The Morality of PE
On the younger side of this forum. Been prepping for on cycle PE and is honestly hindered by the ethical/ morality aspect, especially with the aspect of firing half of the portco and also possibly the CEO. CEO might have some money saved up, but for the staff that are laid off what if they have children/ a sick family member and being laid off affects their livelihood? Call me young and naive but I can’t possibly be the one doing that to them knowing exactly what the outcome is, feel like that’s putting blood on my hands. I feel like I’m flocking to PE as a herd from IB because everyone thinks IB-> PE is just natural. Even if I make PE associate making PE VP is another story anyways, will likely have to leave to something else at some point. And being on the management of portco is unlikely anyways. Anyone got thought on this?
I think you're looking at the outcome (layoffs, CEO transition/firing) without looking at the underlying causes and ultimate responsibility. The reality is that by the time you as a PE professional are looking at acquiring a company, the CEO has already decided to sell and should bear the consequences for the results thereafter. Maybe this is their choice to sell, maybe its circumstantially driven, but regardless, the CEO (and board / controlling shareholders) are not ignorant that selling to a PE often means that there will be layoffs / staffing reductions and are wholly responsible for the outcome of the sale (and any subsequent layoffs).
You might argue that VCs are forcing them to sell or that bankers are manipulating them into selling unnecessarily, but the VC argument is the same as above (just at an earlier stage), and even if banks are being manipulative / coercive in trying to force unnecessary sales, again, ultimately the responsibility rests on the CEO / Owners to determine if selling is the right move.
In the case of a founder CEO (who still owns controlling majority), the beauty is that they are welcome to run the business how they see fit - they don't have to achieve optimal margins and they can keep the ineffective CFO / Sales team / on-shore call center, simply because they like the people or went to Uni with them, etc. Once you, as the PE, own the business you don't have this flexibility - you have a fiduciary responsibility to protect investors capital and an investment imperative to operate the business as efficiently as possible (which generally is aligned with the long-term survival of the portfolio company anyway).
In reality, PE gets the blame for the layoffs / firing the management but majority of the time the cause of these actions is due to the lack of focus on efficiency by the previous owner. I'm also not saying this blame is "unfair", it's the job of PE firms to clean up and optimize the firms they buy (which they get compensated for in returns) and often times founders chose to exit to PE firms to have a path to instant monetization without the blame or pain that would come with optimizing the firm / cutting staff themselves if they retained ownership.
Great points and I'd like to add that this isn't any different to how public companies handle their struggling business units (layoffs, replacing senior staff).
All of these outcomes from a PE deal is just the cost of doing business and most equity owners selling their company to a PE firm know that. The people with little to no say (lower ranked employees) can get screwed by a PE deal outcome but that's not any different to what I've seen in terms of these mass layoffs at public companies in this past year.
I've worked at a small public traded company and a well-known MF PE company (headline multibillion dollar deal, sold to a strategic and the PE firm got a huge return). That formerly owned MF PE company is now a subsidiary of a large strategic and has had many layoffs since the acquisition. When I worked there, there weren't any significant layoffs during my 3 years there.
I mean this is kinda not how morality works. You can’t “I’m just doing my job” your way into justifying everything (see Nuremberg). It’s up to you to determine whether what you are doing is in accordance with your held beliefs. If not do something else
I mean comparing layoffs to mass murder is quite a wide spectrum on the morality discussion.
Unemployment in the USA, especially if coupled with any level of severance, often offers plenty of cushion for the unemployed to find new jobs.
I'd argue that when most CEOs sign the deal sheet they probably will not choose to lay off the staff member. If they just volunteered for someone to lay off the employees for them, they'll go to the HR, not PE.
When KKR bought Safeway in 1986 they cut many jobs and closed stores. There were even a few high-profile suicides amongst workers who lost their jobs. However, the Safeway of today is a much healthier and employs many more people than the Safeway of 1986 did pre-LBO. So, were the actions that KKR took post-acquisition
"unethical"? Many journalists thought so in 1986/1987. Yet in the long-term the restructuring created more jobs, not fewer. Had Safeway just allowed their business to crash and burn, everyone would have lost their jobs, and grocery stores would have become more consolidated and there’d be less competition in the industry.
If you look at PE through a 10-20 year lens rather than a 1-2 year lens, in most cases it is fairly clear that it is long-term extremely "ethical" (defined by me as producing the best economic outcome, it is then up to the government to figure out how to redistribute that outcome, not private industry).
Is that attributable to Safeway being such a huge entity today? Also it's an in industry which needs workers to scale
Many PE portcos won't have such a fate
For every Safeway there are multitudes more examples of failures. Sears: PE backed failed because of sold real estates holdings, now is non-existent. Dean Foods: PE backed who did not pay out pension post LBO to extract "value", now non-existent. Red Lobster: PE backed sold RE to extract "value" now bankruptcy. Friendly's: PE backed who sold RE to extract "value" now non-existent. The list goes on...
OP: there's a fascinating book called Plunder: Private Equity's Plan to Pillage America. There are numerous examples of PE's method of debt fueled "value extraction" has led to collapse of the acquired entity. The kicker is while the investment failed the house never lost.
Do you think more PE-backed businesses have failed than been successful...?
Commenting for reference. Didn't know this book existed, thank for the share!
Maybe look into growth equity roles
You will be giving management money to expand the business vs the traditional LBO process which you have issues with.
Many jobs today wouldn't exist if businesses weren't optimized in a previous generation. Need to free up both capital and labor to keep the world moving forward.
It’s easy to get wrapped up in the bad parts of PE, and they exist, don’t get me wrong. But the other side is that 1. If you are at a large enough firm, odds are you’re going to be investing on behalf of teachers, firefighters, police officers, etc. 2. It isn’t in the best interest for a firm to catch bad press by writing off an asset or firing half the labor force. Although that is sometimes the reality, it is usually the last option. I know people that come to work everyday and single handily are responsible for hundreds of people keeping their jobs. One was even accredited for saving thousands after their actions during a 100 hour work week. 3. If employees have ownership and your firm does well with the exit, that is normal people receiving a lot of money that they wouldn’t have otherwise. There is nobility in investing
Consider the fact that PE firms hire a lot of people too. They're not all evil.
what is morality, what is good, what is bad? too subjective
PE is an economic creation so a subjective interpretation to it will never do it justice, thus morality-wise it's neutral and the qualification of it to a certain moral paradigm is futile; it depends on the eyes of the beholder
now, if you were to ask about its economic value in the economy, that's something totally different, but it's a very long discussion for this forum...
I've personally fired hundreds of people and it is not a huge deal at all.
If you don't do it, the company is dead and it's a net loss for the economy.
It's not like you're a shitty surgeon going around cutting limbs off and making people retarded.
We are all better off when labor is allocated to where it is most effectively used and prices inform that resource allocation. We should not feel morally obligated to maintain horse and buggy manufacturing jobs.
del
I’m sorry, is the question basically “is laying people off immoral”?
People get laid off all the time, why does it suddenly take on moral importance when it’s a PE firm doing it?
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