I don't understand how PE manages to get debt financing for LBOs? Seems like a big risk for the creditors?
If I buy a corp at 10% net margin for 5x ebidta on 80% leverage, i’ve really paid 1x ebidta. then lets say 20% of revenue was going to R/D and stuff that would only pay off in a few years. I cut all R/D so now its at 30% net margin.
So I can triple my money every year because it’s now generating profits of 3x my original downpayment every year (minus interest payments). After a few years of zero R/D the company has no good products to sell, demand falls, and it’s declared insolvent. Well, I dont care about my 20% equity downpayment because I already got like a 3-9x return. But the debt financers are screwed.
Yeah, that’s the idea. The loans get bundled up and resold to insurance companies, pension funds, and retail bond investors.
Funds are plenty willing to lend other peoples money to get guaranteed dividends and fee payments and not be left holding the risk. Retirement funds are the bag holder - but they won’t realize till later.
There’s structural pressure to buy from PE because insurance/pension is designed as fixed payout requiring say 7% yield forever. In a world where investment-grade bonds pay 4% and demographics are shifting from net-inflow to net-outflow, liquidity is _tight_. Meanwhile PE was promising 10% a year or whatever (someone call Madoff…) so that was preferable to the hard conversations of the funds failing. At the cost of kicking the can down to the road and making it worse in the future.
If this sounds like 2008 that’s because it is. But bigger and worse, and happening in wayyy more than just mortgages this time.
I'll sketch a few points to illustrate the inner workings here:
- It's hard to buy a decent company at 5x EBITDA today. A typical EBITDA multiple nowadays is like 10x-15x.
(e.g. EQT bought SUSE for $3B in 2023, and the adjusted EBITDA was $240M, which implies 12x EBITDA)
- Debts are tranched. Banks typically get a senior slice, often secured by real assets (a.k.a. collateral), so they can recoup the money even when the company goes straight into a ditch. The real risk lies in the junior loans ("mezzanine"), which demand very high yields to compensate for that risk.
- In a typical PE deal, most profits are earned at exit, not via dividends en route. So managers have incentive to make the target company (look) better for the next buyer, rather than neglecting it.
A more fundamental reason why the situation you describe rarely happens is that PE fund managers treat their operation as an "on-going" business. Lenders are gonna be really pissed if they lose their money. So fund managers try to avoid that scenario to keep the credit flowing for their next deal.
I love how obsessed HN is with civilization. I put over 1000 hours into Civ 5 alone and was proud to beat diety (and then consistently beat diety). It's funny how many founders are big on civ. Zuck and Elon both apparently spent a lot of time during college on the series.
I think it just sounds like a fun game to be honest. By a goofy little overengineered piece of jewellery. Buy a bunch of them and join the club. Compare to your friends. Reminds me of pokemon cards on the school playground...
apologies if my comment came off this way, it was not intended. I think all consumers (myself included!) are vulnerable to being swayed by commercial propaganda
You're delusional if you think the US isn't spying on you though.
They spy on everyone, they just happen to pay US-companies to do the spying to avoid any accountability.
I don't think we should also just tolerate spying on other countries. Why does the average Joe Blogs in Sweden need to be spied on by the US Government?
I do wonder if all this extra user data will be of much use. I suppose it could make commerce frictionless, recommending the exact product/service to you at the ideal moment, before you've even heard of it.
But the nature of innovative products and services is that most people don't know how to use them yet, and therefore they can't be recommended based on user data. So idk...
In my opinion it would be mostly a ghost town if it requires money for something that was free. It would probably have to be more like a n invite-only semi-private forum. An example would be lobsters. [1] Not sayin' that's perfect, just an example. One can always try it and see what comes of it.
Bit melodramatic. The US still has the most talent, most capital, and best property protections of anywhere in the world. Name a country that (1) doesn't have any quid-pro-quo system with the govt, and (2) has pro-growth pro-capitalist policies.
If I buy a corp at 10% net margin for 5x ebidta on 80% leverage, i’ve really paid 1x ebidta. then lets say 20% of revenue was going to R/D and stuff that would only pay off in a few years. I cut all R/D so now its at 30% net margin.
So I can triple my money every year because it’s now generating profits of 3x my original downpayment every year (minus interest payments). After a few years of zero R/D the company has no good products to sell, demand falls, and it’s declared insolvent. Well, I dont care about my 20% equity downpayment because I already got like a 3-9x return. But the debt financers are screwed.
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