can. Recently they changed the law to allow regular people to have PE in their retirement. They are running out of useful idiots, and want access to the general public. DO NOT FALL FOR IT
Have worked in C levels of many PE portfolio companies across industries and this all tracks for me.
I make a good amount every time the company changes hands so I’m kind of complicit but I also try very hard to run each company the best it can be run from the perspective of all stakeholders. Sometimes they just live in la la land with their expectations. They put together an investment thesis prior to investing and cant wrap their heads around any deviations from some stupid excel model they built with 5-10 year financials all on rose colored assumptions. One business I was a part of had a new government regulation immediately erode 40% of their revenues and every month explaining it over and over why we were down to plan was ridiculous. Then the annual budget we told them would be a readjustment to reality. When we presented it they acted flabbergasted. This same thing went on over and over until I just got fed up telling them I didn’t care about their investment thesis and would only discuss reality and left the company purely because of the investors. Stuff like that is pretty common
Looting is a rather apt word. What really breaks me is the fact that these are the people who are making it. Destructive people who extract every last cent of value from everything in sight are winning. Society actively rewards this. Constructive people who are actively trying to add value to the world face many more risks and difficulties.
I've seen this in K-12 EdTech. Most of the companies are owned by PEs. Digital curriculum companies, Assessment companies, Auth companies (like Clever), etc. And these PEs have portfolio of them and keep expanding. Not saying good or bad, just an observation.
Of course they would. Private equity looks for the following things
1. Things with an inelastic market and fixed demand.
2. Many overlapping small time competitors.
3. Steady cash flow, preferably with low capital costs though not always
You can take the cash flow, take debt against the companies own cash flow to buy it, pay yourself back, consolidate, then raise the prices on a captive market.
Interesting seeing a quote from Sen. Josh Hawley that I agree with...
Quote (from article)
“This didn’t just happen to you accidentally. This is a business decision, isn’t it? You keep these backlogs like this. […] Another word for this would be a heist. This sounds to me like private equity came in; bought up all of these small companies; combined them; shut down their production; rolled up a huge backlog; massive profits; stiffed these guys; and now you’re making out like bandits.”
Putting the financing debt on the books of the thing that's bought instead of the purchaser's shouldn't be legal IMO. Imagine if you could buy houses and leave the mortgage on the house's book instead of your own. It's a total farce.
Not all PE problems are existential; they will be outcompeted.
What keeps a newly graduated Veterinarian from opening her own clinic and undercutting the PE competition? With no massive loans on her books, she can profitably offer lower prices than PE can. She may even drive the local PE clinic out of business.
First, opening a clinic requires some serious money. Then, if the new clinic gets traction, PE can make a very good offer for a buyout and the owner would have to be stupid or very stubborn to refuse. Most big companies these days just buy up competition. Good for the owners but bad for the customers.
Another thing which I've seen personally is that in general getting from 0 to 1 required HEROIC effort to the point that it requires a personality type.
How many veterinarians got into the game to become relentless, driven, scrappy and indomitable business owners vs because they love furry things and helping?
> With no massive loans on her books, she can profitably offer lower prices than PE can
Depends entirely on fixed vs variable costs. Rollups (which are very common now) work mainly because most "mom and pop" businesses can easily be "unlocked" by pooling the treasury, HR, accounting, commercial banking, supplier negotiations etc.
People had no problem starting clinics in the past and they probably could today if they really wanted to, but there is little incentive to for the past few decades while the stock market has been booming. Why spend 80 hours a week struggling to run your own clinic and paying off loans when you can work 40 hours a week working for somebody else's clinic and invest your savings in the stock market?
Assuming you had $$$ for some supplies but couldn't afford to lease a commercial building, you could provide small mammal services from your vehicle, driving to people's homes to give vaccinations and well care.
Being mobile would also allow you to serve a larger market than a fixed clinic; you could serve a couple small towns on Monday, a couple others on Tuesday, and server a larger metro on the weekends.
Once you're consistently profiting $$$$/day you'll be able to start saving for the equipment you'll need for a commercial lease somewhere because you have both the cash, cash flow, a loyal customer base, and critically, a good sense of where a good location would be to serve them from.
Sure, that sounds plausible. I'm not saying you need an enormous amount of money, but for this scenario you need supplies, car payments, gas, probably some kind of licensing fee, insurance, some kind of advertising, and a few months of rent and living expenses until you start making a profit. Maybe like $10,000, plus more as a safety net in case it doesn't work out and you need to find a job?
Even if they are lucky enough to have no debt, I don't think the average graduate has $10,000+ in the bank to spend. I have never started a business so I honestly have no idea how hard it is to get a small business loan for something like this, maybe it's easy, but even so it's certainly risky.
Except every newly-graduated veterinarian does have a massive loan on their books, in the form of student loans. And even if she didn't, where does the startup capital for her clinic come from? Whether in human or animal medicine, starting your own practice--especially as a new grad--is usually the course of action with the highest-risk-to-lowest-pay ratio.
Yet there is no evidence of this happening in any industry or area where PE has become the dominant player. Why not? What you’re saying is nice economic theory but it’s clearly not happening.
That's where the scam is. They sell to their pension fund and mutual fund buddies, and in return when they get a really good deal, those funds will be first in line. It's a scratch-my-back-scratch-yours kind of deal that is utterly corrupt but no one seems to care because the losses are papered over by these huge funds.
One thing I don't see is the other side of this story: the sellers.
I don't get why sellers are selling to PE. Can these services not "IPO"? Why do these companies need to sell?
When PE takes over medical practices, my understanding is there just isn't enough capital available for a dentist to "cash out". The options are either they find another dentist to buy it, the close the practice, or they sell the private equity...
How is local doctor's office going to IPO? An IPO is just selling to the public instead of a private buyer. Not to mention the amount of paperwork and ongoing reporting requirements of actually IPOing.
Talking to a single buyer is easier than arranging an IPO and I would imagine the diligence far less onerous.
Out of the gate you need $27.5m in cash flow with $2.2m in profit. I doubt there are many single practice dentists doing that kind of volume.
You can’t just IPO because you want out of the business. There’s lots of reporting and regulatory requirements to ensure you aren’t screwing investors.
In the past farmers needed COOPs in order to make their products/the local community's economy viable. Today we need something like COIVs (community owned investment vehicles). Kiva for the rest of us I guess.
I'm trying to be generous here... but prisoner's dilemma says the people in a community are probably better to park their money outside of the community in order to protect (and grow) their retirement investments.
Yes, it would be better for the community if people chose to invest locally instead of the SnP 500, but running out of money in retirement is a very real fear and the SnP500 is much better/safer for most people than COIVs.
My understanding is people don't like the PE / LBO with a single investor, because it loads the company with debt that it pays back via cutting quality and service offerings.
My assumption is publicly traded company would have access to better financing terms and a diverse set of investors with less "hunger" the financial shenanigans the PE investors have.
> I don't get why sellers are selling to PE. Can these services not "IPO"? Why do these companies need to sell?
Shifting private ownership to a publicly traded company is an awful lot of paperwork (especially for accounting) and upfront costs, you need to time it properly, you need to find banks willing to cooperate.
In contrast, selling a private company to a PE is a pretty much straightforward transaction.
I think it's totally appropriate to hold it against them if they knowingly sell out to scumbags. Society used to look down on selling out. We wrote songs about it. But in 2026 it is glorified.
What do you think they should do? Who are they holding out for and for how long can they hold out? Retirement is a financial situation and an age. Do they shutdown the business when they are too old to function as an owner?
My friend's parent's local services company shutdown when they didn't find a buyer. A business limping under interest payments IMHO is better than a complete shutdown.
You're 55, making $400k a year as a HVAC Repair Company, and while you love the business and your kids are in expensive colleges (not taking over the business) you are offered $8MM to sell. Instant retirement. A buy out isn't the same as selling out because people live off of cash and not principal.
At the end of the day it comes down to how much money your principles are worth. People are commenting about dentists and doctors being bought out. Those strike me as the kind of people that can afford retirement without also contributing to the worsening of society.
I get this is sarcasm but... meanwhile the founders/great thinkers on free markets wrote extensively on how free markets REQUIRED strong government and strong government oversight.
>> a structure where 50 to 90 percent of the purchase price is financed by debt, and that debt is loaded onto the balance sheet of the acquired company, not the firm making the acquisition.
This just seems wrong. The buyer takes out a loan, how does that become the responsibility of the company they purchased? I thought loans used to buy a business treated the business as collateral, like a home mortgage. What lender would participate in this? and why?
> The buyer takes out a loan, how does that become the responsibility of the company they purchased?
Because the company they purchased is now a part of them.
As for why a lender would agree to it, it's because these transactions are not as simplistic or universally disastrous as they are usually described. A lender will obviously only make that loan if it has a reasonable expectation of being paid back, and most of them are. They may get additional collateral like parent/affiliate guarantees and the loans will have covenants relating to financial performance etc.
The people behind these funds are playing Monopoly IRL, and this in particular makes me very angry.
The UK high street has been a notable victim. Gradually, over the past couple of decades, company after company has been snapped up by PE. Not just shops, but restaurants too. Suddenly you realise that the 5 or 6 high street chains that were competing are now owned by the same fund. Quality collapses, prices rise, not just at one chain but everywhere. People stop going, the chain collapses, another empty unit, the fund moves on. It's easy to point at Amazon and internet shopping as having degraded the British high street, but there are several other factors, and PE is a big one.
You're only thinking from a consumer perspective. When it comes time to sell a business, original owner wants to retire or what not, most small businesses have a hard time finding a buyer. This forces the owner to continue working beyond their time or face destitution. Having a market where PE can snap up a small business is a god-send for these owners. It meets a market need.
As a consumer, there are many non PE owned restaurants and pubs you can frequent. While you might not be able to change the game, you can absolutely vote with your wallet. The small guys will thank you.
Same for Amazon vs going direct to the manufacturers, which is more often than not, China.
> Same for Amazon vs going direct to the manufacturers, which is more often than not, China.
That comes with a bunch of problems. Taxes, import duties and import refusals are the biggest one. With Amazon, at least as long as it's sold or fulfilled by Amazon, no matter what, you are going to get the product in a reasonable time frame (1-3 days IME).
Shipping... depends. If you're in bad luck, the seller doesn't ship Fedex or DHL, but Yanwen or another one of the usual bunch of "aggregators" that bundle weeks worth of shipment to forward it to the US or Europe and unbundle the shipments there.
Assuming your product shows up at your doorstep, legally, you are now the importer and fully responsible for anything related to that specific product - say, an electrical appliance that sets your house on fire. You can't hold anyone accountable but yourself.
And finally, if there's defects, you only have to deal with Amazon. Free shipment back, done. With anything straight out of China, you are now responsible for shipments.
PE profits sound like other companies opportunities. Unless there are barriers to entry not covered in this article, I would think other companies could move in, deliver a fire truck faster and at a lower cost, and at least take a portion of the market that is able to switch.
The purchasing process is the barrier to entry. Municipalities are required to run a request for proposal on anything over ~10k. The RFP gets awarded to a PE owned manufacturer that then takes 4+ years to deliver. The municipality is locked into the vehicles they don't have so a new market entry needs to simultaneously establish a track record that qualifies them for being awarded an RFP and be able to wait out the purchase lag. Not impossible, but easier said than done.
look at the interest expense line on any PE-backed company 10-K. healthy operating business, absurd debt load. the business doesnt decline — the capital structure slowly kills it.
Setting aside the obviously LLM-generated headings (if not text), this is a serious problem. PE has purchased fire inspection companies in my city such that every company that needs these must contract with the same PE overlord no matter which of the previous 15 companies they used to work with.
The new PE overlord will do things like send you a bill for inspection after you inquire about their pricing ("Well, our guy was in the area so he took a look!") while billing you for gas from their home location.
This is disgusting on so many levels—no competition here at all, just oppression by those with a lot of money.
The theme I keep seeing in all of these problems about our economy is unfair access to debt. PE firms get a loan that you can't and then buy out your company? Giant megacorp get a loan for more than your companies value and make an offer you can't refuse. Billionaires live off loans instead of income and avoid paying income taxes.
So many of our issues can be traced back to unfair access to debt. Too much cash in the system chasing returns. We need harder money.
If you go after an entire market, they'll close ranks. If you go after specific business groups (such as REV), they'll probably be easier to divide and rule.
I think an unintended byproduct of prolonged cheap capital is an environment ripe with antitrust issues. I’m all for capitalism mentality but this feels like a logical extreme and is not good for the long term.
Other examples not mentioned: eggs, kids athletics, I’ve heard stories in fintech services as well
An interesting aspect of this story is that America has an idiosyncratic approach toward firefighting vehicles that demands very large bespoke vehicles from a limited set of vendors [0] that are primarily used to bring a set of first responders to medical emergencies. [1] This philosophy carries on to other aspects of fire fighting like the very famous wooden ladders of San Francisco. [1]
Cost insensitive customers with bizarre business requirements, what could go wrong?
1. No one forced these people to sell. Is the idea that you can’t sell to an entity with more money? If you block that good luck with the world economy.
2. If above is ok is the idea that the new owner is inherently worse because they have more money, whereas as the smaller would be OK then where are the new entrants?
3. Going to the article it is clear enough. These industries just are not lucrative to begin with. PE buys them and raises prices, but this only works because people complain instead of starting rival business.
4. Somehow leaving money on the table in the form of a backlog is bad? Why don’t others start a business and take those orders? Why don't they? Not profitable or worth the hassle.
Well there you go.
Separately, American manufacturing just seems very uncompetitive.
> but this only works because people complain instead of starting rival business.
This reads like fiction. When they corner the market it's of course trivial to just jump in and take that share. No way they will try to be disruptive to you or sue you to hell and back and of course the bank will loan you the pile of money to start a new company since there is no giant corporation to compete with who can squeeze you out in an instance.
Your comment is the one that seems like fiction. You are saying PE is unbeatable? Per the article there is a backlog of orders. What is stopping one of the previous owners from creating another company and taking them?
Sue for what exactly? Of course they will be disruptive, that is what competing means.
Usually from a loan or they bought someone out before the PE consolidation in that market really ramped up.
This is the insidious part: small markets that grow organically over about 10-20 years are specifically what PE investors look for because they are cash heavy but don’t have desire to expand.
So the owner gets 3M cash out for property worth 4M. PE bundles similar businesses (boba tea shops are a popular one) and then uses the net cash to get a loan to expand.
They expand, cut corners then cash out on the net profit and then sell the skeleton in the pink sheets or go bankrupt.
I’ve had to deal with investors and finance for almost 15 years now. My company was bought by a PE backed company and I knew fund owners
PE has a bad reputation, maybe for LBOs, maybe for buying up doctors' offices and retirement homes, and hospitals and making them objectively worse in terms of patient care.
My family doctor underwent that along with several of her local peers and got out from under it and started her own practice. I'm obviously not her only patient, so yes, heightening stress on caregivers by demanding more work to drive profits higher is justifiable of a bad reputation.
Leaving things like medical care, food, water, shelter at the mercy of for-profit dynamics leaves the possibility open that those services stop being provided because it is unprofitable at the expense of the population.
America is deciding it likes profit over its population.
People aren't starting competitor businesses because the hassle has become astronomically expensive, also largely due to rent seekers[0]. You need a space, but real estate is absurdly inflated. You need trained employees, but education is absurdly inflated and also poorer quality for the baseline. You need to pay a living wage and give healthcare benefits to attract labor, but cost of living and healthcare are skyrocketing.
Ultimately the influence of rent seekers has grown and the category of people who can take risks by starting a business was the first to collapse, leaving only the wealthy who don't care and the people who can't risk their own survival.
Then there is regulatory capture in some markets. In this case:
You need a street legal product, which takes certification
You probably need multiple firefighter associations, which takes not only meeting criteria but politicking with associations (don't know about firefighters but some associations are themselves captured and limit approval to their friends/connections).
If you own a business and wish to retire, your options are pretty much to sell, pass it on to someone, or dismantle it. I don't know how this is even a question really. Where in the article or the comment section is anyone saying they shouldn't be selling?
1. In the 90s, I had a struggling one-man Mac ISV, and would do gig programming on the side. I did a lot of work for boutique investment banks, and also for a "consulting" firm that did about 75% of their business with the finance industry. The owner of that firm praised me, but didn't like that if my business took off, he'd lose me.
"What would it take to get your commitment to this firm?"
50%
"Where will you get the money to buy half my company?"
A loan from the firm?
When the dust cleared, the business loaned me the money to buy in, and I paid it back with 50% of my profit sharing payouts. This is not some weird financial alchemy, a lot of partnerships are run this way.
———
2. My Duathlon racing buddy was a mold-maker, very specialized and good at his trade. He worked for an elderly entrepreneur who had built his mold business up over decades. Said entrepreneur sent his own kids to university to become "professionals."
What to do about succession when he was ready to retire? My buddy literally photocopied my own arrangement, bought 50% so the business would have a successor it could count on, and bought the remainder when the founder retired. He is now a comfortably wealthy automotive sector entrepreneur.
———
The huge LBOs in the news always seem like space-age deals, but little LBOs for succession purposes are remarkably common.
Your comment is entirely conjecture. Even if we assume it is correct, no young person is creating similar businesses? If so that’s the root cause, not PE, since the alternatives would be all of these businesses shut down anywhere per your reasoning, backlog increase and the remaining businesses increase prices anyway.
This is a comment section. Much of it is conjecture. You are making (implicit) conjectures that there are no systemic causes of these sales to PE so you can place blame on the sellers instead of the looters and pillagers themselves.
Why do we need antitrust laws? Why do mergers need government approval? Or are you a libertarian who believes in unfettered capitalism?
Where does it end? What if I threatened you with violence to sell your business? Is that OK? You might correctly say "that's illegal". If so, does that stipulate we do need laws? How far can coercion go while still being legal? What if I also own your key suppliers? What if you run a veterinarian practice and I jack up the price of all your meds, radiological film, etc if you don't sell? What if I own the major pet insurance providers and decide that your practice, if you don't sell, is no longer covered by my insurance?
> 2. If above is ok
It's not.
> 3. Going to the article it is clear enough. These industries just are not lucrative to begin with
They're engaged in anticompetitive behavior but on a local level so it tends to escape scrutiny. Unfortunately, if you dog is sick and you like in Cincinatti, you don't really have the option to go Reno where there's (for now at least) a cheaper option.
This is all just rent-seeking behavior. Nothing about this is productive. The people who engage in this should be treated the same way profitters are in wars and natural disasters, which historically hasn't been a fine or legal sanctions. I'll put it that way.
> 4. Somehow leaving money on the table in the form of a backlog is bad?
That's what rent-seeking is. It's unproductive extraction of wealth by removing all other options.
Wait until PE comes for your ISP and suddenly a 1gig fiber connection is $300/month. What are you going to do then? Start your own ISP? Good luck with that.
