How do you live with yourself?
I have a simple question: How do you live with yourselves? Every deal you make impacts real people. Every layoff, every cut in quality, every price increase affects those who are already struggling to get by. Can you imagine what someone must be going through who has to pay a massive medical bill just because you made the policies ever so much worse? Or a mother struggling to pay next month's rent, which a PE firm increased by 30%, just because someone decided it would meet their IRR targets? And all that for what? A bigger paycheck? A boost to your ego? Or just the thrill of closing a deal and solving "puzzles"?
Note: I'm referring primarily to the LBO shenanigans that you guys do.
How do I live with myself? In a big house in the suburbs, with my wife and kids.
would you feel worse about yourself if you lived in a less prestigious suburb in a smaller house with your wife and kids without ruining lives of thousands of people?
Based on the employee growth at our portcos at exit (probably averaging around + ~20%), I’d argue that we’ve improved the lives of thousands. It expands to hundreds of thousands (public pensioners) when you consider the outsized returns we deliver to LPs to compensate for the absolute shit in their portfolio.
Now tell me, how righteous is your paper-pushing, consulting boy? Is this all just projection because your boss made you put together some slides about a RIF and you’re feeling guilty?
ain't no way a consultant is tryna lecture someone on ethics 💀
Dated view - most firms don’t operate like this and the ones that do are controversial.
Well, then how do you generate IRR/get a good exit?
A business is not that different than your personal cash flow and savings capabilities.
There are two ways to make your bank account bigger -
(1) Cut your living expenses
(2) Get a higher paying job / get a side hustle / create new income streams
Most private equity today is the latter - but there is also some of the former. For reasons that are clearly going to be too technical for you (based on the simplistic take you presented), there is significant more profit opportunity in (2) growing the pie, than (1) cutting expenses - there is only so much expenses you can cut.
highest quality PE firms don't operate like this anymore
at a MF and if anything we are far too forgiving of incompetent middle management / provide free biz ops and FP&A and internal strategy consulting type work in order to keep people in their jobs
Focus is on 'talent addition' not replacement
The trolling aside, I think there is an interesting thought here. I work at a fund that does PE co-investments, we see a bunch of deals from a bunch of sponsors across several different industries. Some of our most successful investments have been, not surprisingly, in technology. But cutting that further, we have found that our most successful tech investments follow a similar pattern:
Somewhere in the world, likely outside the big cities, some guy starts an enterprise SaaS business that does a pretty good job making the lives of employees of companies in some narrow sector (could be anything from logistics companies, fashion retail, waste companies, anything really) much easier. He grows the company by focusing on the product, hires engineers in his town that care about the company and its clients and ultimately, scales it a point that .......he gets cold called from a 23 year old at Insight or Summit or TA or whatever. And so he does the PE deal, takes quite a bit of money off the table and hands over the reins to the PE owners.
Things can go a couple different ways from here. From my experience, in the most equity accretive deals, this is what happens: the PE firm enacts a massive RIF, moving engineers from the entrepreneur's town to some center of excellence in Bangalore or Manila or whatever. A new management team gets bought in and they try to aggressively scale the business while at the same time reducing the number of engineers and increasing the number of sales reps. The deal usually ends up being successful for the PE owner but I don't think it can be denied that at the end of the day, the company is a shell of its former self. It loses the focus on product and consumer, the people who built the company and care about its culture is gone and really it becomes a "company" that looks good on a banker's CIM with a bunch of bullshit terms like mission-critical, rule of 40, untapped cross-sell and up-sell initiatives etc.
I have struggled with this a bit over the years but lately, I have come to realize that like all of us, most companies also have finite lifespans and this is perhaps the most efficient lifepath for these tech businesses that capitalism shows us. Didn't mean to get philosophical but there goes!
Well even in my experience I believe that most companies have a finite lifespan. Could you tell me a bit why you think that this is the best way for a company to die?
Because the guy who risked his whole life building it gets his reward, and so do a lot of the early employees that got equity. The PE guys who worked 90 hour weeks for months on end got their cut and made some profits for the pension fund LPs that help people retire.
If what you're describing killed the lifespan of cos the exit multiple should tank but it doesn't because it's not about life span but value maximization. There is no need to pay local engineers who care
The most valid legitimate knock against PE is that they way over-lever private businesses which creates significant risk for the enterprise (e.g., private companies are regularly levered 4-6x whereas in a public market, anything over ~2-3x leverage will start severely impacting share price).
