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A simple gloomy model you could have of private equity is:Like: There was an arbitrage, and correcting it made people rich, and now it is corrected, so correcting it can no longer make you rich. If you want to buy a good company, lever it up, improve its operations and sell it back to the public markets:1. Once upon a time, companies were mispriced. Lots of companies were available cheaply. Their price didn’t reflect the present value of their cash flows, or at least, it didn’t reflect the present value of the cash flows they could reasonably achieve if you added some leverage and improved their management.
2. A few ambitious risk-seeking entrepreneurs noticed this systematic mispricing and set out to fix it. They raised money from friends and family and patient investors who were willing to take risk, they bought companies at low prices, levered them up, fixed their operations and resold them after a few years at higher prices.
3. It helped, in doing this business, that interest rates were declining for decades and valuation multiples were rising. If you bought a company, did nothing to it, waited five years and sold it, you’d have a profit just from valuation tailwinds.
4. The people who started this business — private equity — made great returns for their investors and became billionaires themselves.
5. This attracted many, many more people to the business. Who wouldn’t want to become a billionaire by buying and selling companies? Who wouldn’t want to invest with them?
6. So now private equity is the default career path for smart ambitious people entering the financial industry, and private equity firms are now giant alternative asset managers with hundreds of billions of dollars under management.
7. Why would companies be mispriced?In the golden age of private equity, private equity ownership was an exception, a way to move companies from a low-value state to a high-value state. In 2025, private equity ownership is almost the norm: Huge chunks of modern business are owned by private equity funds rather than public shareholders. It would be a little weird if those private equity funds could all sustainably get much higher returns than public shareholders.• Other private equity firms have already bought most of the good companies;
• The companies that are left have all levered themselves up and hired consultants to improve their operations, like a private equity firm would have done, so there’s no reward to you for doing that;
• Interest rates have gone up, so borrowing money is more expensive now than it was a few years ago; and
• Other private equity firms own tons of companies that they want to sell, so you have to compete with them when you try to sell your company back to the public markets, and you won’t get a premium price.
Anyway Bloomberg’s Allison McNeely, Preeti Singh and Laura Benitez report on gloomy times for private equity:Perfect time to, uh, sell private equity to retail?After a half-century of meteoric growth, buyout firms are facing challenges at every step of their life cycle: Attractive takeover targets are scarcer, financing costs are up and it’s harder to cash out old investments and deliver the robust returns once promised to pension managers, endowments, foundations and wealthy individuals. Even dealmakers are frustrated — waiting to collect their share of profits known as carried interest that comes when investments are successfully wrapped up. …
“Private equity has lost its way and has to go back to what this industry — that employs the brightest and best minds — does best,” Orlando Bravo, managing partner of private equity firm Thoma Bravo, said in an interview. That’s “buying and selling companies and generating great returns for its investors.” …
“Many PE firms are dead already, they just don’t know it,” said Charles Wilson, senior vice president of investment management at industry recruiter Selby Jennings. “Survival will likely hinge on how forgiving managers find their LPs to be when they hit the fundraising trail again in coming years.”
The troubles follow a long, high-flying era. For more than a decade, rock-bottom interest rates and cheap financing helped firms scoop up businesses, re-engineer their finances and then unload them at lofty valuations. But when the Federal Reserve started hiking borrowing costs in 2022, the industry got stuck — unable to exit holdings at the prices and returns they had been touting in marketing pitches and updates to clients. …
Privately, many institutional investors concede that their expectations from private equity investments are muted for the next decade compared with the previous 10 years.
© 2015 Mutual Fund Observer. All rights reserved.
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Comments
I wonder how much spill over we're talking about when folks eventually crowd the exits. The internet tells me private equity is still under a trillion.
It had been poorly run for years because the CEO packed the board with his cronies and let it go down the tubes. There was a failed merger with the local Catholic Hospital, who refuse to let women with tubal ligation after Cesarean section ( 8 to 10 patients a year) park in the garage or use the same laundry as "the faithful" per the Bishop.
PE firm borrowed $1.6 Billion dollars to pay the owners ( Leonard Green Hedge fund) a huge "special dividend"
To pay off loan, PE firm sold the land and buildings of all their hospitals nationwide to Medical Properties Trust, a REIT. Now all the hospitals had huge rent payments, which were new, as most of them had owned the buildings etc for decades. ( Our hospital opened in the early 1900s.)
This plus the decrease in elective surgeries during covid bankrupted most of them and bankrupted the PE Firm, Prospect Medical. The three hospitals in CT owe $200 million in rent, taxes and utilities and payments to doctors.
Yale offered to buy my old hospital, before the Covid bust but now says it is not worth what they offered. The REIT won't budge. Now two of the smaller of the three may get sold to Hartford Health Care and the State of CT is interested in the larger one ( my old hospital) but says they will not assume any debt.
Looks like a standstill, all because of the greed of PE.
I have seen many profit making Assisted living communities promise the monn and then Poof! Away go the great meals, support services and goodies. If you pay in you are stuck
I would only look at non profits that have a solid endowment, preferably religiously affiliated
But even those make bad decisions and go bankrupt. Look at Eden Hill in Texas. Run but the Methodists got over extended..