PEs own a LOT more than whats on the article. All kinds of home repair (HVAC, Plumbing, electric), child care, dental offices and many others. They buy the local companies, keep the same name (so folks think it is the owner/local company with awesome yelp reviews), enshittify, jack up prices and extract as much as possible with smooth talking sales people.
How would you phrase this though? Plenty of PE firms have the funds to buy your local veterinary clinic or auto body shop with cash; the leverage comes later, when they direct the business that they own to get a loan. How can you make it illegal for the business to get a loan?
The daughter company would presumable be allowed to purchase goods and services. What prevents those goods and services from being supplied (at a hefty markup) by another company under PE control?
ZIRP created a level of absurd wealth such that the ultra wealthy can buy large swathes of things that they never could before, and they’re doing it. And societal norms and laws can’t keep up with it to protect us from them.
Now they are buying fire stations, dentist offices, ski resorts, whatever the fuck they can think of and then raise the prices. Something needs to be done to stop this.
I really like the model, privatising it can be far better as a private firm employee & equipment's will work better also if execution is correct, it can be cheaper and more productive.
The premise is that PE firms invest in companies, load them up with debt, and maximize profit. And it's especially nefarious in industries where people have "no choice but to pay"
> The result is a backlog that reads like a financial opportunity in earnings calls and a crisis in every fire station in the country. As of 2025, REV Group’s backlog stands at $4.5 billion. Wait times for a custom fire truck run to four years. Prices have doubled in a decade: a pumper truck now costs around $1 million; a ladder truck runs over $2 million. Profit margins in the industry have tripled — from the historic 4-to-5 percent range to over 13 percent.
The article goes on to talk about how a backlog is actually genius. Here's a quote from a senator:
> “This didn’t just happen to you accidentally. This is a business decision, isn’t it? You keep these backlogs like this. […] Another word for this would be a heist. This sounds to me like private equity came in; bought up all of these small companies; combined them; shut down their production; rolled up a huge backlog; massive profits; stiffed these guys; and now you’re making out like bandits.”
So you make money by ... not delivering? I'm missing something.
> The fire truck industry is the most publicly documented case, but the underlying playbook — acquire, consolidate, reduce supply, extract margin — appears across essential sectors with alarming consistency.
Sure, anyone can reduce supply and increase prices if they're a large enough supplier. But companies don't produce up to the point where marginal price is equal to marginal cost out of the goodness of their heart. It's the profit maximizing level. This is economics 101. The article doesn't even try to explain beyond hand waving. No one cares about profit margin, they care about maximizing profit, and you don't do that by creating backlogs. So something is off here and the author is either too incompetent to ask basic questions or just wants to write another PE bad article
Let’s compare two hypothetical companies. They are equal in every way except one has a $4.5b backlog and one has a $0 backlog. Which company would you rather own?
The way to get to a backlog is by not having made sales you could have made in prior years. So they shouldn't be equal in every way - the one with $0 backlog should have more cash, and that is probably preferable unless your business has diseconomies of scale.
Not sure. On one hand, a huge backlog means they're not meeting their demand. Operations may not be in order. Everything else is the same so sales and everything else is equal so I guess money is just deferred? Also huge backlog encourages competition and if you can't deliver, you're going to lose.
But such a big backlog suggests that they're underpricing. So it may be as simple as increasing price and ramping up your production, even though it would likely mean higher marginal costs.
Overall no one wants a backlog. It's not good business
Have you ever heard the phrase ceteris paribus? It means all other things being equal. It's a phrase economists use to discuss things in the ideal, sort of like, "imagine a spherical cow in a vacuum" but for economics.
The point of the exercise is not to suppose what other things could have been different to allow these two hypothetical companies to end up in the described state. The point is to actually freeze everything else, do not allow it to vary, and look at the backlog in isolation. Obviously such a situation would never actually arise. Even if things were trending in that direction, the two companies would very quickly diverge from ceteris paribus.
Obviously having a backlog is better than no backlog because unless you make a new sale tomorrow, you have a problem. You will have idle capital and labor resources. Which company do you think has easier access to credit?
Private equity is very much interested in the margins. That is one of the key differences between private and public companies. Public companies are under pressure to grow at all costs. PE would probably be satisfied to make half the profit and double the margin, especially if it also happens to position the company for a more favorable sale. Would you rather buy a business that's at 5 or 10% margin?
The depth of the backlog also happens to be a pretty decent proxy for how much competition there is the market. A deep backlog means there isn't another firm around to fill that demand. That makes your company look better.
Let's go a little left/up the funnel. Imagine two startups, all things equal, their sales funnel goes wide > qualified > sale. They consistently convert 5% of qualified leads into sales. Do you want to be the company that has zero qualified leads, or $4.5b of qualified leads?
Ceteris paribus can be stretched to the point of absurdity though. A startup with $4.5b of qualified leads, vs one with zero? Come on now...
For the sake of argument, we're imagining both startups have equal levels of investing/funding secured, equally talented founders and employee, equal access to equal networks (i.e. I'm imagining something like defense or aerospace, to make it a little easier to imagine a startup getting $4.5b in qualified leads), equal technology or IP, equal EVERYTHING as per your hypothetical... and yet somehow one startup has $4.5b in qualified leads and the other does not.
I truthfully would rather buy into the one with zero leads, because presumably, under ceteris paribus conditions, that startup must be priced at a discount to the other one, since it has no leads... and yet, EVERYTHING ELSE is equal (equally strong team, equally good tech, equal networks, etc.), and so it seems to me, that I would be able to buy a larger equity stake for a discounted price, and have EQUAL odds of winning future business since this startup is EQUAL in all other respects expect for the odd qualified leads backlog.
Would you rather buy shares in NVIDIA, or buy shares in another company that is equal to NVIDIA in every way (same talent, same tech, same everything), but just happens to have no backlog of confirmed orders? I think I'd like to buy this shadow-clone of NVIDIA, because I would buy into the thesis that there is more room for growth, vs buying the incumbent... after all, ceteris paribus, right?
The all things being equal makes no sense in this regard.
It's like me saying "all things being equal except you're a duck"
You can't be a duck and have all things equal. Same way a company can't be equal to another company and have a $4bn backlog. This isn't an independent variable like the color of your logo.
> PE would probably be satisfied to make half the profit and double the margin, especially if it also happens to position the company for a more favorable sale. Would you rather buy a business that's at 5 or 10% margin?
So PE doesn't maximize profit but instead maximizes profit margin? This makes no sense. Why?
Because they don’t want to have to work that hard for their money. They get more value for their effort by focusing on something else instead of trying to maximize profit for a single business.
The demand curve for a business could be such that you sell 100 widgets and get $100 profit, sell 200 widgets get $101 profit. Why bother trying to sell more than 100 widgets?
Maybe you can sell 50 widgets and make $90, that sounds like a pretty good deal. Instead of making 50 more widgets you could do something else and make more than $10 profit in the same time.
The buyer (who PE sells to) is "thinking about" collecting on the backlog.
Obviously, the backlog is "fake".
EDIT:
The backlog is fake or worthless in the sense, that dollars worth of reputation (a.k.a. Brand) were given away to get pennies worth of backlog. Customer satisfaction is real, even in a business valuation sense.
So much condescension in your comment. So little to back it up.
> So you make money by ... not delivering? I'm missing something.
Precisely. Let's review imperfect competition. Although it's you who so unpleasantly insists on framing the discussion in econ 101 terms, it's your comment that is sunk by a misunderstanding of elementary economics.
What you're missing is evidently the things one learns when they go past chapter 1 of an intro textbook!
> It's the profit maximizing level.
Not all markets match the assumptions of the simple "perfect competition" ideal you learn about first. The efficient equilibrium you describe requires an assumption that there are no barriers to entering the marketplace as a producer. An extreme example breaking this assumption is the "monopoly market", where there is only one seller of the good because barriers prevent other sellers from viably entering the marketplace. That's why the consolidation in OP is relevant to the discussion...
In the extreme case the market equilibrium is reached when a monopoly jacks up the price and produces less than it would in a competitive market. Deliberate scarcity! The (single) producer makes more money in this kind of market. The consumer is worse off. But the every extra dollar the monopolist makes in profits takes more than a dollar away from the consumers. Deviating from the perfectly competitive equilibrium results in a market inefficiency called "deadweight loss".
The article also nodded to the price-inelastic demand for the equipment enabling emergency services. Inelastic demand makes this phenomenon more extreme. It's pretty intuitive that fire departments' demand for firetrucks would be price-inelastic.
So anyway. Your comment implied that you don't want to be mad about the consolidation and price gouging for e.g. firetrucks if you're in the "woohoo go free markets" tribe. Couldn't be more wrong. You should be just as mad if you're in that tribe. The extraction of monopoly rents from emergency services is not just dangerous, and not just unfair, but also a textbook case of market inefficiency.
> In the extreme case the market equilibrium is reached when a monopoly jacks up the price and produces less than it would in a competitive market
Wrong. The amount produced is still the point at which marginal cost is equal to marginal revenue under a perfect competition. However the amount charged is higher. Below is the monopoly model, chapter 7-2 :-)
> The monopoly firm maximizes profit by producing an output Qm at point G, where the marginal revenue and marginal cost curves intersect. It sells this output at price Pm.
Basic economics doesn't not apply when you go past chapter 1.
> Because their customers, who they built a trusting relationship with, get hosed when the owner wants to cash out.
Sure, and it's often a real loss to customers, but are you suggesting mandating that you vet the person you're selling to for their business aspirations and then have some kind of legal covenant that binds them to those stated aspirations, enforced by...something?
Otherwise we can just be satisfied with shaming them, but seems like an awfully convenient way to sidetrack this conversation from the obvious remedies.
> That cash out comes from the future business increasing profit, which is over the longest term cutting service quality.
Which is a problem when the same person buying also bought up all the other dentist offices, so there's no choice, let alone competition, in services.
Eliminate that and the sweetheart buyout offers make a lot less financial sense and we can at least prevent the scales from tippng so steeply toward PE buying up all the dentists, hospitals, retirement homes, HVAC repair, roofing companies, pest control, etc etc
> Because their customers, who they built a trusting relationship with, get hosed when the owner wants to cash out.
Unfortunately people are mortal and everything ends. Even if a someone didn't sell their business to PE, the trusting relationship is over once they retire. There's no guarantee that someone new - even if vetted - is going to be as good as the previous owner.
Because a sale for cash is a basic legal contract that predates modern society by millenia, whereas a LBO that PE uses to purchase companies is a weak spot in American Capitalism created at the intersection of:
1.Shareholder primacy. Under Delaware corporate law (which governs most large U.S. public companies), once a board decides to sell, directors have a fiduciary duty to maximize the price shareholders receive. A premium cash offer from a PE firm is hard to refuse without legal exposure.
2.Interest deductibility. The tax code lets companies deduct interest payments but not dividends, which makes debt-heavy capital structures more tax-efficient. LBOs exploit a feature of tax law that exists for many reasons unrelated to private equity.
3.Freedom of contract and limited liability. Sponsors can put a thin equity check into a holding company, have that company borrow on the target's assets, and walk away if it fails, because limited liability is the foundation of corporate law generally.
Why would anybody expend time reading something that is probably full of hallucinations? And what's crazy is clearly only a few of us have enough experience with Instruct Mode LLMs to even spot it. The rest of these guys don't even know they're reading slop.
If you just keep gutting companies with leveraged buyouts, you're not taking on any real risk.
If you're buying up firms that deliver "essential services", you're likely engaging a monopoly. Again, low risk, high reward. A direct violation of the rules of how investments should work. Regulate the monopoly and this goes away.
> Do you think losing the equity portion of the investment means no risk? It's not fully debt financed.
To quote the bandana-clad bard of Venice, CA, Mike Muir: "it's the difference between a Porsche and a Rolls Royce".
If you're playing the LBO game at the level where you're looking at buying up chunks of a community's essential services, you are unlikely to be doing business in a way that presents meaningful risk to your personal financial situation.
You don't have to take meaningful risk to your personal financial situation for an investment to be risky. The CEO of Coca-Cola also takes no meaningful risk to their personal situation. Should we forbid CEO roles?
The risks are asymmetric in real world terms. For the PE side, the worst-case outcome is bankruptcy of the company they bought via LBO, but because it was an LBO their own exposure is relatively minimal (the lender is the one with the one most capital at risk). At the end of the day, it's a balance sheet item, a cost of doing business, a few digits on a spreadsheet.
But for the company that was bought? Those are people's jobs, their livelihood. A community that depended on those jobs to sustain a town's economy. And for company's providing essential services with inelastic demand (like fucking fire trucks), the downside is loss of those services, broken fire trucks, and ultimately loss of life.
When you hear "profits over people" as a complaint, it sounds abstract. It is not. Though this specific article is AI slop, the underlying phenomenon is very real (that other commenters have shared other links to better reporting). A very real dollar figure can be crystallized against very real human lives that have been harmed or sacrificed.
Most "regular people" (you know, the ones who just want firefighters to have working trucks and ladders, and to come quickly when there's a fire) don't care about the most hyper-efficient allocation of capital through some skewed financial engineering and legal wizardry (especially when the definition of "efficient" allocation is a biased one, that doesn't account for externalities properly, like people fucking dying due to broken or not-enough trucks). But regular people don't really get a "vote", when it comes to LBOs (and I am specifically focusing on the ones that affect essential services). They just get screwed with the increased tax bills that fund the increasing profit margins of the PE firms. That seems unfair to me, but fairness is a matter of politics and not finance.
---
Personal disclosure: I made a post a few months back about a related topic (https://news.ycombinator.com/item?id=46307300), of PE buying up and consolidating the companies that used to provide software to emergency services, and jacking up the price and taking advantage of inelastic demand. This is a topic I am personally passionate about, and I am still exploring different options for fighting back in various ways.
In general, the company that was bought was likely being outcompeted or soon to become outcompeted. There's a reason the PE bought it: to turn it around into something that is better than the previous owner could achieve.
You can only make money in an LBO if you meaningfully improve margins or you grow massively such that the debt portion of enterprise value becomes smaller. In both cases, the company is better off than it was before.
I do think there are limits to the value that PE can bring and there are many bottom feeders going into businesses they shouldn't, like fire trucks. But not all of PE is bad.
The better solution is to tax PE capital gains as income so they pay their fair share of taxes, making good deals harder to find, drying up some appetite for that highly saturated part of finance, and returning more value to communities when they do succeed.
I just wanted to say that you're absolutely correct on everything, but I wanted to add a point:
We have spent the last 50-ish years "legitimizing" things like PE buying up essential services and implementing cost cuts. When I say "legitimizing", I mean we keep removing the avenues for the "regular people" to legally and formally reduce the harms that this sort of business brings about. It becomes just a fact of life: people can come in and do this and you have to "deal with it".
When you have people dying, watching their streets crumble, have garbage piling up, etc., you can't just think that "regular people" (or maybe "the little people", as some businesspeople might view them) will "deal with it" forever, regardless of how much legal, financial, and political cover you provide yourself. At some point, there will be a reckoning. In that case, you'll prefer that it be through a regulation change, lawsuit, or lost election/ballot initiative.
It's the same around the world. 99% of the time if something has gone to shit, it's because it was bought by private equity and milked for every last penny.
The irony is that PEs exist largely because of pension funds. So to sum it up (not so nicely) we are transferring value from our current standard of living to pay for retirement checks for our old folks.
Pensions fund a significant part of PE and they do so because they need around a 7% return in order to look solvent. If they do not have the higher PE returns, they basically go out if cash in 10 years and everyone would scream bloody murder. But with the higher returns from PE they have 40-50 year runways and people can pretend everything is fine.
So PE firms exist to extract value from basically all high quality goods and services to show a high ROI to prop up pensions. They extract wealth by buying up companies and gutting the “extra” things in them - for luxury goods, it’s quality, customer service and warranties (like my venta humidifier or reformation dresses), for services it’s stripping the underlying excess risk management and quality control. One can argue that PEs make the business more efficient but in my opinion they just turn worker or consumer related benefits into profits (stakeholder and business benefits). It’s a transfer of value from worker and consumer to business and asset holders at a massive scale.
But sadly it’s not some evil dudes at the top doing this transfer, the market force behind it is because we promised old people way too aggressive paychecks when they retired. Pensions need to invest massive amounts of money into higher rates of return and PEs just happened to be the medium that is the most successful. Sure the people running the PE firm extract a ton of value drying up all luxury quality and robust services from the daily lives of working families, but their take home is a tiny fraction of the wealth they extract (but yes they take home a massive amount of wealth for an individual). Instead the wealth extracted shows up on a 1400$/m for some old person probably living in a retirement home somewhere.
So if you wanna fix or ban PE, solve pensions.
> So if you wanna fix or ban PE, solve pensions.
We solved pensions. People have defined-contribution plans now. I would expect insurance float to dwarf pensions as a source of PE funding.
The real reason PE exists is because it charges high fees. The financial industry does not make products to serve customer needs, though by happy accident that sometimes happens. It makes products to charge fees. Index funds removed a big chunk of the fees that active mutual funds used to charge, so financiers went looking for a replacement.
Even if you snapped your fingers and all remaining pensions (and insurance float?) disappeared, PE is aggressively going after individual retirement accounts, now. Most insidiously, trying to work their way into the "target date" funds that are the defaults for most plans. So "solving pensions" will not make PE go away.
Huh? Don’t many jobs still have gold plated pensions?
Like millions upon millions?
They need to be paid out somehow.
Government jobs, yes. Of which there are more and more every year. https://fred.stlouisfed.org/series/USGOVT
true but be sure to see `All Employees, Government/Population`
https://fred.stlouisfed.org/graph/?g=1WF5r
Looks like about 18 percent, although I would assume there's a particular demographic where this might be higher.
Do they have to be paid out in full, though? I remember cases in the past where a company went bankrupt and had to renege on some parts of pensions, so maybe you'll see that again?
After some percentage are reneged… there would still be a strongly motivated bloc of considerable size?
I don’t see how it is relevant, unless the rate is close to 100%.
> many jobs... millions upon millions
...no. It doesn't even matter what the rest of the words in the question are. Just no, lol.
> They need to be paid out somehow.
No they don't. Lots of pensions, especially the not-gilded ones, go bankrupt.
In fact, that's precisely what happens to pensions of companies that are acquired by PE. The company gets stripped for parts, it goes bankrupt, and PBGC covers a fraction of the affected pensioners' payouts.
In other words, with or without PE, bloated pensions ultimately end up being the taxpayer's burden.
> bloated pensions
I find this characterization offensive. Who is to judge if the defined benefit pension if a primary school teacher or fireman, for example, is bloated? It's part of the negotiated pay package, nothing more or less.
At least here in NYC, a large part of a NYPD officer's pension is calculated based on a 3-year look back from their retirement date, so there is a huge incentive to work as much overtime as possible in order to bump that number in your last few years of service. There are lots of stories of NYPD handing out easy overtime in massive numbers for each other, particularly when they are about to retire.