A PE fund is fundamentally diversified - 1-2 zeros in a fund is not the end of the world. However, wiping the equity of every employee and threatening the existence of a company is catastrophic for everyone at the company.
That unfortunately is inherent in the business model and hard to get away from.
Since I'm in ER, I wonder if the extra leverage even helps your returns. I mean, if you maybe take a bit less leverage, and use it strategically later on to exploit unforseen circumstances to expand the business, it could result in better returns and a healthier company
I'm on the LP side and the smarter PE funds (IMO) use debt much more strategically than just saying "ok we're buying at 12x, half debt, half equity" and will fund 75-80% as equity up front and layer in debt strategically as the business either stabilizes or grows significantly.
I'd take the counter. I take pride in knowing (i) the jobs I've helped create by supporting scaling companies, (ii) the entrepreneurs who have celebrated selling me their founder-backed businesses/add-ons, (iii) the executives whom I've watched succeed and get promoted / advance their careers, (iv) the mid-level leaders who make life-changing 6-7 figure money in exits and can afford to send their kids to college, renovate their homes, etc.
Agree with others above - I think you're dwelling too much on the old school, value-oriented PE stereotypes. Plus, I'm a strong free market believer, so in the cases where jobs are cut or organizations are combined, the strongest players and hardest workers survive. It's a necessary culling factor at times.
Assume you’re at a growth oriented software investment firm? How much of your firm’s returns are through top line growth (even price increases), vs cost takeout?
I imagine the value oriented, cost takeout funds (software or otherwise) must be a bit of a grind if you are personally more of a growth leaning person.
Correct, my shop is mixed, though my investments/portcos have all been growth leaning. I've done my fair share of M&A which always comes with RIFs from synergies, but I feel less bad given the "best player" model of retaining the better talent and shedding the weaker. It's not like we're eliminating wholesale departments, etc.
I personally am indeed less motivated by value deals, albeit nowadays, many value deals are more about turnarounds and/or taking an uncommon stance on a specific material risk (e.g., regulation, material customer renewal, etc.) rather than strictly cutting your way to a successful outcome (albeit plenty still exists, especially for take privates, failed VC bets, etc.).
Good one lol
The American consumer is the most vicious unforgiving capitalist of them all.
The old “cut and chop up” biz model exists, but like many on this thread have said, are not how most PE funds operate today. They want to exit via revenue growth and multiple expansion. I cannot draw on the exact statistic but data shows something like 90%+ of value creation comes from rev growth & multiple expansion and not through increasing profitability.
For the PE funds that do operate a “cut and chop up” business model, they often get involved when a company is in secular decline. Look at Southwest for a current example of a company in secular decline. PE funds come in and try to steer the ship in the right direction. Unfortunately, this often comes with layoffs. Those layoffs are the fault of current management failing over many years to produce a sustainable business model. A smaller number of people benefitting from the success of a company, I.e. those who remain and do not get laid off, is better than everyone at the company getting a piece of nothing when the company in secular decline inevitably fails.
Whether or not PE funds will struggle and close up shop after the nonsense of 2020 and 2021 is a different story.
Revenue growth can come primarily from 2 places - increase in price or quantity sold. In your experience, is it more of price based or quantity based?
I don’t work in private equity so will let others provide their opinions who are more qualified.
If I had to provide something from thin air, I think it depends completely on the business model and customer base. Is it a “sticky” B2B SaaS company with high switching costs? If so, that company can probably increase pricing. If it’s a ball bearing manufacturer in eastern Wyoming, then that company is probably competing on cost, so they would likely focus on finding new customers and increasing quantity sold.
This will vary greatly based on the product / service — every business in the country would increase prices if they could, but many cannot because alternatives products/services from competitors exist and customers are cutthroat capitalists. So volume will always be a growth lever where possible (although often you just assume market growth rates to be conservative), and price will always be a growth lever where possible (although it’s less commonly seen, unless you’re in a specialized product/service like Nvidia).
Also important: price and volume are not the only drivers of equity return on capital.
Take it up with Kamala and Dementia Man bud.
in most deals ive been a part of (that had a neutral or positive outcome), headcount actually increases... rather than ask this here, i would simply look at headcount of your portcos.
yes - there is always some labor arbitrage that can happen (typically in the service delivery part of the biz) but in my experience that (i) decreases rate of new hiring rather than decrease in-place headcount) and (ii) is partially offset by investments in other parts of the biz (such as S&M)
Oh that's interesting! After reading the comments I think that maybe PE is somewhere in the grey zone like everything in life
Damn bro no shit, Sherlock? Took you how many years in equity research and you didn’t realize this?
