Private Equity Debate

PE Discourse comes to a close at the end of a very strange month.

Watch

Private Equity vs. Private Credit: Oxford Style Debate 

Read

"Do Private Equity Buyouts Get a Bad Rap?
This study shows private equity buyouts have both good and bad impacts. 

"Pay Now or Pay Later? The Economics within the Private Equity Partnership

Partnerships are essential to the professional service and investment sectors. Yet the partnership structure raises issues including intergenerational continuity. This study of more than 700 private equity partnerships finds 1) the allocation of fund economics is typically weighted toward the founders of the firms, 2) the distributions of carried interest and ownership substantially affect the stability of the partnership, and 3) partners’ departures have a negative effect on private equity groups’ ability to raise additional funds.

"The Strategic Secret of Private Equity

… aggressive use of debt, which provides financing and tax advantages; a determined focus on cash flow and margin improvement; and freedom from restrictive public company regulations.

Overvalued and Underrated?

At the peak of the private equity boom in early 2007, Cerberus Capital Management announced that it was buying Chrysler from DaimlerChrysler for $7.4 billion. The New York Times described Cerberus as a “private equity firm that specializes in restructuring troubled companies.” “As a private company, Chrysler will be better positioned to focus on its long-term plan for recovery, rather than just short-term results,” Chrysler’s chief executive, Thomas W. LaSorda, told the Times.

Conventional wisdom had it that the sharp businessmen at Cerberus could slash costs and return Chrysler to growth. After taking the company private, they could then take the difficult steps necessary to transform it.

A mere two years later, however, the company filed for Chapter 11 bankruptcy. The turnaround had failed. The financial crisis had sent the company into a tailspin, and Cerberus was derided for its very public failure.

Many critics of PE tell stories like this to demonstrate the rapaciousness of PE capitalism—the hubris before the fall, the stripping of assets, the inevitable bankruptcy. But what is more interesting is what it reveals about the narrative of operational improvement. The Chrysler deal is one obvious case study that points to the fact that private equity’s operational savvy is not always as impressive as claimed in marketing materials.

My personal comments . . . look at the money flows. Always. How do the PE firm and its investors make the most money? Is a turnaround of Chrysler even really important here? Or could they take too big to fail type cash, dispense of lingering obligations - to pensions, unions, vendors - in order to walk away with a very different overhead and thereby future base, repackage for a mid-market firm and then…? How does Cerberus ACTUALLY make the most money. Since the late 80s I would argue operations have been the red headed stepchild of the business world.

Please figure out for yourself who makes money: when and how, before you rush to judgment. It’s not all bad, but it’s probably not what you expect. Small (or solo) companies and big companies do not make money with the same metrics.

I hope you have enjoyed this Discourse. April is all about the Universe - should we bother exploring it? At what cost?

Remember, you may invite up to 3 people. Stay safe and sane in this lockdown. You should see the Discourse back in your inbox Sunday, April 5 with an introduction to the April Discourse, Universe!

Best until then!!

-Kate