Teachers are the easy ones to point to, it is hard to be mad at an underpaid teacher who receives a reasonable pension for life. We certainly can be mad at NYPD scamming the system to get $100-200k/year for life.
[1] https://www.bloomberg.com/graphics/2021-nyc-police-overtime-...
[2] https://www.empirecenter.org/publications/newly-retired-nypd...
All seem trivial compared to the money sucked up by billionaires, who seem to do little good for society. I'm not going to get angry at a police officer trying to maximize their retirement when we live in a society that celebrates people like Elon Musk, Jeff Bezos and Mark Zuckerberg.
Are you confused?
Why are you replying to a comment where you believe the words “doesn’t even matter”?
One of the tools we use was bought by PE last summer. When it was time to renew our support contract had tripled in price. I use it across 10 projects so our costs went from $200k to $500k. I let our account manager know this was unacceptable but even his hands were tied. Cancelled those contracts and let them know we were retooling with a competing tool and opensource to fill those gaps. The impression I got was we weren't the only ones. Sales were getting squeezed between customers bailing and PE management wanting to stay the course.
I've seen PE make businesses more efficient by reviewing all contracts and dropping or renegotiating ones that no longer align. Closing product lines that aren't profitable. But that is year 1-2. By year 3 they start the squeeze, layoffs, asset selloffs (stripping), and lowering quality, raising prices. That is where the real teeth of wolf are shown.
> When it was time to renew our support contract had tripled in price.
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.
Yes, that is typical for a certain kind of management. Only costs that are visible and easily measurable are taken into account. Invisible costs or costs that are hard to measure are ignored, even though they may amount to a whole lot, up to the ruin of the company. Employee motivation is one example for the second type of costs, while the 500 bucks per month for pizza were easily seen and cut.
I'd have said ghouls. At least vampires are sexy...
This is just the design of a PE fund. They run on a fixed cycle, so early on they heavily invest into their portfolio with the aim of resolving that risk and maximising the sale value by the end of the cycle.
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?)
> how successful they have become at aggressively optimising for market value
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.
That's only possible if the financial system is valuing things systematically incorrectly.
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.
> some institutional sucker will buy the company
What sort of institutions would try to take on operating such a business? And when does word get around, and the pool of suckers dry up?
> That's only possible if the financial system is valuing things systematically incorrectly.
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.
>That's only possible if the financial system is valuing things systematically incorrectly.
...have you looked around? Some of the biggest companies in our economy basically just serve ads...
“ In principle, I don't think there's anything wrong with this. All investment expects a ROI over some time horizon”
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?
Bringing morality into it opens a whole can of worms that I don't think we have the tools to answer.
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.
That is a baffling response, no one suggested corporations have consciousness.
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.
> By year 3 they start the squeeze, layoffs, asset selloffs (stripping), and lowering quality, raising prices. That is where the real teeth of wolf are shown.
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?
As long as customers choose services based on quality.
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.
Unless the new company ends up more competitive than the pre-PE company, does it matter? Thats not a good outcome, thats just a period of bad time between 2 good times.
A lot of markets can't support more than a couple of competitors. And in many cases, you can't easily open a new company because of upfront expenses. E.g.: an emergency room.
This is true but to use your example of an emergency room:
It's not uncommon in more rural areas to find a business that is essentially "more than an urgent care but less than an emergency room". e.g. they aren't doing trauma surgery but they can deal with broken limbs, severe lacerations etc that an urgent care couldn't handle.
My point is that while it's true that there are "step functions" in certain services, this is not always the case.
Seems like their might be an opportunity to start a private equity that buys extracted software businesses for pennies on the dollar and then revive those businesses with actually valuable (to the customer) practices
Or maybe by then nobody trusts the name of the original company and it's just useless
In this case, why doesn't someone else see a market opportunity and sell competing tools for less?
Medium / large companies won't take the risk on smaller operations selling a new focused tool unless it's a major pain point. They'll pay more for less risk, assuming the PE-managed company will go out of their way with account management to address all their concerns.
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.
Companies have finite attention. Taking on the risk of switching tools often has a higher cost than paying more for the existing tools. There is a significant opportunity cost offsetting the savings. Trying to compete on price with a tool a company already uses is usually an exercise in futility.
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.
Their competitors did exactly that!
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!
Because capitalism and customer brand awareness don’t work like your Econ class told you. There is a lot more nuance, starting with the inertia of customer’s awareness of brand reputation. But don’t listen to my ramblings, this comment in this thread does a better job than I would:
https://news.ycombinator.com/item?id=48295440
sure. not just that. certainly part of the issue is that the market is not perfect information.
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.
> The irony is that PEs exist largely because of pension funds.
The irony goes way deeper than that.
A large part of PE clients are university endowment funds.
Harvard for instance has close to $60B in its endowment fund, 40% of which is invested in PE. At this point, Harvard is more an investment fund, with a university as side business.
I think, if you were to say there is a way where you can take $10b and have that money make more ROI with less risk than $1000 can, people would look at it and scream this is broken let’s policy this out of our economy. It defies all laws of a balanced economy (not a capitalistic one, a balanced one). It’s just like monopolies and we have strong laws against that.
But… if you were to say hey we need to pay our old people and we desperately need some way we can deploy massive amounts of money at higher rates of return, people will say… hmm well it’s broken but the alternative is worse so we’ll ignore it.
But now imagine you have a way to deploy large amounts of money and get large returns off that money. Every large amount of money (endowments basically) will jump on it because why not? That’s literally an endowment dream scenario.
So pension funds are the moral reason these other huge chunks of money to get large returns. PE firms have become a streamlined business model because they continue to improve what they are good at doing, and it’s insane that we haven’t passed laws against it yet. Except of course we can’t mess with it because it touches government workers.
So yeah even if we wanted to policy it out of our society it’s practically impossible from a social point of view.
I think you have this pretty backwards. Private equity does not exist because of pensions. Private equity is investment that has not taken additional steps to be a part of regulated public markets.
It's true that private equity is dominated by institutional investors. One reason for this is that the investments are generally deemed to complicated, illiquid, and risky for retail investors (although the Trump administration is trying to change this).
Additionally, if we added the kinds of regulations, reporting requirements, standardization, etc, that would be necessary to scale this model to hundreds of thousands or millions of investors participating in an informed manner, we would simply recreate public markets.
Freakonomics recently did an episode on this that I thought was pretty good: https://freakonomics.com/podcast/is-the-public-ready-for-pri...
They've done some pieces on private equity in the past too: https://freakonomics.com/podcast/are-private-equity-firms-pl...
I don't believe that's ironic. Harvard and other "elite institutions" are the places with massive endowments, not state colleges or anything. Frankly the more I think about it the more it's nothing particularly interesting, just a fractal representation of the privilege of wealth as far as you want to drill down.
Not entirely... U Mich's is ~$20 billion, UVA & OSU are both around $8 billion, UCLA's is ~$5 billion, the Texas + Texas A&M system have nearly $50 billion in AUM.
https://en.wikipedia.org/wiki/List_of_colleges_and_universit...
I don't know why the University of Washington isn't on the list of public institutions, it should be number 6 with 9.4B in assets.
https://www.uwinco.uw.edu/
Lost in the commotion is the chaos that NIL is wreaking on universities and their donation funnels. The donations side of things seems to be rapidly drying up as a revenue source.
You often see them “monetizing the brand.” That’s a nice way of saying “betraying customer trust.” They buy a company that’s known for high quality and then cut the quality. They can keep charging the high prices for a while until people realize that it’s not what it once was. After a while, higher end customers realize what’s happened and stop buying. Then the brand typically becomes a mid market brand and they start selling on Amazon to a less affluent clientele who still associate the brand with quality but wasn’t in their price range before. They usually cut quality again at this stage.
Effectively it’s burning all of the trust built up with consumers as firewood by tricking them into buying mediocre products at high prices.
It sounds like you’re on the cusp of an entropy model of commerce.
I don't get it. If pensions stopped existing, would people stop doing PE even though it's profitable? If it is possible to get outsized returns "because pensions need them" then isn't somebody gonna notice and get those returns anyway, pensions or not?
Slavery is profitable. People only stopped doing it when it was perceived as immoral.
Lots of things are profitable but immoral. People will do crazy immoral and illegal stuff for money, but we outlaw and slander the more abusive stuff, like monopolies and such.
If it wasn't pensions that were funding PE, I'm sure PEs would get a lot more criticism and would not be allowed to do what they do.
The idea that slavery is a free lunch that is only banned on moral grounds is wrong.
Slavery is bad economics. If you want your economy to grow, paying workers is not bad. Economic growth isn't zero sum.
Yeah, it's like blaming drug users primarily for the violence of the drug trade. Sorry, but the drugs came first.
> Pensions fund a significant part of PE and they do so because they need around a 7% return in order to look solvent.
Pensions fund PE because PE can do a short term cooking of the books in order to smooth out the growth curve. So the return is usually positive each year, not raising problems.
Also what does significant mean? Pensions are the main mechanism non-wealthy people are investing in PE. Being that millions are involved, you would expect pensions would have a sizable portion of the market, but family offices and high net worth offices dominate. If it offers above average returns, why would they not invest? PE is like every other asset class other than housing, the top 1% own a large chunk, the top 20% own the majority, and the bottom 50% own very little. Decisions are not driven by sone fireman, they are driven by the wealthy like everything else. And the origin and continuation of pushing for retirement to come from capital investment comes from the wealthy as well.
> we are transferring value from our current standard of living to pay for retirement checks for our old folks
Well, yes, that's how any retirement (or any social benefit, really) system works: people who actually do work support the people who don't. Those latter include children, the elderly, pop-stars, politicians, etc. So unless you make people work until the day they die (which is possible, and have been done in the past, mind you — it just severely decreases the average life expectancy), we're going to transfer some of the created wealth to the elderly. The exact form of how this transfer is performed is a fascinating topic for discussion (make their direct descendants care for them! make a state-, or charity-funded fund to feed them hot soup once a day! make them save up for retirement themselves! lots of options, really) but it will still happen one way or another. After all, some people simply do have lots of money (and keep getting more) with doing no labour; some of them are retirees.
The S&P 500 already returns 7%. Why do pension funds need PE?
And like FIRE devotees, maybe they should model a lower withdrawal rate.
Because if you're hired as pension manager, and you just shove all the money into VTI, you're going to feel like you're doing nothing, and eventually someone will notice your job is redundant, even if you're outperforming your peers.
Relatively famously, the Nevada public pension investment manager relies entirely on indexed funds. He has one person he works with on the investment side, avoids the expenses of consultants and a large office, and maintains incredibly low fees.
He has been in the role over a decade.
And the people who hire pension managers are too stupid to see that active pension management is redundant? They haven't read A Random Walk Down Wall Street?
I have no idea how reliable this source is, but it looks plausible - from the "American Investment Council", which appears to be some kind of private equity trade association ( https://www.investmentcouncil.org )
https://www.psprs.com/uploads/sites/1/AIC_PublicPensionRepor...
Some interesting details:
- "Nearly 50 percent of the private equity investment dollars that make their way into American businesses come from public pension funds", which substantiates OP's thesis.
- "U.S. public pension funds invest 9% of their portfolios in private equity, on a dollar-weighted basis." 46% is in public equity, so obviously the lion's share is in still in public markets.
This isn't surprising. Public companies tend to be lower risk (and therefore offer lower returns) than PE investments and pension funds want a mix of both. They want the juicy returns of PE deals, but a portfolio invested completely or mostly in PE would be unacceptably risky. Most pension fund mandates will set % limits on how much can be invested in different asset classes, with lower limits for riskier asset classes.
I've been saying pensions should not exist, as they are contradictory to our political system. Some politician 40 years ago can promise everyone the moon, and never force the next generation to figure it out. I'm from Chicago which has a nightmare pension system that's keeping me from ever buying a home in the city I love, because my property tax increases just go to retired people who moved to Florida.
I really appreciate this perspective as It helps fill in gaps in my mental model of where our economy has gone wrong the last 50 years. Unrelated but - I've read an interesting paper on how allowing private banks to create money has led to the infinite profit growth goose chase...
I own a house in Chicago and my property taxes are much lower than my friends in the suburbs.
I live in a working-class southside neighborhood. The people who are complaining about property taxes for SFUs in the city are people in neighborhoods with skyrocketing home values.
Those people stand to receive a massive windfall when they sell. And while it may be annoying for them if they find themselves having to sell when they didn't want to, the they're vastly better off than all then renters in that neighborhood who got priced out much faster with no windfall.
Nah. I own a property in the gold coast area, and my property values have barely changed in the last 20 years. I only see an insane increase in real estate taxes and assessments. These are the things that price renters out, plus the Chicago housing regulations that leave the landlords without any leverage under pretty much any circumstances and force the risk to be reflected in the rent. Currently net profit from rental properties in that area is close to the interest on the equivalent amount of 10y bonds, without all the headache.
So sell and buy 10 year bonds. ¯\_(ツ)_/¯
The Gold Cost isn't suffering a shortage of landlords.
Well, I personally prefer having physical assets a lot more than cash. Just mentioning that to show that math does not favor ownership, provided that the rates stay high.
Note though that there is no shortage of demand for rentals either, so I'll keep increasing the rent following increases in property taxes and assessments, and people will pay. If anyone has a problem with that, let them bring this up with the City of Chicago and the Cook County.
Your Chicago government has way bigger problems than covering its promises to deliver elderly people the standard of life they earned.
The stuff that old people need in their retirements to live is getting more expensive due to the types of shenanigans that PE firms are doing. So their pensions appear solvent now but when those old folks actually retire, their money won't go as far? Doesn't add up. I think the people who are really benefitting here are the usual suspects - the ultra rich, and the PE guys at the top doing this transfer really are evil.
> So their pensions appear solvent now but when those old folks actually retire, their money won't go as far?
The pension people aren't being scored on doing well for their clients. They're scored on money. They don't care.
Ain't no different than some jerk in an insurance/regulator office cooking up a rule about PPE based on first order assessment of a bunch of crappy data. The guy who gets mashed by a forklift he couldn't hear coming doesn't hurt their KPIs. He didn't suffer occupation related hearing loss. MissionAccomplished(TM)
Pretty much every industry that deals at the statistical level whether it's PE making investments or something else runs in this manner.
I wonder if this creates opportunity for spinning up competitors to these PE owned companies. If they are underinvesting in their products in order to extract value eventually their offerings will not be competitive.
I think in theory it does, but in practice the customers of PE-bought companies don't update their priors fast enough.
If a company being purchased by PE meant that they lost the vast majority of their customers as soon as contractually possible, then the possible value extracted by PE would drop off a cliff.
This isn't necessarily the fault of the customers - we're all dealing with a lot of information to process.
And, up until recently, it was reasonable to attach reputation to brand instead of to owners.
And I think that's a lot of what PE exploits - the gap between people's belief about a brand's reliability/reputation, and the fact that the actual reliability has been a function of who the actual owners of the company are for many years - but people are still attached to the old mental model.
(there may also be some value for PE to extract from assets aside from customer relationships and the higher-order "brand value", but I suspect that that's secondary - if I'm wrong please correct me)
> eventually their offerings will not be competitive.
How so?
If you read the article it provides a good example. Fire truck businesses with a 4 year backlog and high margins. This is less competitive than the situation prior to PE consolidating it when it had much lower backlog and ~3% margins. Seems like a clear market opportunity.
Ah, okay. Sorry, I misread what you had said. I missed the “owned”, and thought you were saying the PE companies themselves would be uncompetitive—and wasn’t sure what you meant.
Why don't pensions just invest in index funds generally? High required rate of returns or?
There are multiple reason:
1. If you assume that P.E is uncorrelated/has a low correlation to the stock market (subject of many years of diatribes), then you decrease volatility of your portfolio by adding it.
2. Because a pension fund has a lot of years until they need start to paying out, then it is natural for it to attempt to harvest the illiquidity risk premium.
3. The (edit: removed extra words) "high required rate of return problem" is really a defined benefit problem. A DC plan can (and probably should) just be in mostly straight indices unless it's so big it can negotiate a good fee with asset managers for other classes.
They do (and will generally track the index themselves), but PE offers a higher risk/return profile and diversification.
Yes, underfunded relative to future payout promises, so higher rates of return required to remain solvent.
My State is essentially screwed for budgeting, because for years, our public retirement system garunteed "AT LEAST 8%" to accounts. Some years was much higher. I have a parent that make more, 10 years after retirement, then they ever did working.
They moved around the year 2000 to accounts that don't have the AT LEAST clause, and they earn what they earn, but due to the backlog of people still retiring that were grandfathered in, its wrecking our state.
My city has a huge budget deficit, but 24% of its total payroll budget goes to the public retirement system to 'catch up' from years when it did not make 8%. Next year or two, that is supposed to jump to 28% of payroll.
Problem won't start getting better until something like 2034 when the boomers start 'leaving the retirement system'
The "advantage" for pensions is that they get to "keep the principal" (unless it's setup even more insane than normally) whereas with a 401(k) the residual gets inherited.
Had pension fund just invest in VOO, PE won't need to exist.
This reads as apologia, blame-shifting, "I was just following orders".
People have to eat. They need water. They need a roof over their head. Nobody has to buy out all the veterinarians in an area at rates they can't say no to, have them sign non-competes and them jack up all the prices by 300% because, hey, you now own all of them. Nobody has to buy up all the trailer parks, which are normally peopple's last stop before being homeless, and then jack up the ground rent because, hey, where else are they going to go? Nobody has to buy up utilities, spend big on capex because legally you can pass on that charge and effectively double people's electricity bills.
Hannah Arendt coined the term "banality of evil" [1] decades ago and, in all honesty, I think it applies to the predatory nature of PE. It also goes for working for Palantir and a bunch of other companies. "I need to pay my student loans", "I'm just doing data science", "I'm just writing AI software that identifies when somebody is home" and on it goes.
PE serves no useful function in society. It's pure rent-seeking and incredibly predatory in many cases. ~15 years ago, there was a story about Goldman Sachs invented a derivative on the price of wheat and then essentially conspired to jack up the price of wheat [2]. This wasn't just manipulating a ticker on a Bloomberg terminal. It had real-world consequences. People starved and died because of this decision.
Yet I'm sure there were people who argued "I'm just doing legally allowed financial engineering here".
[1]: https://aeon.co/ideas/what-did-hannah-arendt-really-mean-by-...
[2]: https://theecologist.org/2011/sep/13/how-goldman-sachs-start...
Worse than vets is hospital system and medical offices. In our area there are about 6 hospitals within reasonable driving distance. 1 is a mayo and the 5 others are split between the two major mega-providers. One of those also partnered with CVS/Aetna to provide marketplace insurance, until they decided that didn’t have high enough margins so they dropped 100k (28%) subscribers.