It's a very fair point but probably not the best sub to have this discussion. Most people in high finance are self-serving and simply do not care about the little guy. The Gordon Gekko character on Wall Street from the 1980s movie isn't as 'Hollywood' as you may think. It's quite accurate.
Also to say anecdotally, I had a good experience at a company that was PE backed but it was also the late 2010s / early 2020s and the company was doing exceedingly well. After it sold to a strategic, it's been in bad shape. I know a smaller family office / VC backed company that tried to replicate the company but has struggled a lot (raised in the late 2010s and was heavily focused on consumer / retail model that worked so well for us, the pandemic hurt them bad and they lacked competitive advantage with a mediocre tech stack vs. other competitors who pivoted better when all their consumers were remote). They've had repeated RIFs and consistent outsourcing of low skill tasks. The market / economy dictates the success of PE backed companies sometimes more than the actual investors.
Gotta agree a bit here. Really tough when you see brands like Hoonigan or Donut media on YouTube just gutted bc of “profit targets”. PE’s big selling point has been “don’t get restricted by the quarterly public reporting pressures, let us buy you and we will take a longer term view” then they proceed to lever it to the tits and demand monthly reporting, cut ‘unnecessary’ costs and just pump out crappier products.
theres a reason the public hates PE, they have seen so many brands destroyed by their mis-management and crazy use of debt.
not every business needs to be an ultra lean, debt ridden machine. Being more comfortable with slower but stronger growth and making great products and services will lead to a better business long term.
“Right, as the world goes, is only in question between equals in power, while the strong do what they can and the weak suffer what they must.”
Thucydides
As a person who works on a corp dev team at a utility (aka not quite who you are referring to), just fine. Like most people, my ability to rationalize behavior is phenomenal. If this wasn't something most people are good at then that rapist who tried to overthrow the government of the United States named Donald Trump would never be a viable political candidate.
In PE now, don't really care. I always wanted to make money at the expense of others feel like it's kind of fun/funny. Would joke in college that my goal was to exploit the masses to accumulate wealth and feel like I am in fact now going down that path.
I'm still a little peanut though, the partners are the ones doing the real damage
Cut of your living expenses!
Your argument is just a bunch of fallacies:
1. Appeal to emotion
2. Straw man (misrepresenting motivations, rather than consider other factors)
3. Slippery slope (cherry picking/lack of evidence).
4. Hasty generalization (limited set of negative examples applied to all LBOs). my take: LBO is a mechanism to take the company, not an operational aspect.
5. Ad hominem (points to a lack of empathy to divert attention fro ma lack of data on your claims)
6. Begging the question (assumes all actions follow this pattern, without evidence)
7. False dichotomy (ignores possibility of balancing multiple goals)
8. Appeal to fear (homelessness or medical debt which are extremely rare extremes)
9. Post hoc ergo propter hoc (causation where none may exist/wrongly attributes causation).
10. Overgeneralization
11. Composition
12. Division
13. Red herring
14. Appeal to authority.
Mind you that I even didn't start the entire philosophical discussion re. the subjectivity and relativeness of one's actions and how those relate to other people in a society surrounded by capitalism.
Before you say anything, my tone just mirrors your tone, because a post aimed to educate yourself, from a humble position, would have sounded: "It is true that PE/LBO impacts people with xyz, etc." vs. "How do you live with yourself" which already puts harsh judgments on PE professionals and involves subjectivity on your tone i.e. inclination to favor an unilaterally formed opinion on morality/behavior. My only drop of empathy goes to you because indeed, PE is the most hardcore capitalist invention which can't be understood purely with intuition.
Good luck on your existential quest. I'm sure that even finding/not finding an answer won't stop you from wanting to get into the buy-side ;) (talk about hypocrisy)
Honest advice: learn how an economy works.
You talk about a medical bills for example. That life-saving drug/procedure exists because 20 years earlier we had the GDP per capita necessary to fund the research. Look at things over a longer period of time.
You talk about layoffs, yet you work in a job that only exists because for the past several decades, society adapted to change and kept making economic progress. Would you rather work on an assembly line than in equity research? Because that's what we'd be doing if we didn't keep shifting capital to the most efficient places.
A society's ability to take care of it's less fortunate people is highly driven by the economic success of that society. Slowing down that progress because of short-term concerns and anecdotal appeals to emotion is the precise wrong answer. If you want to know the result of that thinking, look at the GDP per capita growth in Western Europe compared to the rest of the world over time. The experiment has already been done.
I'll admit the PE firms buying up trailer parks and jacking up rents does make me feel a little sick.
At the end of the day, it's capitalism. I have been laid off before, and I have also survived layoffs by being in the right place at the right time (i.e., nobody on my team was underperforming and people who were more senior/higher on the pay scale got cut over me). We move on. Life is not a linear path. I'm not arguing PE/IB, or really any line of business is omnibenevolent, but it's just how life works.
Honestly, most situations that I've been in have been pretty clear. If you don't let go of these people, this company will suffer. It's either you make the cuts or they get cut at some other point when the company goes under or is acquired by someone else.
In other situations, it can also be a little more clear. What you describe above sounds really harsh. But suppose you take over a company with 20 engineers and you realize that 10 of these guys are getting paid six figures for basically doing jack shit. Do you allow them to continue doing jack shit for good money? I mean that's kind of not fair. Investors shouldn't be subsidizing their super easy lifestyle. They need to be working at either your company or another company but they don't get a lifestyle where they just get to coast on your dime. So from that perspective, it's a little easier to let go of those 10 engineers than you think.
There are of course other situations where the cuts are too deep and unnecessary but in my opinon, when you cut too deep, you are not saving money but are losing it elsewhere. It's not something you should do to employees or to investors.
Bro if you want to play this game. Every Mcdonalds sandwich you ate and starbucks coffee you drank in your life created an ever so marginal impact on farmers/palestinians. So the real question how do you live with yourself, murderer?
No one goes into this job thinking they'll be a king ruling over serfs. The dumb summer analyst like me from many years ago made the appropriate decision at the right time to get profits and get a promotion and get a nice house for his kids and wife. The only reason lay offs exists most of the time is because of autistic management and employees who add no value, we will also get fired with enough time if we do nothing. Capitalism is a fair game and they're will always be losers, just like they'll be winners like the tech nerds who used to be nothing in early 2000, but were running the world in 2021. You sound like a fucking loser ngl and I'd argue ER is one of the biggest cost center and most useless things financial institutions could produce.
There are no more barriers to cross. All I have in common with the uncontrollable and the insane, the vicious and the evil, all the mayhem I have caused and my utter indifference toward it I have now surpassed. My pain is constant and sharp and I do not hope for a better world for anyone, in fact I want my pain to be inflicted on others. I want no one to escape, but even after admitting this there is no catharsis, my punishment continues to elude me and I gain no deeper knowledge of myself; no new knowledge can be extracted from my telling. This confession has meant nothing.
Which name brand PE funds still operate like OP described?
They almost all do. Like most things the truth is in the middle on this one. Hard for people to get nuance.
-PE eventually realized with multiple expansion and a really accommodative Fed, growing revenue worked better than a “cost cutting” model. It’s just wrong to say PE is straight cost cutting today.
-that doesn’t mean they don’t rif however. A lot of morons in this thread are acting like it’s one or the other. The guy mentioning you fire engineers and hire sales people hit the nail on the head. The goal is growth, but it doesn’t mean that they won’t try to cut costs where they can. It ends in a major increase in value for the company often and a fast growing enterprise, but product suffers for sure.
Personally, I think OP is taking too wide a brush, but his criticisms are fair. I could write a dissertation on horrible behavior in the medical field however, so like most things, I think this one gets the generic stamp of “people suck”. There is sketchy behavior in PE and also in Law, medicine, etc.
To me, I can somewhat justify firing engineers for more salespeople. It means more people get the product and therefore more people are getting value in the world.
What I really can’t justify is outsourcing. How the hell the US government allowed US jobs to be moved by PE firms to other countries is just insane. This would be a criticism of larger companies too however. A lot of products are being made today by basically slave labor or severely underpaying people because they have regulations in different countries and PE asshats justify it by “free market bro”. Further, PE’s involvement in things like the medical field, autism centers, retirement homes, vet clinics, day cares, dentistry, or other fields that deal with people is just horrible. It’s one thing to say a software product declined in quality and more people got access to it, it’s another to say people are now getting worse care because some guy is cost cutting a roll up of retirement homes and they are cutting services and jacking prices on old people.
A lot of disrespect in my view toward healthcare lbos. The software guys can continue killing products for sales though—eventually that allows new products to be made and the cycle continues. Don’t know if it really makes the world worse off.
Ah yes, a fellow self righteous investment research professional.
A very Bernie like comment. Disregard the troll.
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