The healthcare system is just rent-seeking upon rent-seeking. PBMs are another big one where the PBM gets to decide after the fact what your rebate is. No conflict of interest there when United Healthcare owns Optum, which I think is the biggest PBM.
I see the healthcare system's bloat as a symptom, not a cause of the expense.
It's kind of like the university system. It's a (mostly) privately run industry that gets massive injections of cash from the government because of both campaign promises (everyone needs healthcare, everyone goes to college and, bonus, everyone gets a house) and it being an incredibly unpopular position to either remove that funding or make the program entirely public which would, imo, alleviate both problems (but have their own unique drawbacks). The hybrid model we have is the worst of both worlds.
The hybrid system we have now of massive injections of public money into private industry is like blood in the water for do nothing intermediaries. PBMs are just the assistant dean of underwater basketweaving for medicine.
To clarify the main point is it is wrong but because it affects old people no one wants to crusade against it. It has the perfect moral excuse to hide behind.
I've never heard of the tie between PE and pensions until today.
I find it very hard to believe that if pensions didn't exist, nobody would have come along and exploited the same loopholes.
I've been thinking about that comment and I don't think it makes sense. When it comes down to it, PE is really just doing two things:
1. Taking advantage of a pricing inefficiency; and/or
2. Using local monopolies, inelastic demand and regulation to jack up prices.
But what powers PE is the LBO (leveraged buyout). That is, you buy csome company with borrowed money and then you borrow against the assets of that company to repay your original loan.. That... shouldn't be allowed. Obviously that company is saddled with debt and it's usually structured to explode at some future point when the buyers won't actually own it anymore. I think of it like subprime lending in a way.
Now passive funds kind of have to buy sufficiently large companies. This has been an issue with the SpaceX IPO because SpaceX is doing a small float (~5%) and NASDAQ has changed the rules to essentially force passive funds to buy SpaceX where up until now that wasn't the case unless at least 25% of the company was available to buy. It's so nakedly corrupt.
Anyway, if a LBOed company saddled with complicated debt gets re-listed it kind of has a captive market of buyers with passive funds.
So going back to (1) there is long historical precedent for pricing inefficiencies. I'm speaking about the corporate raiders of the 1980s. The movie Wall Street was about this era (well that and insider trading). Essentially ailing companies would be trading below their book value. The book value was simply the value of assets (real estate, etc) so you could buy the company, sell it for parts and make a profit. All the lost jobs be damned.
The companies that tend to get targeted for PE own real estate. This has been a competitive advantage because yet other rent-seekers can't exploit them by jacking up rents. But real estate is an easy asset to sell to pay back your LBO and you can even split the real estate into a separate company and lease it back from that company. It's just financial hocus pocus.
Sort of off topic but I like HN and comments like yours for educating me about subjects I would otherwise know nothing about. Thank you
Agreed. If we're gonna blame shift PE to pension and university funds, we may as well follow the thread all the way to the glorification of Greed.
A 30-year treasury offers 5% and A-grade corporate bonds offer 6.5%. You don't need to exploit essential services for the other 50bps.
[0]: https://fixedincome.fidelity.com/ftgw/fi/FIYieldTable?popupM...
Because treasury rates are rising, it now actually puts even more pressure on PE firms to burn furniture.
.. now. Five years ago that was more like 2%.
The S&P grew at ~15% annualized post GFC, and PE acquisitions of housing and essential services hasn't stopped.
Pension funds still exist?
There's $32trn of them: https://fred.stlouisfed.org/series/BOGZ1FL594090005Q
Who do you think is buying .. everything? They're holding substantial fractions of both the whole stockmarket and national debt.
I do not know anyone other than teachers, cops, or firemen that have pensions and all of those are grossly underfunded (see city of Chicago).
Now... if you mean IRAs then yeah... that's 99% of all private "investors"
EDIT: I forgot all about State and Federal pensions.
The pension plans for many government employees still exist. CalPERS (California Public Employees' Retirement System), Illinois Teachers Pension, etc. (https://en.wikipedia.org/wiki/List_of_largest_pension_scheme...)
It's the corporate businesses that have gotten rid of pensions in favor of 401k plans.
Many government employees have pensions. Most of the ones I know are also ... skeptical of the future solvency of those funds by the time they retire.
Most (if not all) gov't pensions still have the defined benefit part as the "optimal" choice even when they offer defined contribution plans.
They can also offer some really nice benefits like accessing your pension income at 55 which can be a substantial portion of your last year's salary, and you can keep working elsewhere if you want.
> we are transferring value from our current standard of living to pay for retirement checks
Isn’t this just what happens when you have an inverted pyramid (older population is larger than the younger population)?
> One can argue that PEs make the business more efficient
I’ve never seen it (I agree with you). To improve something they’d have to understand the business and do a bunch of work. Mostly they show up at quarterly meetings and want spreadsheets that measure some number that will go up (regardless if that number means anything).
> if you wanna fix or ban PE, solve pensions
How does one solve pensions?
> How does one solve pensions?
I was thinking that Covid and widespread antivaxxer mentality would have.
But no. This will be the latest ladder-pull by the boomers and silents to extract the last bit of wealth from all the younger generations. And this will impoverish gen-x and all younger generations even more so than we already are.
It goes beyond boomers (the boomerdoomer is already in full swing) - as they're dying off, most new employees do not have pensions (instead having defined contribution plans which have their own issues) - except for a few very large swaths, namely government and education.
lol we know that the vaccine did not stop the spread and didn’t even prevent contraction. I was double vaxxed but they did have some things correct that we were in fact lied to about.
It lowered the chances, and in case of getting sick it also massively lowered the chances of getting the worst side-effects, exactly like any other vaccine does.
It's a shame that even highly educated populations do not understand a basic fact of immunology.
Yeah what a shame. I never claimed that it didn't lower the chances of side effects.
This is what was claimed.
"You become a dead end to the virus." — Fauci, 2021
This was the reality
"[Vaccines against respiratory viruses produce] decidedly suboptimal protection." — Fauci, Cell Host & Microbe journal article, 2023
"The durability of protection against infection and hence transmission was relatively limited." — Fauci, 2024 congressional testimony
Anybody that questioned the religious dogma that the vaccines were super effective and that healthy people needed to get endless boosters were crucified and in many cases, fired from their jobs for refusing an unnecessary medical procedure.
There are so many things that went wrong during the pandemic. You were not lied to, that means someone has intent.
The lesson was not that vaccines are bad imho. I do not live in the US, so I just find it tiresome to listen to you guys blaming everything on people. There was no right way.
I don't live in the USA, so whatever was claimed is not universal.
Everyday I am infinitely grateful I have the ability to understand nuance, and the mental firepower to be able to comprehend data coming from sources rather than tiktoks, twitter, and hyper-partisan news orgs.
No one ever said the vaccine would prevent transmission. What they said was that it !could! prevent transmission. But no one would know before studies were done. What they did say is that it would lower mortality rates. Which it did in fact do. But the factors of transmission and spread were dice rolls. And everyone with first hand knowledge knew that from day one.
But, you are in fact correct, you were lied to. But not by anyone with knowledge of the vaccines, but by the grifters you hold up has being "a beacon of truth". The grifters who read "Vaccine has a chance it could slow or stop transmission" and turn around and say "They are promising it will stop transmission!" just so they can tear it down later as "another victory for TRUTH!".
Yes they did say it would. https://thehill.com/homenews/sunday-talk-shows/553773-fauci-...
Also you don’t know anything about me and what media I consume. You can’t quote me on something I didn’t say. They did say it would stop transmission.
Your source clearly says that the likelihood of transmission is reduced, not eliminated.
‘“So even though there are breakthrough infections with vaccinated people, almost always the people are asymptomatic and the level of virus is so low it makes it extremely unlikely — not impossible but very, very low likelihood — that they’re going to transmit it,” Fauci said.‘
Extremely unlikely is a lot stronger than reduced. Calling it breakthrough implies that the norm is prevention. Obviously nothing is 100%.
Preface: I have been in favor of the COVID vaccine and disease mitigations (and wish we would have used this opportunity for clean indoor air...).
I'm willing to accept my memory is wrong here with evidence, but I remember a very strong narrative in the early period claiming that the vaccine did in fact prevent contraction and transmission, to the point where it was supposedly surprising when "breakthrough" cases started being reported.
It's possible there was some loose language around "prevent" as I did see that especially later on, but I have trouble finding reliable information on what they actually believed and if they actually reported this accurately to the public.
There is the unfortunate mark against where they knowingly promoted misinformation around masks - persistent through today - that they were ineffective, in an effort to direct uncontrolled distribution of masks to medical professionals most in need.
Exactly. IN cases of national or world-level event, governments and government related bodies (WHO) will do whatever they can as not to cause a widespread panic. And if that means lying, they will absolutely do that.
And because the capitalists run the show in a lot of countries, https://ruinmyweek.com/wp-content/uploads/2020/07/live-laugh... is a good image that explains why lots of things kept going on as usual.
A world-level 6 week pause would have burned covid and a whole lot of other diseases out. But no. Poor capitalists need their 3rd yacht, 13th vacation home, etc etc etc.
As for me, my SO worked in health care. And Covid is a SARS. We have decades of effects and response. The shit's airborne. WHO knew that. CDC knew that. But they lied and lied and lied.
We take our healthcare in our own hands. I'll critically listen to the "experts" and deal with med doctors for prescription drugs. And Im definitely interested in my own manufacture of pharms https://fourthievesvinegar.org/ . But yeah, the wider and general the message, the more propaganda it likely is.
And we also have a good stock of PPE now, including a few tyvek suits. And everclear is 95% alcohol and $30 here for a handle. Best sanitizer you can easily acquire and food safe to boot.
EDIT as comment to WarmWash:
No. The WHO and CDC lied about Covid being an airborne infection. They refused and refused, up to then redefining what an "airborne infection" is.
https://www.bmj.com/content/385/bmj.q985
Covid is a SARS. Airborne. SARS requires BSL3 to handle properly. https://en.wikipedia.org/wiki/Biosafety_level#Biosafety_leve... "Biosafety level 3 is appropriate for work involving microbes which can cause serious and potentially lethal disease via the inhalation route."
I dont need international experts to tell me a stream of bullshit, when I can look at the type of disease and go "wellll fuck, airborne. time to wear masks outside the home and no parties or events. and go to store when its not busy."
Was Covid as bad as SARS? No. But is SARS response something that can be compared to what we should have did for Covid? Hell yeah.
No, if you wanna fix or ban PE, ban PE. PE is just a really easy and safe way for financiers to make extra cash, with huge externalities that everyone else pays for. The people benefiting from this are those who already have a lot of capital, and while it is true that old people generally have more than young people, don't fall for this simplistic generational warfare narrative. PE is also going after retirement homes and elderly care services.
It's just a ploy for the wealthy to extract even more wealth from the rest of us, while stripping the country for parts and dooming the actual economy for years to come.
On the subject, if you have 50 minutes to waste: https://youtu.be/tyNFosOFUDM?is=hwDH5tFCAYc7soHG
These are side effects of PE fund behavior, and where many of them get investors from
There are also many benefits you don’t notice because they don’t bother you
Interesting perspective. I had never considered that before.
If the government guaranteed basic human needs are met for every person (food, shelter, healthcare) there would be less of a need for giant pools of public money (pensions, insurance) sloshing around.
Mass index fund investment is basically socialism but stupid. My retirement money is going to get invested in the SpaceX IPO against my will. The market is not efficiently allocating capital, it's structured to allow elites to skim off the top while forcing middle class people to subsidize them.
I wrote about this not long ago: https://theloop.ecpr.eu/its-not-finance-its-your-pensions/ "It's not finance, it's your pensions"
(it's a blog summary of a much longer, and rather esoteric, academic article)
We all own the means of production. Communism crept in right under our noses.
Huh, that somehow reminds me of Crassus from Rome [1]
> The first ever Roman fire brigade was created by Crassus. Fires were almost a daily occurrence in Rome, and Crassus took advantage of the fact that Rome had no fire department, by creating his own brigade—500 men strong—which rushed to burning buildings at the first cry of alarm. Upon arriving at the scene, however, the firefighters did nothing while Crassus offered to buy the burning building from the distressed property owner, at a miserable price. If the owner agreed to sell the property, his men would put out the fire; if the owner refused, then they would simply let the structure burn to the ground. After buying many properties this way, he rebuilt them, and often leased the properties to their original owners or new tenants.
[1] https://en.wikipedia.org/wiki/Marcus_Licinius_Crassus
Nice establishment you got here—be a shame if something happened to it.
I wonder if the incidence of fires increased during this time.
https://en.wikipedia.org/wiki/Battle_of_Carrhae
For the curious, above is how Crassus died.
TLDR: Got over his skis and mad with power and money. Decides to invade Parthia. Gets wrecked by horse archers. That ends up being typical for Romans, but this was the first-ish time that happened. Some of those captured legionaries may have ended up in China, though it is unlikely.
https://en.wikipedia.org/wiki/Liqian#Lost_Romans_myth
> Gets wrecked by horse archers. That ends up being typical for Romans
I don't think the Western Romans ever really learned from it did they? The Huns ended up wreaking them pretty hard.
I know the Eastern Romans did learn at some point out of necessity by creating their own professional units and hiring mercs.
massed horse archers wrecked pretty much everyone constantly until the 1600s
Fighter Jets with missiles are the modern version of the same concept.
so instead of simply financing military operation and staying home, he went in himself?
in some sense I even respect that decision
Not going probably never even crossed his mind. Social status in Roman society was very strongly influenced by military success. He was a previously successful general.
Historically (with all the accuracy you get when you summarize all of history) raising an army and not leading it was effectively telling everyone that you should be replaced by whoever did lead it.
>Upon arriving at the scene, however, the firefighters did nothing while Crassus offered to buy the burning building from the distressed property owner, at a miserable price.
sigma
Article doesn't really dig into the angle I personally find most horrifying, strip-mining social capital.
In my area PE is gobbling up mom-and-pop apartment complexes, plumbing companies, restaurants, and generally making customers and employees alike pretty miserable.
Hard-working founders should be able to cash out, but there has to be a better system than this one. Succession, maybe. Not that we should push an unmysterious destiny on our children, but maybe more ought to consider pulling one?
> Hard-working founders should be able to cash out, but there has to be a better system than this one. Succession, maybe.
The large PE buyouts that came from the ridiculous ZIRP period could deliver better financial stability than handing the business down.
I know two families with businesses that attracted huge PE offers in the past few years. One of them took the buyout and the family members slowly left their jobs at the company because they effectively been early retired by their buyout.
Now the kids are looking at new businesses to buy and start for themselves with this new financial freedom that has come to the family. One of their considerations is starting another business in or around their old line of work that was sold off. They have to wait until the contractual non-compete expires, but if the PE owners are really making both the employees and customers miserable then it becomes a golden opportunity for experienced operators to come in and run a good business in the vacuum. Even many of the old employees have expressed a desire to join.
The bad PE phenomenon buyout is annoying, but businesses that become miserable for the customers and employees are not stable long-term businesses. When they decline because competitors show up to do a better job and retain better talent, it becomes a transfer of money from the lenders to the old owners and an annoying churn in the local business scene. As we see more of these failures, the willingness of banks to lend for these buyouts will go down.
I knew of a family-run hoagie shop that sold to "investors" (not sure if it was PE, probably was) three times, each time they ran it to shit amazingly quickly, and they were able to buy it back for a song and fix the damage.
This is surprisingly common. I know a few people that recycle their businesses through PE, getting a payout each time.
The trick is that the business owner has a good relationship with his customers. After the PE investors run it into the ground, they can credibly reach out to customers directly, assure them that the adults are back in charge, and basically be a hero to the old customers who hate what the business became.
Yep! These situations are annoying for the customers, but an amazing opportunity for people trying to run good businesses. Let the bad operators run a company into the ground and then buy the pieces at an amazing discount.
Companies need to brand as "Not owned by PE" the same way health food has prominent labels on the packaging.
Agree. I think that's what "Owner Operated" used to mean. Would be interesting to have a certification for these businesses. I've also started collecting related links:
https://privateequityvet.org/vet-list/ https://whoownsmydentists.com/ https://ledger.worseonpurpose.com/
I think part of the problem with the succession idea is that a lot of people in these positions worked these hard jobs to try and give their kids a better life. They encouraged their kids to go to school for their passions and now those kids are in careers far removed from what their parents did.
Instead of succession, I wonder if there is a way to make it easier for these people to sell their company when its time to retire to someone who is looking to start the next step of their career. A lot of software engineers joke about becoming farmers, but if they could instead make an easy transition into a small business by buying a small business, we could prevent PE from raiding things.
We should be encouraging employee stock purchase plans with tax incentives. [0] It’s better for the businesses and better for our communities than PE.
[0] https://en.wikipedia.org/wiki/Employee_stock_purchase_plan
The vast majority of people can’t just go out and buy a machine shop or laundromat and then start running the business. It’s a risky asset, not like a house where you put down 20% and any bank will loan you the rest. I’d love to own a small franchise restaurant or something in my town but they cost millions that I don’t have.
And that’s before you even make it to the question of “can the person that manages to buy it actually live off of it as a lifestyle business?”
sure but a restaurant is always going to be a risky asset. I am thinking more in terms of a plumbing business. It's a business that will always have a need, no matter the economy because a bursting pipe doesnt care if its a recession or a booming market.
I guess what I would like to see is a pathway to making it easy to buy or start up crucial businesses like a plumbing business, HVAC company, etc. As the current generation of owners want to sell and retire, we should make it easier for people to be able to get in there and buy these companies before PE can.
A plumbing business doesn't have "assets" though; it's valuable because the owner is good at their job. You can't durably "sell" that brand value unless the new owner is also known to be great at their job, at which point they don't really need to buy your business.
Family businesses handle this by slowly getting the next generation involved, such that the intangible value has been transferred by the time the owner wants to retire. That works less well with a stranger. You really need high levels of trust to make that work fairly for both parties.
I wonder what would make it easier for a regular person to buy a mom-n-pop plumbing business, besides financial help? If the owner wants $5M for it, and you (or a PE firm) walk up to him with $5M, it's yours. The mechanics of buying the business aren't particularly hard--the hard part is obtaining the capital.
The thing is those businesses can't really be "sold" because they make enough money to support a few families, but they can't do the same AND carry the debt-load necessary to buy it.
So they can only really be inherited or given away (and they often are).
But if it's not to kids on death, it's moderately difficult to give away a business that has "paper value".
Yea, I occasionally go to estate sales, and a machine shop going out of business popped up on my radar. Went down there to buy a few power tools, chatted up the elderly owner, and asked him why he was selling everything. The shop had everything, and would have been a really cool business to own and operate! He said 1. his adult kid had no interest in running the business, and 2. he couldn't find anyone willing and able to buy it for more than he could get by "parting it out" and selling all the assets.
I'm sure there are tons of people in my local area who could happily and successfully run such a business, but nobody can swing it financially. The initial financial hurdle of going from "not a business owner" to "a business owner" is real.
Yep, and if you're starting on your own, you might as well get new equipment and such built and made for you.
Same thing happened with a restaurant - nobody wanted to buy the business so it shut down, even though you could have bought the whole business for the cost of the building, basically.
(There's a path for entrepreneurial "youngsters" - identify these businesses 10 years before, and become a valuable employee in such; I've seen them given away for a song to such. Of course, in some of them they also ended up with the daughter, so ...)
I think the other thing is the older generation are of the opinion that a steady paycheck is somehow safer than owning your own company, mostly because most of them never sat in the other side of the table.
This leads to them pushing their kids to be employees even though that's...really contradictory to their actual lived experience.
yea the side of the table they sat on is one that fluctuates month over month, year over year. They recognize that it can work out, but its a gamble whereas working for a steady company (pre 2026 I guess) is the better option for their kids.
Succession is hard for businesses with a majority "intangible" value. Think private practice doctors: your patients are with you because they like you as a doctor, so the "value" of your business is tied directly to your continued involvement.
Family businesses have traditionally gotten around this by having their children involved for 10+ years prior to taking over. That way, you slowly transfer your "social capital" to the new owner (in this case your kid). This is understandably harder to manage with a stranger, because you can't transfer the value before they buy it, but they won't buy it if they can't guarantee you'll help them transfer the value.
> Hard-working founders should be able to cash out
Why? Operating a successful business should be remunerative on its own, or else it's not successful. Owners who don't want to do it anymore can let it become worker owned. If they don't want it, it can dissolve. What else do you need? The very concept that the end of a successful business is a big payday for its creator is itself the poison here. There is no end just another workday, success is ongoing not final. This is natural and correct.
When my parents started farming they had about a half dozen large loans for the base farm, land, equipment, buildings and an operating loan to purchase seeds and other inputs in the spring.
When they retired they didn't have any money in the bank besides the proceeds from their final harvest, but all their loans were paid off. That's where the profits went -- paying off the loans.
The farm was their retirement savings. They sold it off for high six figures, and that's what funded their frugal but comfortable retirement.
The neighbor's son bought the farm; I hope he's pretty much paid off the loan he took out to buy it.
But that's how it is supposed to be. You "just" need to have a system that incentives banks and small entrepreneurs to take on that risk, and makes it not a good investment for PE.
What makes that system rare is that there's a buyer who knows the business available. The new owner needs to understand the industry and convince the bank that they know how to run it as a successful business. PE do their homework on the business before they buy it and don't have to convince the bank that they know what they are talking about. The neighbors son isn't usually an expert on the your business.
I generally agree, but this point of view shifts the blame from one big, evil, soulless PE firm to thousands of small shops owners that just wants to "retire comfortably". It's not easy to sell because one can easily sees oneself as that small owner, but not as a big evil PE.
It's the same with gentrified zones: yes there are some dark patterns going on as well, but mainly is previous, smaller owners that want to make big bucks by selling to someone with money from outside rather than someone local like themselves for less money.
Sorry you're right, I should have been more careful with the phrasing there. The structures, risks, and incentives that make business owners believe and act like this are real, and that's the poison I was pointing at.
I'm not trying to put all of the blame on individuals responding to the pressures being applied to them. But neither am I accepting their abdication of the responsibility to act with honor and courage in the face of those pressures.
I think you're right to zoom in on that point.
My guess is owner-operator selflessness is a key ingredient in a lot of beloved small businesses. I don't know for certain that the winning personality for getting a business off the ground on all the bad days is the same one that raises rates proportionally with their success.
So it becomes all-or-nothing. It's my friends and neighbors when I'm working, when I sell-out it's purely business. No in-between.
I agree. It's a major problem that people who are usually, not always, already very well off decide to do a final "fuck you I got mine" and sell their business to a company they damn well know is going to strip it for all it's worth.
This scene from Ubik has been coming back to my mind very often recently:
The door refused to open. It said, “Five cents, please.”
He searched his pockets. No more coins; nothing. “I’ll pay you tomorrow,” he told the door. Again he tried the knob. Again it remained locked tight. “What I pay you,” he informed it, “is in the nature of a gratuity; I don’t have to pay you.”
“I think otherwise,” the door said. “Look in the purchase contract you signed when you bought this conapt.”
In his desk drawer he found the contract; since signing it he had found it necessary to refer to the document many times. Sure enough; payment to his door for opening and shutting constituted a mandatory fee. Not a tip.
“You discover I’m right,” the door said. It sounded smug.
From the drawer beside the sink Joe Chip got a stainless steel knife; with it he began systematically to unscrew the bolt assembly of his apt’s money-gulping door.
“I’ll sue you,” the door said as the first screw fell out.
Joe Chip said, “I’ve never been sued by a door. But I guess I can live through it.
- Philip K. Dick, Ubik
That's amazing! The "machines as woodland fairies" conceit imagines them as natural creatures, but nature has no laws
"In developing countries, everything is possible and nothing works. In developed countries, everything works and nothing is possible."
End consolidation. Go back to pre-1980s antitrust policy. Encourage competition and bust the trusts.
The pre 1980s standards were ridiculous though. However, even if the US moves to some 3 quarters of the way towards now would be a huge improvement.
The "consumer harm" standard is idiotic.
I don’t see how they were ridiculous on the face it. The economy during that regulatory period grew into a huge juggernaut.
Most of the R&D that laid the future of the world happened during that period. The middle class grew to its largest portion during that period.
I don’t think the economy was hamstrung in the least
> I don’t think the economy was hamstrung in the least
post WW2 the world basically outside of the US blew up and the US pumped a ton of money into europe+asia to bolster it.
it's easy to be #1 when everything else burnt down
Rose colored glasses.
The classic example is airline deregulation which happened under Carter. The real cost of flights is way, way down since then. But this doesn't stop people from complaining about how "flying is a worse experience now" and wishing for a return to inane regulations.
Would you share a more detailed argument? Right now we only have adjectives: "ridiculous", "idiotic".
The US economy generally did very well with those standards, maybe the best it ever did, especially considering distribution of benefits.
> The US economy generally did very well with those standards
Spurious correlation. Few experts (economists) think old regulations caused economic growth.
If we really want to recreate post-war growth, we should destroy half our infastructure and fight a world war. Then, in the years following the end of that war, we can experience catch-up growth.
Statutory antitrust regulation would be fantastic. Instead of litigation, the regulators, corporations, and shareholders know when a business must split or divest. The firm files a plan, it gets approved, everyone wins except monopolists.
Progressive business taxes. At a certain income level, natural pressure starts mounting to split.
Not a bad idea honestly. Would be interesting to see how it affects tech companies since they rely on hypergrowth. My one worry is that instead of divesting they would just play shell games with complex ownership structures.
elaborate on this line of thought please.
Sounds like communism /s
I thought “socialism” was the current bogeyman
most americans don't know the difference
most americans can't define woke
Its called "free market capitalism". I have been in favour of it for decades: https://pietersz.co.uk/2009/11/fix-capitalism
I am somewhat more inclined to some socialist policies now though.
free market capitalism will always end like this though. the end goal of capitalism is the consolidation of all things into a megacorporation or oligarchy that controls everything, creates nothing, and earns infinite money
Why is this downvoted? To me, it seems like a self-evident conclusion. Even the supporters of the current system would probably agree with it. When you have a system that encourages endless growth at absolutely all costs, while placing no limits at the amount of power a single entity can hold, what other outcome can there be but the biggest players absorbing everything into themselves and using their influence over people and governments to guarantee their dominance?
We haven't had a free market in the United States in awhile. It's public-private partnered market fixing. Which is good for the consumer, many times, though not all the time.
Is there a difference in terms of outcomes? In the final form of a complete 'free market' without a government, the biggest entity would simply replicate the same levers of power that a government has through private militias, issuing scrip, having their own private courts and so on. But, since the US has a powerful government, it's much cheaper, simpler and more stable for them to just buy out as much of it as possible and use the same power through a proxy. Admittedly, the US government is not completely controlled by them, so it could still get much worse.
I had the pleasure of growing up around gray markets (relatively free, bribes were predictable & reasonable enough for an average noodle seller) in Southeast Asia in the 90s. It's quite different from large corporations getting Federal agencies and municipalities to lock out any potential competition. The enforcement of the US govt is far stronger than the enforcement of a handful of corrupt cops, as each precinct is essentially its own feudal regime, and within the department you have individuals mostly loyal to their families. A corrupt cop in a corrupt system driven by loose associations of extended families & fictive kin groups, one of five in a neighborhood say, can be pressured by a group of aunties and uncles serving street food or pirated goods through a web of personal relationships. This was much easier for them than hiring a lobbyist here would be.
I'm not saying it's better, rule of law has many benefits, but it is an example of where there were markets which were more free, that did not have cyberpunk outcomes, and they were quite different.
I'll say that I don't know anything about 90s SEA, but I know a bit about gray markets. One thing that stands out to me in your description is that all the corruption is incredibly localized and small-scale. Everything happens at the scale of individuals. And I don't deny that living under these conditions won't be that bad (a single corrupt official's power can only go so far), but what's stopping it from eventually becoming more organized? With us encouraging endless growth of wealth and influence, corrupt individuals are bound to form groups, then rings, then whole organizations. To me, what you're describing seems like a transitory state caused by societal factors, instability and simply not having had enough time. What the thread is all about is end states. We're already in a place where removing government regulation would turn our biggest players into those same cops, except with trillions of dollars, offices in every country and an ability to get their hands onto anything that money can buy.
I'm saying that those biggest players and our governments already work hand in hand to do that. Which is to say, the government is used as the enforcement arm for corporate interests. This is less "free" market, and more market commanded by interests.
Without debating your point, I don't think it contradicts the GP's.
These mega-strong players always kill themselves and collapse. We can see this on the global geopolitical scale (which fundamentally acts as a true free market), where all the empires have always fallen.
The stressing part is when they are at their peak, so people would like to use regulation to short-cut right to the collapse part.
The only example we have a true free market victor that hasn't collapsed is humans, who have totally and completely dominated all other life on Earth, but man, it's certainly not looking good for us right now.
But does that collapse happen because of some universal axiom about controlling humans, or were those empires merely limited by what was possible in their era? This is the first time in history we have so much military power, ways to exert influence that's truly world-spanning, the most sophisticated technology and the most thorough surveillance ever - all at the same time. Whatever barrier there might be, who's to say that today's megacorporations won't be able to push past it?
I'd say the axiom is that as your system becomes larger, more complex, the number of stable states it can exist in shrink. Which is something that is just generally true about systems.
We can envision a future with an ASI controlled super corporation that owns everything with omnipresent micromanagement, but then why would the ASI even bother with humans. That event right there would be our "got to powerful for our(humans) own good" moment.
(I agree, but generally commenting about downvotes isn't something we do here from what I've seen)
I didn't comment just to complain about them, though, but to tell people who leave them to elaborate on why.
In my experience, most self-proclaimed "capitalists" either lap up the scholastic propaganda that capitalism is the 'bestest' economic system in the world, or are a real capitalist and don't have to give one fuck about what others say.
And most of these types NEVER read past, say, page 20 of https://www.gutenberg.org/files/38194/38194-h/38194-h.htm , Adam Smiths treatise on capitalism. Here's a few failures that Smith wrote back in his initial treatise in 1776. I think so far, we're failing every one of these, and basically speedrunning all the terrible warnings Smith wrote about as accomplishments.
Gross inequality was even mentioned there as something to significantly avoid. Book I, Ch. X, Part II; ~p. 50
Principal-agent problems in joint-stock companies. Managers of other people's money "cannot be expected to watch over it with the same anxious vigilance" as owners, leading to waste and negligence. Book V, Ch. I, Part III; ~p. 312-313
Mercantilist policy distortions. Protectionism, export bounties, and import restrictions enrich narrow merchant interests while reducing national wealth by intentionally misallocating capital. Book IV, Ch. II-V; ~p. 183-213
Underprovision of public goods. Markets fail to supply infrastructure (roads, bridges, canals, harbors) and institutions that benefit society broadly but yield no direct profit to private actors. Book V, Ch. I, Part III, Art. I; ~p. 303-305. https://www.independent.co.uk/news/world/americas/us-cities-...
Dehumanizing effects of extreme division of labor. Repetitive specialized labor "renders [the worker] as stupid and ignorant as it is possible for a human creature to become," impairing civic and moral capacities. Book V, Ch. I, Part III, Art. II; ~p. 324 . Even in the 1800's this got so bad that Karl Marx wrote about this in both of his critique of capitalism AND the communist manifesto.
Merchant collusion and monopoly power. Smith warns that "people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices". Book I, Ch. X, Part II; ~p. 54 . Hello, eggs, meat packers,oil products (gasoline), grocery chains, electronics (RAM), health care. Collusion after collusion, and almost no enforcement.
Im not communist, and probably not socialist. But its clear as day as to the failures of capitalism. And as a stopped clock is right 2x a day, capitalism does handle some problems better than any previous system. But we can do better. Lots better. But the entrenched power holds on to capitalism as fervent as a religion, and not dispassionate analysis.
How will that work - for example Y Combinator classes. They cannot be acquired? What about acquihires? Cant stop that - employees have their own agency.
> How will that work - for example Y Combinator classes. They cannot be acquired?
For the record: national economic policy shouldn't revolve around Y Combinator classes and similar startups.
I'm totally fine if it turns out a sensible antitrust policy completely destroys the acquisition exit pathway for tech startups. I'm not saying one will, but I'm saying that's a cost I'm willing to pay.
YC startups could just become mature businesses. Nothing wrong with providing a good service, earning a good profit, and employees maturing into stable careers.
> I'm totally fine if it turns out a sensible antitrust policy completely destroys the acquisition exit pathway for tech startups.
And it should also prevent the acquihire.
I think the really important question is HOW this will happen. If you mean for the state to buy them at fair market value, nobody will object to that, not even if it closes the door to private equity.
But that's not what you're talking about, is it?
How about doing what America used to do? Provide seed funding for a new fire truck company in trade for condictions. Can we agree to do that? Fund 3 companies to make fire trucks, fast-track whatever certification and approvals they need. Create the companies we need, risking (and in fact expecting to lose) a bunch of the capital used for this.
YComb was just an example, though. Should companies be able to be bought and sold at all? My opinion is yes. Agree or disagree?
The OP explicitly answers this: go back to pre-80s antitrust policy. Companies can be bought and sold but not if it creates concentrations of economic power that allow them to dictate prices to vendors or customers.
This is vague and not actionable. Should Microsoft and Amazon have been able to buy Anthropic and OpenAI 5 years ago?
People always give these vague guidelines (and even the guidelines in the 80s were) and wonder why they are easily circumvented.
This is actually how anti-trust works - if you decide a company gets too big you Ma Bell it and break it up, its very actionable, just hard.
People keep bringing up Bell as if the situation now is not just as bad.
And they want to do it again and enforce anti trust laws? I don't see any contradiction here. Break up faang and keep a close eye on all these acquisitions the ai companies are doing and why they need to own package management and code editors and etc.
Yes, breaking up things wasn't bad, it was the completely lax failure to continue this action and to regulate corporations that got us rafts of stupid ass legislation culminating in citizens united. "Too big to fail" companies are just government entities that are not regulated properly.
The situation now is just as bad, if not worse, which is why people keep bringing up the case of something being done about the monopolies.
> This is vague and not actionable. Should Microsoft and Amazon have been able to buy Anthropic and OpenAI 5 years ago?
No, because if we had proper anti-trust they already would have both been broken up years ago.
There's nothing ambiguous about it at all. We had it as our public policy for generations and then bought-off politicians stopped enforcing it.
The information is captured the same way as most policy - via statute and precedent, and guidelines for enforcement agencies.
None of this is confusing, or even hard, except insofar as it's hard to fight against well funded opponents.
How is going back to a policy that used to work "vague and unactionable"? It literally had been actionable.
It did not work though. Bell and Standard Oil are notable examples. What else?
> It did not work though. Bell and Standard Oil are notable examples. What else?
That's pretty unfair. IIRC, Standard Oil was on of the companies that was the impetus for antitrust law (and broken up by it), and AT&T was broken up (famously) in the 80s.
Basically, your "argument" is a troll or a deep and basic misunderstanding. Especially in the case of Standard Oil. You're basically saying the law doesn't work because it didn't work before it existed (Standard Oil became dominant in the 1870s or 1880s and the Sherman Antitrust act wasn't passed until 1890).
They were LITERALLY BROKEN UP due to anti-trust policies. You are a troll. There's nothing left to say. Bye.
How are you allowed to continue to post every 2 seconds? dang
> Companies can be bought and sold but not if it creates concentrations of economic power that allow them to dictate prices to vendors or customers.
The policy in question (as stated) should have prevented Ma Bell and Standard Oil from getting to the point of being broken up.
1. If you are proposing something even stricter than previous antitrust rules, great. But getting back to antitrust itself is actionable is step 1.
2. You don’t have to prevent every case before it happens so much as just stochastically go after the worst ones to make it less economical for people to go take on debt to have huge swaths of consolidation. Letting the market work, after pricing in that egregious monopolies will be broken up, is kinda great and better than minutely scrutinizing every tiny deal for long-term consequences.
If you want to move the goalpost of the conversation that's fine, but it's different from what the previous person was talking about, and why it doesn't make sense to blow up at them for it.
> You are a troll. There's nothing left to say. Bye.
is a wildly disproportionate response to the post, IMHO.
Microsoft and Amazon should have been restricted, due to their monopoly power, long before 5 years ago.
I've read enough of the pre-Borkian (ie, pre-1980s) history of antitrust law to know this was very actionable.
They were not easily circumvented in that it required decades of funding and activism to nerf the Sherman Antitrust Act and its successors.
> Should Microsoft and Amazon have been able to buy Anthropic and OpenAI 5 years ago?
Antitrust enforcement can be done retroactively as well, if it appears that a large company abuses its financial firepower to undercut competitors or a marketshare gets too dominant.
It was absolutely actionable and implemented as policy for decades, what are you even talking about? Your phrasing pretends this isn’t exactly how antitrust enforcement worked before the much more recent approach began.
It really was not. Go look at the success rate of enforcement.
You're alluding to some second order effects which are real but also able to be dealt with, and have been.
Montgomery Ward thought it was "too big to fail" and too powerful to regulate.
So, what happened?
If the US government wants to, and it has in the past, it just takes your business at gunpoint.
4 soldiers walked into the ultra-conservative owners office and made him leave. Two of them picked up his arms and legs, took him outside, and deposited him on the sidewalk.
> a major U.S. CEO being physically evicted from his own company by armed troops became one of the most famous news photos of the home-front war
But "corporations are people" and those types of markets have closed since 1865 in the united states.
Why do you present this as a binary to agree/disagree with?
Simply because that is the maximally reduced case and it inevitably will result in the same situation.
> that is the maximally reduced case
It sure is.
> and it inevitably will result in the same situation
Why?
If the acquirer has too big or dominant position already in the specific sector no. They should not be able to sweep the board of all companies doing single thing.
If the acquirer attempts to acquire a startup (regardless of investor) for anti trust reasons, or there are anti trust concerns, the M&A activity is disallowed by regulators. A recent example is Figma and Adobe.
https://hn.algolia.com/?dateRange=all&page=0&prefix=true&que...
Seems vague. What is an anti trust reason? Figma and Adobe id a great example. Both are doing very poorly.
What definition of success are we using that having over $7 billion in net income after expenses in 2025, and nearly $2 billion so far this year, is "doing very poorly"?
2025 numbers: https://www.sec.gov/Archives/edgar/data/796343/0000796343250...
2026 Q1 numbers: https://mlq.ai/stocks/ADBE/q1-2026-earnings/
Their joint market cap
It's not vague. You can go look it up.
Everything is vague to you. All you're doing is concern trolling for monopolists
It really is sad that any disagreement with “pe is bad” means i am concerned trolling. Ever consider the guidelines are actually vague which is why usa keeps failing in attempts to enforce?
Don’t confuse the nature of the feedback you’re receiving here. Your comments in this thread are so obstinate and so far from this forum’s standards of good faith argument that community members can’t help but perceive you as a troll.
Nobody likes this state of affairs so we are asking you to stop strawmanning and start steelmanning the posts you are responding to.
You are clearly not dumb, so stop responding to the dumbest possible and easiest to dismiss interpretation of other people’s comments and instead go deeper
> Ever consider the guidelines are actually vague which is why usa keeps failing in attempts to enforce?
Your cause and effect is wrong.
The US doesn't fail to attempt to enforce, the gov representatives often get paid to not enforce by said corporations who have been allowed to put money into their campaign for election/reelection.
I am not an anti trust enforcer or scholar, so I'm going to defer to experts in the field: Lina Khan, Matt Stoller, etc. That is the point of experts in a domain.
Given the vagueness it is no surprise nothing happens.
> Given the vagueness it is no surprise nothing happens.
Lots of success during the last admin for those paying attention.
https://www.ftc.gov/news-events/news/press-releases/2025/01/...
https://www.economicliberties.us/press-release/lina-khans-tr...
https://www.economicliberties.us/our-work/factsheet-the-ftc-...
Most of these are not blocking merges or sales. What is your point? We are talking about the original comment which advocates ending consolidations.
Quite clearly the word "consolidation" is referring not to acquisitions, but to M&A activity that achieves a certain level of, you know, consolidation.
I think 5-15 person employee businesses do not concern trust busters.
Whats the connection between the number of employees and anti trust? Also, there are plenty of YC companies with far more than 15 employees.
Generally you don't hold a market dominant position in any sector that anti-trust regulators care about at 15 employees?
Frankly this stuff is impossible to talk about in the abstract. The details of every individual case matters. If you're actually curious (instead of just playing a shell game), you can go look up the types of analysis that FTC does to evaluate market dominance and whether a given transaction will excessively consolidate a market.
What's rarely addressed in these articles is the question: if the product/service is so bad relative to the cost, where's the competition? Specifically in this article about fire trucks, they say that margins have tripled... ok, why isn't anyone jumping on that?
I simply don't understand why leveraged buy-out(LBO) is allowed in the first place. It is like paying for the company with the money from the company you are buying.
It provides liquidity to business owners.
As a business owner, if you want cash today because you are done with a business. You could go to a bank and get a loan to pay dividends. This is a bad deal for the bank as you have no incentive to operate the business after you cash out the loan. A private equity firm comes in and operates the business on the model that they still keep some of the profits after the loan value.
The crappy side comes in as a customer, the PE firm can do this to an arbitrary number of firms in the area and raise prices on each/cut services. PE firms can trivially build out monopolies. Many of these monopolies will be invisible as they leave the existing branding etc. in place.
That in itself is reasonable. However governments choose to encourage it with tax systems that mean you pay less tax by increasing debt. This is the main thing that breaks capital structure irrelevance: https://moneyterms.co.uk/capital-structure-irrelevance/
> As a business owner, if you want cash today because you are done with a business. You could go to a bank and get a loan to pay dividends.
If you are a business owner you could borrow yourself using the business as security.
but then you would need to keep running it, what if you don't want to do that anymore? how do you incentivize someone to keep it going to pay off the debt you just borrowed outside of the llc.
Private parties are allowed to make bad business decisions: Lenders can give loans that might not pay back. Businesses can take on a lot of debt and cash out the owners if allowed under the terms of the loan. A PE buyout isn’t even necessary to do this. The owners could load the company up with debt and pay themselves a lot of money if they negotiated the right loan terms. One of the suppliers I used for a while did exactly this, enriching the owner and then collapsing.
One correction is that it’s not like paying for the company with money from the company you’re buying, because that obviously wouldn’t benefit the sellers. The money comes from a lender and they get terms to take the business if the loan terms aren’t meant. The lenders are the effective new largest owners of the company with the PE firm being a smaller owner but the expected primary operator.
You understand mortgages, though, right?
Even 3% or 0% down mortgages?
LBO's are like buying a rental property where the mortgage is approved based on expected future rental income from the property.
That's why the parent is saying "It is like paying for the company with the money from the company you are buying.".
LBOs are much worse than that. It's like buying a rental property where the mortgage is owed by the a shell corporation that owns the property. The shell corporation, not the purchaser, owes the debt.
It's like taking out a mortgage on a house, but letting the house owe the debt.
>It's like taking out a mortgage on a house, but letting the house owe the debt.
Isn't that a non-recourse loan, which in some states is the default for the initial loan to acquire the housel
When you put it like that, you make it sound reasonable! The house being collateral for the debt seems in a blurry way to be "the house owes the debt".
That's pretty blurry, though. Blurry enough that we don't distinguish between the collateral and the borrower.
Exactly. That is largely how commercial lending is underwritten: by ensuring the DSCR (debt service coverage ratio) is over 1.0.
Sure that is commercial lending.* And the acquirer owes the debt. But that's not how LBOs work. In an LBO the target owes the debt.
*Coverage of 1:1 is an accident waiting to happen, but otherwise sure.
That's not especially different from the typical LLC/SPE holding structure where individual properties in a large real estate portfolio are not held directly, but rather by a single-purpose entity that holds each property and then is owned by a larger but distinct entity. You don't want an issue in a single company/property to be able to take down your entire holding company. If someone will lend you money without cross-collateralization, why wouldn't you prefer that?
If PE firm A wants to buy company C using an LBO, it could do so by having C borrow money and then A purchase C, or by creating an entity B that borrows money and then purchases C. Whether B or C owns the debt doesn't change anything meaningful for A, and it's pretty clear that you're allowed to form company B (and really hard to imagine how you'd make that illegal without effects that would be worse than current).
>If someone will lend you money without cross-collateralization, why wouldn't you prefer that?
I would prefer that! I'd prefer even more strongly that the debt be owed by someone else entirely, so a default isn't associated with me at all. If you're up for it I'd also prefer to use your credit card number to buy stuff on Amazon. But for whatever reason the law doesn't always seem to follow my preference.
I'm sensitive to your point about restricting formation of new corps. The system can't just be changed randomly without extremely careful thought. And often not even then.
That's exactly HOW rental properties are (supposed to) be bought!
Most small-time single family landlords actually go above and beyond that and "pretend" the rental is a house they're buying to live in (or actually is, for a time) and get a "home owner's mortgage" which is even easier.
Large commercial real estate is sold and loaned based on future rental income, pretty formulaically.
Yes, those exist in industrialized countries as a result of public policy decisions. We do not have 3 or 0% mortgages because that’s what the market naturally bears or produces: we have it because mortgage debt is backstopped by the state.
It’s possible to “understand” mortgages by understanding that conditions for stable home markets don’t arise by themselves—we collectively make them possible because the outcome is desired—then wonder WTF because what social function is creating conditions for private equity getting us.
In residential real estate, I think stems in large part from a desire to help people who don’t come from money to own personal real estate (which is one of the best ways to go from $0 or negative net worth to positive six figure net worth).
Not only is that politically attractive, I think it’s more good than bad as public policy.
Turning back to PE/LBOs:
Having limited liability entities (companies) also serves good public purposes. Having companies being able to borrow money also does. Having companies being able to own other companies also does. I think that’s the only three ingredients you need for the PE model to operate and I don’t think that the public is helped by barring any of those three things.
This was called corporate raiding in the 1980s and even Reagan era America looked upon the practice as horrific, vilifying it in books/movies. That it's now an acceptable norm even after 40 years of it making things worse says a lot about the state of our nation. 'Money above all else' is more believed today than 1980s Reagan America.
It is analogous to a mortgage, you put down X% and the house itself secures the loan, along with PMI if your equity is below 20%. The assets of the business secure the loans in the same way a house secures a mortgage.
It is not analogous because if you sell your house and the sale money is not enough to cover your mortgage you are still on the hook for what's left of the principal. A leveraged buyout is exclusively on the purchased company's books, so if the company goes to zero the PE parent company is not on the hook for a single penny.
That varies by state. Twelve states are fully non-recourse states (lenders can’t go after borrowers beyond the loan security); in other states they may be able to, but borrowers who default on their mortgage may not be particularly asset-rich targets in the first place.
If the company wasn’t able to borrow money for itself, a wrapper company could which would still have very closely the same effect as being an asset-poor borrower.
What I don't understand is how the cost of banks repossessing these companies in case of default don't make the math unviable. Unless the company have a lot of fairly stable semi-liquid assets (like real estate) banks should be charging fairly high interest on these loans which would make most of these business unprofitable.
Which would increase the rate of defaults (if they are authorized in the first place) and in turn increase interest even further. I guess the PE is always maxxing out the leverage on every deal at _just_ the projected break-even point for loan repayment? But that leaves no room for error or changing market conditions which also increase the rate of defaults and so on.
> Unless the company have a lot of fairly stable semi-liquid assets (like real estate)...
That's exactly what happened famously with Red Lobster. PE sold off all the underlying real-estate to get the initial sugar-high and replaced it with a leasebacks. Those leases had escalating costs and fixed terms, which made it difficult to adapt to changing trends, and was a big contributor in what ultimately sunk it all.
Non-bank entities being in play is likely part of the problem. If you can sell the bad debt to some other entity say a fund that got investment from pension you win. For fund managers these things can look great on paper and that is everything that matters. Even if things do not workout they can on paper extend and pretend or take payment-in-kind. Meaning well you are short on interest payments so you just tack it on the principal.
And everyone gets their management fees until people start asking their money back...
Ah so it is related to that whole private debt markets, the loans these PE companies take are not with banks. It is related to that whole thing with Trump opening those kind of loan investments to ordinary americans and pension funds.
Great another financial crisis.
Most fun thing is that even if bank can't led to these sort of companies they can lend to companies that lend to them... So added fun. And well this has been going on for long time and cracks have started properly showing up more recently.
Does "the bank" know that it is unviable?
Check the other comment, apparently these loans don't come from banks, but rather from private debt markets. And most likely they don't know these loans aren't viable.
Yes, it's using bankruptcy and limited liability to extract value from companies that may well be completely solvent and functional with little/no downside or risk to PE.
Pure parasitism.
bingo
Yes, this is the crucial distinction. (I wish that articles criticizing PE were framed in terms of LBOs + bankruptcy-law instead, because that's the root of the policy problem.) Corporations can go bankrupt without risk to the human beings who are owners/investors in the corporation.
Note that from the lender's perspective, the risk is the same and in a perfect-information universe could be mitigated by charging higher interest. The problem for society is the externality that the business's services get worse.
> so if the company goes to zero the PE parent company is not on the hook for a single penny.
Sounds like a problem for whoever is providing the financing. Not really my concern unless you're saying there's some systemic problem it causes like with mortgage securitization during 2007. The lender will charge a high interest rate if what you're saying is true.
It’s the shareholders of the purchased company that provide the financing, in the form of debt in the company’s books. Then they exit, and the company lays off people to service the debt, and you and I as taxpayers cover unemployment and other social harms.
It’s literally a way to extract revenue from our broader social institutions by spreading the pain across so many people that individuals don’t complain (or, in some cases, don’t even understand how it harms them).
It's the concern for the community who pays in higher prices, and the employees in their job stability.
Has everyone forgotten the social contract? We do not exist as communities to make a small number of people richer. If the trade doesn't work for all involved, we change the rules.
Not necessarily. In non-recourse states like California, the lender is stuck if the asset becomes worth less than the loan.
11 USA states have Non-Recourse mortgages where you also are "not on the hook for a single penny."
Some of those are for purchase and not refinance, but the reality is in almost all states (even those that are not single-action by statute, where single-action is "they can go after you, or the house, but not both") are practically single-action.
In fact, they'd much rather single-action foreclose as they'll likely get a house than force you into bankruptcy where they might not even get that.
The Abrahamic religions have a natural safeguard against excessive wealth concentration: ban interest-based loans to private individuals (usury is shunned in the Bible and the Koran) and instead encourage a wealth tax on hoarding that directly transfers charity from the wealthiest to the poorest (tithe or zakaat).
Some modern economists have suggested this should work theoretically if properly implemented. See Helmut Creutz, Das Geld-Syndrom (1993) and “The Natural Rate of Interest Is Zero” — Mathew Forstater & Warren Mosler.
And which countries does this work for? They all still somehow still manage to have palaces.
There's also a strong argument that charity transfers to the poor does far more harm than good. How do you price a field worth of wheat, a mill, or even a local grocery when an airdrop of processed flour and food rations can arrive at any moment with no warning? And how do you get the capital to start one of those when it's illegal to get a loan?
Of course there are solutions if you have enough tenacity, but the overall result is far fewer businesses started because the friction is just so much higher.
Run from investing in PE, run as fast as you can.
I (and leaders at my PE-owned company) cannot say enough bad things about private equity. How anyone who managed to make money in their life decides PE is a good investment blows my mind.
We are now on our 5th PE firm in 10 years, and just completed a "PE lifecycle" of buy -> merge -> sell -> part out -> merge.
None of these PE firms bring anything to the table. Even the hundreds of billions AUM giants. They have zero interest in tangibly improving the company, and lots of interest in cheap window dressings meant to fool other PE firms. Not that they could do much else, because it's mostly business grads with minimal real world exposure, and hunger to be rich above all else.
The most critical thing to understand is that they pay themselves "advisory and oversight fees" for the incredibly difficult work of increasing sales targets 300%. These fees can eat 10% of our revenue, and is one click above theft. Trust me, they will lay-off 75% of the company before even considering cutting back their personal take. Never mind the fees they take from investors too. They bill both sides.
Also, if they kill some of the companies they acquire, it's the investors loss. It is not their loss. They still collect all their fees just the same.
There is a total misalignment between investors and PE firms, where PE firms just want to maximize their looting while investors think they are actually trying to improve the acquired companies. If the invesotrs do see gains, it's mostly because the firm successfully conned another firm into overpaying.
Run from investing in PE, run as fast as you can. Recently they changed the law to allow regular people to have PE in their retirement. They are running out of useful idiots, and want access to the general public. DO NOT FALL FOR IT
Have worked in C levels of many PE portfolio companies across industries and this all tracks for me.
I make a good amount every time the company changes hands so I’m kind of complicit but I also try very hard to run each company the best it can be run from the perspective of all stakeholders. Sometimes they just live in la la land with their expectations. They put together an investment thesis prior to investing and cant wrap their heads around any deviations from some stupid excel model they built with 5-10 year financials all on rose colored assumptions. One business I was a part of had a new government regulation immediately erode 40% of their revenues and every month explaining it over and over why we were down to plan was ridiculous. Then the annual budget we told them would be a readjustment to reality. When we presented it they acted flabbergasted. This same thing went on over and over until I just got fed up telling them I didn’t care about their investment thesis and would only discuss reality and left the company purely because of the investors. Stuff like that is pretty common
Looting is a rather apt word. What really breaks me is the fact that these are the people who are making it. Destructive people who extract every last cent of value from everything in sight are winning. Society actively rewards this. Constructive people who are actively trying to add value to the world face many more risks and difficulties.
so basically the principal - agent problem turned up to 11?
I wonder if the fractional reserve money system helps perpetuate this in any way?
I've seen this in K-12 EdTech. Most of the companies are owned by PEs. Digital curriculum companies, Assessment companies, Auth companies (like Clever), etc. And these PEs have portfolio of them and keep expanding. Not saying good or bad, just an observation.
Link to the Musharbash article that spurred the congressional investigation (2025):
https://www.thebignewsletter.com/p/did-a-private-equity-fire...
which contains links to its claims and an author with a name, unlike the above article...
Of course they would. Private equity looks for the following things 1. Things with an inelastic market and fixed demand. 2. Many overlapping small time competitors. 3. Steady cash flow, preferably with low capital costs though not always
You can take the cash flow, take debt against the companies own cash flow to buy it, pay yourself back, consolidate, then raise the prices on a captive market.
Interesting seeing a quote from Sen. Josh Hawley that I agree with...
Quote (from article) “This didn’t just happen to you accidentally. This is a business decision, isn’t it? You keep these backlogs like this. […] Another word for this would be a heist. This sounds to me like private equity came in; bought up all of these small companies; combined them; shut down their production; rolled up a huge backlog; massive profits; stiffed these guys; and now you’re making out like bandits.”
As a Missourian who is regular embarrassed by Senator Hawley, I must say that he brings the goods when he has the opportunity to grill an oligarch.
Funny that Eric Ries book "Incorruptible" was released yesterday - it applies directly to the PE owners who should possibly rethink their approach.
Putting the financing debt on the books of the thing that's bought instead of the purchaser's shouldn't be legal IMO. Imagine if you could buy houses and leave the mortgage on the house's book instead of your own. It's a total farce.
Not all PE problems are existential; they will be outcompeted.
What keeps a newly graduated Veterinarian from opening her own clinic and undercutting the PE competition? With no massive loans on her books, she can profitably offer lower prices than PE can. She may even drive the local PE clinic out of business.
First, opening a clinic requires some serious money. Then, if the new clinic gets traction, PE can make a very good offer for a buyout and the owner would have to be stupid or very stubborn to refuse. Most big companies these days just buy up competition. Good for the owners but bad for the customers.
Another thing which I've seen personally is that in general getting from 0 to 1 required HEROIC effort to the point that it requires a personality type.
How many veterinarians got into the game to become relentless, driven, scrappy and indomitable business owners vs because they love furry things and helping?
> With no massive loans on her books, she can profitably offer lower prices than PE can
Depends entirely on fixed vs variable costs. Rollups (which are very common now) work mainly because most "mom and pop" businesses can easily be "unlocked" by pooling the treasury, HR, accounting, commercial banking, supplier negotiations etc.
"Lower your prices to compete with massive sources of capital" Great idea.
How is a new graduate supposed to start a business without a loan?
People had no problem starting clinics in the past and they probably could today if they really wanted to, but there is little incentive to for the past few decades while the stock market has been booming. Why spend 80 hours a week struggling to run your own clinic and paying off loans when you can work 40 hours a week working for somebody else's clinic and invest your savings in the stock market?
Find an investor.
Could a veterinary business not be bootstrapped?
Assuming you had $$$ for some supplies but couldn't afford to lease a commercial building, you could provide small mammal services from your vehicle, driving to people's homes to give vaccinations and well care.
Being mobile would also allow you to serve a larger market than a fixed clinic; you could serve a couple small towns on Monday, a couple others on Tuesday, and server a larger metro on the weekends.
Once you're consistently profiting $$$$/day you'll be able to start saving for the equipment you'll need for a commercial lease somewhere because you have both the cash, cash flow, a loyal customer base, and critically, a good sense of where a good location would be to serve them from.
Sure, that sounds plausible. I'm not saying you need an enormous amount of money, but for this scenario you need supplies, car payments, gas, probably some kind of licensing fee, insurance, some kind of advertising, and a few months of rent and living expenses until you start making a profit. Maybe like $10,000, plus more as a safety net in case it doesn't work out and you need to find a job?
Even if they are lucky enough to have no debt, I don't think the average graduate has $10,000+ in the bank to spend. I have never started a business so I honestly have no idea how hard it is to get a small business loan for something like this, maybe it's easy, but even so it's certainly risky.
Do you know how much it costs to start a business, and how much the average well-off American has saved?
this is a peak HN comment in terms of cluelessness about the realities of how the world works if you're an ordinary person.
who are these grads graduating without massive loans hanging over their heads?
> With no massive loans on her books,
Except every newly-graduated veterinarian does have a massive loan on their books, in the form of student loans. And even if she didn't, where does the startup capital for her clinic come from? Whether in human or animal medicine, starting your own practice--especially as a new grad--is usually the course of action with the highest-risk-to-lowest-pay ratio.
Yet there is no evidence of this happening in any industry or area where PE has become the dominant player. Why not? What you’re saying is nice economic theory but it’s clearly not happening.
Because the pain is bearable and not too much.
If it becomes too much, things actually happen.
(This is the dark side of financialization, as it can be used to maximize human misery.)
"PE firms load acquired companies with debt, cut costs aggressively, then resell at a profit"
The last part never made sense to be. Where do they find willing buyers for these debt laden, hollowed out husks?
That's where the scam is. They sell to their pension fund and mutual fund buddies, and in return when they get a really good deal, those funds will be first in line. It's a scratch-my-back-scratch-yours kind of deal that is utterly corrupt but no one seems to care because the losses are papered over by these huge funds.
PE isn't really the issue. Some things just shouldn't be run for profit - doesn't matter who the owner is.
Oh no!
Who would have guessed that turning social human constructions into businesses that 'have to make profits' could result in such deaths!?
What on earth could be next?
Defining margins again and again until these businesses suddenly actually are totally compliant and suddenly there are even more deaths?
Oh how will we ever solve this strange behaviour!?
/s^s
One thing I don't see is the other side of this story: the sellers.
I don't get why sellers are selling to PE. Can these services not "IPO"? Why do these companies need to sell?
When PE takes over medical practices, my understanding is there just isn't enough capital available for a dentist to "cash out". The options are either they find another dentist to buy it, the close the practice, or they sell the private equity...
How is local doctor's office going to IPO? An IPO is just selling to the public instead of a private buyer. Not to mention the amount of paperwork and ongoing reporting requirements of actually IPOing.
Talking to a single buyer is easier than arranging an IPO and I would imagine the diligence far less onerous.
My point is, if not PE, how do people expect boomers to exit from their businesses?
Out of the gate you need $27.5m in cash flow with $2.2m in profit. I doubt there are many single practice dentists doing that kind of volume.
You can’t just IPO because you want out of the business. There’s lots of reporting and regulatory requirements to ensure you aren’t screwing investors.
I don't get for the sellers, what is the alternative? It feels like their only choice is LBO PE deal.
In the past farmers needed COOPs in order to make their products/the local community's economy viable. Today we need something like COIVs (community owned investment vehicles). Kiva for the rest of us I guess.
I'm trying to be generous here... but prisoner's dilemma says the people in a community are probably better to park their money outside of the community in order to protect (and grow) their retirement investments.
Yes, it would be better for the community if people chose to invest locally instead of the SnP 500, but running out of money in retirement is a very real fear and the SnP500 is much better/safer for most people than COIVs.
Successful business owner has revenue of $2-20MM with their owner's "salary" being $200k-4MM which is very respectable.
Owner gets old or want to quit the business and a PE offer of 2-8x Revenue comes in.
Owner making $200k instantly cashes that $4MM check and walks away.
PE takes contracts, guts all the expenses and cuts staff in half, and purchase price is recovered in <2 years.
Suddenly there is only one HVAC or dentist company that can maintain licenses and insurance.
Going the IPO route is not an option for most of the companies being acquired (vets, plumbers, electricians, construction companies, etc.)
If not PE / LBO, what is the alternative?
why would you think a public traded company behaves any better than a privately owned one?
My understanding is people don't like the PE / LBO with a single investor, because it loads the company with debt that it pays back via cutting quality and service offerings.
My assumption is publicly traded company would have access to better financing terms and a diverse set of investors with less "hunger" the financial shenanigans the PE investors have.
> I don't get why sellers are selling to PE. Can these services not "IPO"? Why do these companies need to sell?
Shifting private ownership to a publicly traded company is an awful lot of paperwork (especially for accounting) and upfront costs, you need to time it properly, you need to find banks willing to cooperate.
In contrast, selling a private company to a PE is a pretty much straightforward transaction.
I think it's totally appropriate to hold it against them if they knowingly sell out to scumbags. Society used to look down on selling out. We wrote songs about it. But in 2026 it is glorified.
What do you think they should do? Who are they holding out for and for how long can they hold out? Retirement is a financial situation and an age. Do they shutdown the business when they are too old to function as an owner?
My friend's parent's local services company shutdown when they didn't find a buyer. A business limping under interest payments IMHO is better than a complete shutdown.
You're 55, making $400k a year as a HVAC Repair Company, and while you love the business and your kids are in expensive colleges (not taking over the business) you are offered $8MM to sell. Instant retirement. A buy out isn't the same as selling out because people live off of cash and not principal.
At the end of the day it comes down to how much money your principles are worth. People are commenting about dentists and doctors being bought out. Those strike me as the kind of people that can afford retirement without also contributing to the worsening of society.
> Who would have guessed that turning social human constructions into businesses that 'have to make profits' could result in such deaths!?
What are these "social human constructions"?
Healthcare, protection like police and fire departmens, maintenance, repairs, etc.
You don't understand! It's because it's not a truly free market. If it was truly free of regulation and government oversight it would be incredible.
I get this is sarcasm but... meanwhile the founders/great thinkers on free markets wrote extensively on how free markets REQUIRED strong government and strong government oversight.
Indeed it does. Extremely strong government oversight plus corruption control. It’s getting out of control very fast.
>> a structure where 50 to 90 percent of the purchase price is financed by debt, and that debt is loaded onto the balance sheet of the acquired company, not the firm making the acquisition.
This just seems wrong. The buyer takes out a loan, how does that become the responsibility of the company they purchased? I thought loans used to buy a business treated the business as collateral, like a home mortgage. What lender would participate in this? and why?
> The buyer takes out a loan, how does that become the responsibility of the company they purchased?
Because the company they purchased is now a part of them.
As for why a lender would agree to it, it's because these transactions are not as simplistic or universally disastrous as they are usually described. A lender will obviously only make that loan if it has a reasonable expectation of being paid back, and most of them are. They may get additional collateral like parent/affiliate guarantees and the loans will have covenants relating to financial performance etc.
The people behind these funds are playing Monopoly IRL, and this in particular makes me very angry.
The UK high street has been a notable victim. Gradually, over the past couple of decades, company after company has been snapped up by PE. Not just shops, but restaurants too. Suddenly you realise that the 5 or 6 high street chains that were competing are now owned by the same fund. Quality collapses, prices rise, not just at one chain but everywhere. People stop going, the chain collapses, another empty unit, the fund moves on. It's easy to point at Amazon and internet shopping as having degraded the British high street, but there are several other factors, and PE is a big one.
The combination of PE extraction and "property values = rent we want to change, even if the property is empty" has been economically catastrophic.
PE is often just legalised larceny.
You're only thinking from a consumer perspective. When it comes time to sell a business, original owner wants to retire or what not, most small businesses have a hard time finding a buyer. This forces the owner to continue working beyond their time or face destitution. Having a market where PE can snap up a small business is a god-send for these owners. It meets a market need.
Hard sell in a world where the average worker is expected to survive without a nice final buyout and told to budget/plan for that shit.
You're well served if you want incredibly overpriced sweets at least.
As a consumer, there are many non PE owned restaurants and pubs you can frequent. While you might not be able to change the game, you can absolutely vote with your wallet. The small guys will thank you.
Same for Amazon vs going direct to the manufacturers, which is more often than not, China.
> Same for Amazon vs going direct to the manufacturers, which is more often than not, China.
That comes with a bunch of problems. Taxes, import duties and import refusals are the biggest one. With Amazon, at least as long as it's sold or fulfilled by Amazon, no matter what, you are going to get the product in a reasonable time frame (1-3 days IME).
Shipping... depends. If you're in bad luck, the seller doesn't ship Fedex or DHL, but Yanwen or another one of the usual bunch of "aggregators" that bundle weeks worth of shipment to forward it to the US or Europe and unbundle the shipments there.
Assuming your product shows up at your doorstep, legally, you are now the importer and fully responsible for anything related to that specific product - say, an electrical appliance that sets your house on fire. You can't hold anyone accountable but yourself.
And finally, if there's defects, you only have to deal with Amazon. Free shipment back, done. With anything straight out of China, you are now responsible for shipments.
PE profits sound like other companies opportunities. Unless there are barriers to entry not covered in this article, I would think other companies could move in, deliver a fire truck faster and at a lower cost, and at least take a portion of the market that is able to switch.
The purchasing process is the barrier to entry. Municipalities are required to run a request for proposal on anything over ~10k. The RFP gets awarded to a PE owned manufacturer that then takes 4+ years to deliver. The municipality is locked into the vehicles they don't have so a new market entry needs to simultaneously establish a track record that qualifies them for being awarded an RFP and be able to wait out the purchase lag. Not impossible, but easier said than done.
The Capex and Opex requirements to do anything in the US are THE barriers to entry.
Nobody has that kinda cash lying around, banks can't justify such high liabilities, and VCs are not interested in "stable", businesses.
look at the interest expense line on any PE-backed company 10-K. healthy operating business, absurd debt load. the business doesnt decline — the capital structure slowly kills it.
Setting aside the obviously LLM-generated headings (if not text), this is a serious problem. PE has purchased fire inspection companies in my city such that every company that needs these must contract with the same PE overlord no matter which of the previous 15 companies they used to work with.
The new PE overlord will do things like send you a bill for inspection after you inquire about their pricing ("Well, our guy was in the area so he took a look!") while billing you for gas from their home location.
This is disgusting on so many levels—no competition here at all, just oppression by those with a lot of money.
The theme I keep seeing in all of these problems about our economy is unfair access to debt. PE firms get a loan that you can't and then buy out your company? Giant megacorp get a loan for more than your companies value and make an offer you can't refuse. Billionaires live off loans instead of income and avoid paying income taxes. So many of our issues can be traced back to unfair access to debt. Too much cash in the system chasing returns. We need harder money.
If you go after an entire market, they'll close ranks. If you go after specific business groups (such as REV), they'll probably be easier to divide and rule.
Good article and discussion but I couldn’t find anything about the author? There’s no bylines or about page anywhere on the site.
Does anyone know about the source?
Check this out...
https://rubbishtalk.com/media-kit/
Whoever put this together couldn't even be bothered to compete the template they were using.
Because it's slop. It even starts the whole article with "It's not X, it's Y"
I think an unintended byproduct of prolonged cheap capital is an environment ripe with antitrust issues. I’m all for capitalism mentality but this feels like a logical extreme and is not good for the long term.
Other examples not mentioned: eggs, kids athletics, I’ve heard stories in fintech services as well
If the waiting time for a fire truck is 4 years, can't fire departments import from abroad?
An interesting aspect of this story is that America has an idiosyncratic approach toward firefighting vehicles that demands very large bespoke vehicles from a limited set of vendors [0] that are primarily used to bring a set of first responders to medical emergencies. [1] This philosophy carries on to other aspects of fire fighting like the very famous wooden ladders of San Francisco. [1]
Cost insensitive customers with bizarre business requirements, what could go wrong?
0. https://www.slashgear.com/1890538/why-american-fire-trucks-b...
1. https://www.pulsara.com/blog/why-does-911-send-a-fire-truck-...
2. https://sf-fire.org/our-organization/division-support-servic...
Seems strange to me:
1. No one forced these people to sell. Is the idea that you can’t sell to an entity with more money? If you block that good luck with the world economy.
2. If above is ok is the idea that the new owner is inherently worse because they have more money, whereas as the smaller would be OK then where are the new entrants?
3. Going to the article it is clear enough. These industries just are not lucrative to begin with. PE buys them and raises prices, but this only works because people complain instead of starting rival business.
4. Somehow leaving money on the table in the form of a backlog is bad? Why don’t others start a business and take those orders? Why don't they? Not profitable or worth the hassle.
Well there you go.
Separately, American manufacturing just seems very uncompetitive.
> but this only works because people complain instead of starting rival business.
This reads like fiction. When they corner the market it's of course trivial to just jump in and take that share. No way they will try to be disruptive to you or sue you to hell and back and of course the bank will loan you the pile of money to start a new company since there is no giant corporation to compete with who can squeeze you out in an instance.
Your comment is the one that seems like fiction. You are saying PE is unbeatable? Per the article there is a backlog of orders. What is stopping one of the previous owners from creating another company and taking them?
Sue for what exactly? Of course they will be disruptive, that is what competing means.
> What is stopping one of the previous owners from creating another company and taking them?
... they sold the original business to retire??
> ... they sold the original business to retire??
Conjecture unsupported by article
Suggesting that the original seller could swoop back into the market is also conjecture unsupported by the article.
> What is stopping one of the previous owners from creating another company and taking them?
You will not find any investors.
The investors that want to invest in fire trucks already invested in the PE fund and will give them money over any new start
That’s the point
There’s no money elsewhere.
How did the original businesses start to begin with? Also where is this information coming from? It isn't in the article.
Usually from a loan or they bought someone out before the PE consolidation in that market really ramped up.
This is the insidious part: small markets that grow organically over about 10-20 years are specifically what PE investors look for because they are cash heavy but don’t have desire to expand.
So the owner gets 3M cash out for property worth 4M. PE bundles similar businesses (boba tea shops are a popular one) and then uses the net cash to get a loan to expand.
They expand, cut corners then cash out on the net profit and then sell the skeleton in the pink sheets or go bankrupt.
I’ve had to deal with investors and finance for almost 15 years now. My company was bought by a PE backed company and I knew fund owners
this is how the economy works
PE has a bad reputation, maybe for LBOs, maybe for buying up doctors' offices and retirement homes, and hospitals and making them objectively worse in terms of patient care.
My family doctor underwent that along with several of her local peers and got out from under it and started her own practice. I'm obviously not her only patient, so yes, heightening stress on caregivers by demanding more work to drive profits higher is justifiable of a bad reputation.
Leaving things like medical care, food, water, shelter at the mercy of for-profit dynamics leaves the possibility open that those services stop being provided because it is unprofitable at the expense of the population.
America is deciding it likes profit over its population.
People aren't starting competitor businesses because the hassle has become astronomically expensive, also largely due to rent seekers[0]. You need a space, but real estate is absurdly inflated. You need trained employees, but education is absurdly inflated and also poorer quality for the baseline. You need to pay a living wage and give healthcare benefits to attract labor, but cost of living and healthcare are skyrocketing.
Ultimately the influence of rent seekers has grown and the category of people who can take risks by starting a business was the first to collapse, leaving only the wealthy who don't care and the people who can't risk their own survival.
[0]https://en.wikipedia.org/wiki/Rent-seeking
Then there is regulatory capture in some markets. In this case:
You need a street legal product, which takes certification You probably need multiple firefighter associations, which takes not only meeting criteria but politicking with associations (don't know about firefighters but some associations are themselves captured and limit approval to their friends/connections).
If you own a business and wish to retire, your options are pretty much to sell, pass it on to someone, or dismantle it. I don't know how this is even a question really. Where in the article or the comment section is anyone saying they shouldn't be selling?
Two connected anecdotes:
1. In the 90s, I had a struggling one-man Mac ISV, and would do gig programming on the side. I did a lot of work for boutique investment banks, and also for a "consulting" firm that did about 75% of their business with the finance industry. The owner of that firm praised me, but didn't like that if my business took off, he'd lose me.
"What would it take to get your commitment to this firm?"
50%
"Where will you get the money to buy half my company?"
A loan from the firm?
When the dust cleared, the business loaned me the money to buy in, and I paid it back with 50% of my profit sharing payouts. This is not some weird financial alchemy, a lot of partnerships are run this way.
———
2. My Duathlon racing buddy was a mold-maker, very specialized and good at his trade. He worked for an elderly entrepreneur who had built his mold business up over decades. Said entrepreneur sent his own kids to university to become "professionals."
What to do about succession when he was ready to retire? My buddy literally photocopied my own arrangement, bought 50% so the business would have a successor it could count on, and bought the remainder when the founder retired. He is now a comfortably wealthy automotive sector entrepreneur.
———
The huge LBOs in the news always seem like space-age deals, but little LBOs for succession purposes are remarkably common.
Your comment is entirely conjecture. Even if we assume it is correct, no young person is creating similar businesses? If so that’s the root cause, not PE, since the alternatives would be all of these businesses shut down anywhere per your reasoning, backlog increase and the remaining businesses increase prices anyway.
This is a comment section. Much of it is conjecture. You are making (implicit) conjectures that there are no systemic causes of these sales to PE so you can place blame on the sellers instead of the looters and pillagers themselves.
> 1. No one forced these people to sell.
Why do we need antitrust laws? Why do mergers need government approval? Or are you a libertarian who believes in unfettered capitalism?
Where does it end? What if I threatened you with violence to sell your business? Is that OK? You might correctly say "that's illegal". If so, does that stipulate we do need laws? How far can coercion go while still being legal? What if I also own your key suppliers? What if you run a veterinarian practice and I jack up the price of all your meds, radiological film, etc if you don't sell? What if I own the major pet insurance providers and decide that your practice, if you don't sell, is no longer covered by my insurance?
> 2. If above is ok
It's not.
> 3. Going to the article it is clear enough. These industries just are not lucrative to begin with
They're engaged in anticompetitive behavior but on a local level so it tends to escape scrutiny. Unfortunately, if you dog is sick and you like in Cincinatti, you don't really have the option to go Reno where there's (for now at least) a cheaper option.
This is all just rent-seeking behavior. Nothing about this is productive. The people who engage in this should be treated the same way profitters are in wars and natural disasters, which historically hasn't been a fine or legal sanctions. I'll put it that way.
> 4. Somehow leaving money on the table in the form of a backlog is bad?
That's what rent-seeking is. It's unproductive extraction of wealth by removing all other options.
Wait until PE comes for your ISP and suddenly a 1gig fiber connection is $300/month. What are you going to do then? Start your own ISP? Good luck with that.
PEs own a LOT more than whats on the article. All kinds of home repair (HVAC, Plumbing, electric), child care, dental offices and many others. They buy the local companies, keep the same name (so folks think it is the owner/local company with awesome yelp reviews), enshittify, jack up prices and extract as much as possible with smooth talking sales people.
Leveraged buyout should be illegal.
How would you phrase this though? Plenty of PE firms have the funds to buy your local veterinary clinic or auto body shop with cash; the leverage comes later, when they direct the business that they own to get a loan. How can you make it illegal for the business to get a loan?
> How can you make it illegal for the business to get a loan?
That would also be legal. But if you take the assets out of the daughter company you would go to prison for https://web.archive.org/web/20141030194421/http://www.sfo.go...
The daughter company would presumable be allowed to purchase goods and services. What prevents those goods and services from being supplied (at a hefty markup) by another company under PE control?
If it's done for the purpose of defrauding debtors of the daughter company, the law
I think they should be perfectly legal, but there probably shouldn't be tax advantages for it (carried interest rule, etc).
See also Matt Stoller on fire truck private equity:
https://www.thebignewsletter.com/p/did-a-private-equity-fire...
this article is literally just an LLM regurgitation of Stoller / Musharbash's reporting and research on the topic.
ZIRP created a level of absurd wealth such that the ultra wealthy can buy large swathes of things that they never could before, and they’re doing it. And societal norms and laws can’t keep up with it to protect us from them.
Now they are buying fire stations, dentist offices, ski resorts, whatever the fuck they can think of and then raise the prices. Something needs to be done to stop this.
PE are the management equivalents of slumlords.
I really like the model, privatising it can be far better as a private firm employee & equipment's will work better also if execution is correct, it can be cheaper and more productive.
This is a racket and should be illegal.
The premise is that PE firms invest in companies, load them up with debt, and maximize profit. And it's especially nefarious in industries where people have "no choice but to pay"
> The result is a backlog that reads like a financial opportunity in earnings calls and a crisis in every fire station in the country. As of 2025, REV Group’s backlog stands at $4.5 billion. Wait times for a custom fire truck run to four years. Prices have doubled in a decade: a pumper truck now costs around $1 million; a ladder truck runs over $2 million. Profit margins in the industry have tripled — from the historic 4-to-5 percent range to over 13 percent.
The article goes on to talk about how a backlog is actually genius. Here's a quote from a senator:
> “This didn’t just happen to you accidentally. This is a business decision, isn’t it? You keep these backlogs like this. […] Another word for this would be a heist. This sounds to me like private equity came in; bought up all of these small companies; combined them; shut down their production; rolled up a huge backlog; massive profits; stiffed these guys; and now you’re making out like bandits.”
So you make money by ... not delivering? I'm missing something.
> The fire truck industry is the most publicly documented case, but the underlying playbook — acquire, consolidate, reduce supply, extract margin — appears across essential sectors with alarming consistency.
Sure, anyone can reduce supply and increase prices if they're a large enough supplier. But companies don't produce up to the point where marginal price is equal to marginal cost out of the goodness of their heart. It's the profit maximizing level. This is economics 101. The article doesn't even try to explain beyond hand waving. No one cares about profit margin, they care about maximizing profit, and you don't do that by creating backlogs. So something is off here and the author is either too incompetent to ask basic questions or just wants to write another PE bad article
Let’s compare two hypothetical companies. They are equal in every way except one has a $4.5b backlog and one has a $0 backlog. Which company would you rather own?
The way to get to a backlog is by not having made sales you could have made in prior years. So they shouldn't be equal in every way - the one with $0 backlog should have more cash, and that is probably preferable unless your business has diseconomies of scale.
Not sure. On one hand, a huge backlog means they're not meeting their demand. Operations may not be in order. Everything else is the same so sales and everything else is equal so I guess money is just deferred? Also huge backlog encourages competition and if you can't deliver, you're going to lose.
But such a big backlog suggests that they're underpricing. So it may be as simple as increasing price and ramping up your production, even though it would likely mean higher marginal costs.
Overall no one wants a backlog. It's not good business
Have you ever heard the phrase ceteris paribus? It means all other things being equal. It's a phrase economists use to discuss things in the ideal, sort of like, "imagine a spherical cow in a vacuum" but for economics.
The point of the exercise is not to suppose what other things could have been different to allow these two hypothetical companies to end up in the described state. The point is to actually freeze everything else, do not allow it to vary, and look at the backlog in isolation. Obviously such a situation would never actually arise. Even if things were trending in that direction, the two companies would very quickly diverge from ceteris paribus.
Obviously having a backlog is better than no backlog because unless you make a new sale tomorrow, you have a problem. You will have idle capital and labor resources. Which company do you think has easier access to credit?
Private equity is very much interested in the margins. That is one of the key differences between private and public companies. Public companies are under pressure to grow at all costs. PE would probably be satisfied to make half the profit and double the margin, especially if it also happens to position the company for a more favorable sale. Would you rather buy a business that's at 5 or 10% margin?
The depth of the backlog also happens to be a pretty decent proxy for how much competition there is the market. A deep backlog means there isn't another firm around to fill that demand. That makes your company look better.
Let's go a little left/up the funnel. Imagine two startups, all things equal, their sales funnel goes wide > qualified > sale. They consistently convert 5% of qualified leads into sales. Do you want to be the company that has zero qualified leads, or $4.5b of qualified leads?
Ceteris paribus can be stretched to the point of absurdity though. A startup with $4.5b of qualified leads, vs one with zero? Come on now...
For the sake of argument, we're imagining both startups have equal levels of investing/funding secured, equally talented founders and employee, equal access to equal networks (i.e. I'm imagining something like defense or aerospace, to make it a little easier to imagine a startup getting $4.5b in qualified leads), equal technology or IP, equal EVERYTHING as per your hypothetical... and yet somehow one startup has $4.5b in qualified leads and the other does not.
I truthfully would rather buy into the one with zero leads, because presumably, under ceteris paribus conditions, that startup must be priced at a discount to the other one, since it has no leads... and yet, EVERYTHING ELSE is equal (equally strong team, equally good tech, equal networks, etc.), and so it seems to me, that I would be able to buy a larger equity stake for a discounted price, and have EQUAL odds of winning future business since this startup is EQUAL in all other respects expect for the odd qualified leads backlog.
Would you rather buy shares in NVIDIA, or buy shares in another company that is equal to NVIDIA in every way (same talent, same tech, same everything), but just happens to have no backlog of confirmed orders? I think I'd like to buy this shadow-clone of NVIDIA, because I would buy into the thesis that there is more room for growth, vs buying the incumbent... after all, ceteris paribus, right?
The all things being equal makes no sense in this regard.
It's like me saying "all things being equal except you're a duck"
You can't be a duck and have all things equal. Same way a company can't be equal to another company and have a $4bn backlog. This isn't an independent variable like the color of your logo.
> PE would probably be satisfied to make half the profit and double the margin, especially if it also happens to position the company for a more favorable sale. Would you rather buy a business that's at 5 or 10% margin?
So PE doesn't maximize profit but instead maximizes profit margin? This makes no sense. Why?
Because they don’t want to have to work that hard for their money. They get more value for their effort by focusing on something else instead of trying to maximize profit for a single business.
The demand curve for a business could be such that you sell 100 widgets and get $100 profit, sell 200 widgets get $101 profit. Why bother trying to sell more than 100 widgets?
Maybe you can sell 50 widgets and make $90, that sounds like a pretty good deal. Instead of making 50 more widgets you could do something else and make more than $10 profit in the same time.
Okay, now same question except one small change.
There's only one company: the one with the backlog. The other company either went bankrupt or was bought out and consolidated into the first company.
Learn how businesses are priced.
The buyer (who PE sells to) is "thinking about" collecting on the backlog.
Obviously, the backlog is "fake".
EDIT: The backlog is fake or worthless in the sense, that dollars worth of reputation (a.k.a. Brand) were given away to get pennies worth of backlog. Customer satisfaction is real, even in a business valuation sense.
There's no competition left to drive the marginal profit back down to a reasonable level.
So much condescension in your comment. So little to back it up.
> So you make money by ... not delivering? I'm missing something.
Precisely. Let's review imperfect competition. Although it's you who so unpleasantly insists on framing the discussion in econ 101 terms, it's your comment that is sunk by a misunderstanding of elementary economics.
What you're missing is evidently the things one learns when they go past chapter 1 of an intro textbook!
> It's the profit maximizing level.
Not all markets match the assumptions of the simple "perfect competition" ideal you learn about first. The efficient equilibrium you describe requires an assumption that there are no barriers to entering the marketplace as a producer. An extreme example breaking this assumption is the "monopoly market", where there is only one seller of the good because barriers prevent other sellers from viably entering the marketplace. That's why the consolidation in OP is relevant to the discussion...
In the extreme case the market equilibrium is reached when a monopoly jacks up the price and produces less than it would in a competitive market. Deliberate scarcity! The (single) producer makes more money in this kind of market. The consumer is worse off. But the every extra dollar the monopolist makes in profits takes more than a dollar away from the consumers. Deviating from the perfectly competitive equilibrium results in a market inefficiency called "deadweight loss".
The article also nodded to the price-inelastic demand for the equipment enabling emergency services. Inelastic demand makes this phenomenon more extreme. It's pretty intuitive that fire departments' demand for firetrucks would be price-inelastic.
So anyway. Your comment implied that you don't want to be mad about the consolidation and price gouging for e.g. firetrucks if you're in the "woohoo go free markets" tribe. Couldn't be more wrong. You should be just as mad if you're in that tribe. The extraction of monopoly rents from emergency services is not just dangerous, and not just unfair, but also a textbook case of market inefficiency.
> In the extreme case the market equilibrium is reached when a monopoly jacks up the price and produces less than it would in a competitive market
Wrong. The amount produced is still the point at which marginal cost is equal to marginal revenue under a perfect competition. However the amount charged is higher. Below is the monopoly model, chapter 7-2 :-)
> The monopoly firm maximizes profit by producing an output Qm at point G, where the marginal revenue and marginal cost curves intersect. It sells this output at price Pm.
Basic economics doesn't not apply when you go past chapter 1.
https://uw.pressbooks.pub/microman/chapter/7-2-the-monopoly-...
Why is there so much attention paid to the buyer (private equity) and no attention paid to the folks who sold the businesses to them?
> no attention paid to the folks who sold the businesses to them?
Why would the retiring dentist selling their practice be a trust or collusion problem?
Because their customers, who they built a trusting relationship with, get hosed when the owner wants to cash out.
That’s the whole math of it. That cash out comes from the future business increasing profit, which is over the longest term cutting service quality.
Start small biz > be successful > want to retire > find someone to buy biz
There’s a lot of pathways with a giant c corp, almost none for the local successful small biz.
I had a acquaintance sell three local trash companies to LRS which is exactly what happened.
> Because their customers, who they built a trusting relationship with, get hosed when the owner wants to cash out.
Sure, and it's often a real loss to customers, but are you suggesting mandating that you vet the person you're selling to for their business aspirations and then have some kind of legal covenant that binds them to those stated aspirations, enforced by...something?
Otherwise we can just be satisfied with shaming them, but seems like an awfully convenient way to sidetrack this conversation from the obvious remedies.
> That cash out comes from the future business increasing profit, which is over the longest term cutting service quality.
Which is a problem when the same person buying also bought up all the other dentist offices, so there's no choice, let alone competition, in services.
Eliminate that and the sweetheart buyout offers make a lot less financial sense and we can at least prevent the scales from tippng so steeply toward PE buying up all the dentists, hospitals, retirement homes, HVAC repair, roofing companies, pest control, etc etc
> Because their customers, who they built a trusting relationship with, get hosed when the owner wants to cash out.
Unfortunately people are mortal and everything ends. Even if a someone didn't sell their business to PE, the trusting relationship is over once they retire. There's no guarantee that someone new - even if vetted - is going to be as good as the previous owner.
What would that attention look like? "Long-time pillar of the community local pediatrician retires and sells their practice"?
How would you know this attention is getting paid or not unless you are consuming local news from the places this is happening?
"Long-time pillar of the community pediatrician unveils true self by selling practice to Devil"
Run a small business for 20 years, work yourself to the bone, and then contemplate a big check from a buyout offer.
The buyer generally runs the service in a much worse way, so it's their management which comes under attack.
Because the buyer is the one monopolizing industries and stripping them for parts
Because a sale for cash is a basic legal contract that predates modern society by millenia, whereas a LBO that PE uses to purchase companies is a weak spot in American Capitalism created at the intersection of:
1.Shareholder primacy. Under Delaware corporate law (which governs most large U.S. public companies), once a board decides to sell, directors have a fiduciary duty to maximize the price shareholders receive. A premium cash offer from a PE firm is hard to refuse without legal exposure.
2.Interest deductibility. The tax code lets companies deduct interest payments but not dividends, which makes debt-heavy capital structures more tax-efficient. LBOs exploit a feature of tax law that exists for many reasons unrelated to private equity.
3.Freedom of contract and limited liability. Sponsors can put a thin equity check into a holding company, have that company borrow on the target's assets, and walk away if it fails, because limited liability is the foundation of corporate law generally.
This subject deserves better than an AI slop article.
To be fair they warned us with that domain name.
Couldn't get through the first line lol.
Why would anybody expend time reading something that is probably full of hallucinations? And what's crazy is clearly only a few of us have enough experience with Instruct Mode LLMs to even spot it. The rest of these guys don't even know they're reading slop.
Again, we have broken higher risk, higher reward.
If you just keep gutting companies with leveraged buyouts, you're not taking on any real risk.
If you're buying up firms that deliver "essential services", you're likely engaging a monopoly. Again, low risk, high reward. A direct violation of the rules of how investments should work. Regulate the monopoly and this goes away.
Do you think losing the equity portion of the investment means no risk? It's not fully debt financed.
And that debt financing bears an interest proportional to the riskiness of the asset's cashflows.
There are lots to hate about LBOs but they aren't entirely devoid of value
> Do you think losing the equity portion of the investment means no risk? It's not fully debt financed.
To quote the bandana-clad bard of Venice, CA, Mike Muir: "it's the difference between a Porsche and a Rolls Royce".
If you're playing the LBO game at the level where you're looking at buying up chunks of a community's essential services, you are unlikely to be doing business in a way that presents meaningful risk to your personal financial situation.
You don't have to take meaningful risk to your personal financial situation for an investment to be risky. The CEO of Coca-Cola also takes no meaningful risk to their personal situation. Should we forbid CEO roles?
The risks are asymmetric in real world terms. For the PE side, the worst-case outcome is bankruptcy of the company they bought via LBO, but because it was an LBO their own exposure is relatively minimal (the lender is the one with the one most capital at risk). At the end of the day, it's a balance sheet item, a cost of doing business, a few digits on a spreadsheet.
But for the company that was bought? Those are people's jobs, their livelihood. A community that depended on those jobs to sustain a town's economy. And for company's providing essential services with inelastic demand (like fucking fire trucks), the downside is loss of those services, broken fire trucks, and ultimately loss of life.
When you hear "profits over people" as a complaint, it sounds abstract. It is not. Though this specific article is AI slop, the underlying phenomenon is very real (that other commenters have shared other links to better reporting). A very real dollar figure can be crystallized against very real human lives that have been harmed or sacrificed.
Most "regular people" (you know, the ones who just want firefighters to have working trucks and ladders, and to come quickly when there's a fire) don't care about the most hyper-efficient allocation of capital through some skewed financial engineering and legal wizardry (especially when the definition of "efficient" allocation is a biased one, that doesn't account for externalities properly, like people fucking dying due to broken or not-enough trucks). But regular people don't really get a "vote", when it comes to LBOs (and I am specifically focusing on the ones that affect essential services). They just get screwed with the increased tax bills that fund the increasing profit margins of the PE firms. That seems unfair to me, but fairness is a matter of politics and not finance.
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Personal disclosure: I made a post a few months back about a related topic (https://news.ycombinator.com/item?id=46307300), of PE buying up and consolidating the companies that used to provide software to emergency services, and jacking up the price and taking advantage of inelastic demand. This is a topic I am personally passionate about, and I am still exploring different options for fighting back in various ways.
In general, the company that was bought was likely being outcompeted or soon to become outcompeted. There's a reason the PE bought it: to turn it around into something that is better than the previous owner could achieve.
You can only make money in an LBO if you meaningfully improve margins or you grow massively such that the debt portion of enterprise value becomes smaller. In both cases, the company is better off than it was before.
I do think there are limits to the value that PE can bring and there are many bottom feeders going into businesses they shouldn't, like fire trucks. But not all of PE is bad.
The better solution is to tax PE capital gains as income so they pay their fair share of taxes, making good deals harder to find, drying up some appetite for that highly saturated part of finance, and returning more value to communities when they do succeed.
I just wanted to say that you're absolutely correct on everything, but I wanted to add a point:
We have spent the last 50-ish years "legitimizing" things like PE buying up essential services and implementing cost cuts. When I say "legitimizing", I mean we keep removing the avenues for the "regular people" to legally and formally reduce the harms that this sort of business brings about. It becomes just a fact of life: people can come in and do this and you have to "deal with it".
When you have people dying, watching their streets crumble, have garbage piling up, etc., you can't just think that "regular people" (or maybe "the little people", as some businesspeople might view them) will "deal with it" forever, regardless of how much legal, financial, and political cover you provide yourself. At some point, there will be a reckoning. In that case, you'll prefer that it be through a regulation change, lawsuit, or lost election/ballot initiative.
Who controls the spice...
clicks
> When a fire truck fails to deploy in a burning building and four people die, the cause isn’t just mechanical failure. It’s a business model.
leaves
When a user clicks the 'close tab' button, it's not just sending a command to their browser. It's sending a signal of disapproval.
It's the same around the world. 99% of the time if something has gone to shit, it's because it was bought by private equity and milked for every last penny.
This is "you will own nothing and you will be happy" in practice.
a.i written shit - no reading.