Great analysis. I think its easy for some to characterize PEs as a bad guy but they are acting rationally in the existing economic environment. If we feel it wrong, we need to change the incentives, you can't shame them to change their behavior
LBOs typically succeed in a "good business / lousy capital structure" situation. Buy the company, refinance the expensive debt, shape up the balance sheet and IPO it before the fund's maturity.
This is one of the unintended consequences of MMT and free money - malinvestment. Trades become more and more marginal - and PE companies are subject to boredom trades as much as any trader.
Very informative summary. I'd be curious to know how JPMorgan Chase, Bank of America, and TCW/Crescent Mezzanine (the financiers of Joann's takeover) ended up doing. They must have taken a haircut in the bankruptcy but net net could have ended up in the black after accounting for all the interest they collected over 13 years (or perhaps they sold the debt long before bankruptcy was imminent).
Beyond principle/agent problems, public pension funds are underfunded.
People don’t want to fund them because the benefits are generally excessive* and would be objected to if people had to pay up front, so they are hidden away in future obligations. Then we pretend the funds are going to make x% a year returns to pay for it, and you can’t pretend your 60/40 is going to make x% but you can pretend some exotic investment will.
*my mom did office work in the nyc public schools for six years and both she and my father got unlimited zero cost share health benefits to life in return. The roi on that has got to be insane. If you NPVed it and asked for a property tax hike for pay for it people would balk.
Joann's toublrs are very reminiscent of those KMart faced in the early 2000s....interestingly enough the other thing that knocked them out of being a top retailer was also Walmart's more intentional approach to logistics.
How much money laundering takes place in the typical PE/LBO transaction?
I remember reading a novel called “Hanover Place” published in the early 1990s that had Mafia drug money involved in Ivan Boesky-type LBOs as a driving force in the ultimate denouement of the story
There's a book I read recently called 'The Kingdom of Prep' about the entire history of J. Crew, and the things that struck me are 1. that the need for growth, the idea that success isn't successful as long as there's a bigger game in town is often a dangerous thing, & 2. that a company needs to know what it is, and if it doesn't have a clear understanding of its own identity, no strategy can save it.
I believe TGI Fridays was an LBO as well, and Borders was a private equity thing? Either way, both stores by me seemed very succesful when they closed.
Not sure you ever pencil it out but the PE firm delivered a negative return on Joanns right? They bought for 1.6b and loaded 1b in debt, paid themselves 50m in fees and IPOd for 130m before they declared bankruptcy? I think it matters a lot here whether this was a success or not for whether people will keep doing it
Great analysis. I think its easy for some to characterize PEs as a bad guy but they are acting rationally in the existing economic environment. If we feel it wrong, we need to change the incentives, you can't shame them to change their behavior
LBOs typically succeed in a "good business / lousy capital structure" situation. Buy the company, refinance the expensive debt, shape up the balance sheet and IPO it before the fund's maturity.
This is one of the unintended consequences of MMT and free money - malinvestment. Trades become more and more marginal - and PE companies are subject to boredom trades as much as any trader.
Very informative summary. I'd be curious to know how JPMorgan Chase, Bank of America, and TCW/Crescent Mezzanine (the financiers of Joann's takeover) ended up doing. They must have taken a haircut in the bankruptcy but net net could have ended up in the black after accounting for all the interest they collected over 13 years (or perhaps they sold the debt long before bankruptcy was imminent).
Beyond principle/agent problems, public pension funds are underfunded.
People don’t want to fund them because the benefits are generally excessive* and would be objected to if people had to pay up front, so they are hidden away in future obligations. Then we pretend the funds are going to make x% a year returns to pay for it, and you can’t pretend your 60/40 is going to make x% but you can pretend some exotic investment will.
*my mom did office work in the nyc public schools for six years and both she and my father got unlimited zero cost share health benefits to life in return. The roi on that has got to be insane. If you NPVed it and asked for a property tax hike for pay for it people would balk.
Joann's toublrs are very reminiscent of those KMart faced in the early 2000s....interestingly enough the other thing that knocked them out of being a top retailer was also Walmart's more intentional approach to logistics.
Are PE funds basically scamming banks and investors?
Asset stripping earned a fancy name: PE + LBO
When money supply is endless then the caution around deploying money vanishes
When money supply is endless then the anxiety on getting returns to stay ahead of money debasement peaks
How much money laundering takes place in the typical PE/LBO transaction?
I remember reading a novel called “Hanover Place” published in the early 1990s that had Mafia drug money involved in Ivan Boesky-type LBOs as a driving force in the ultimate denouement of the story
Reminds me of the J. Crew story.
There's a book I read recently called 'The Kingdom of Prep' about the entire history of J. Crew, and the things that struck me are 1. that the need for growth, the idea that success isn't successful as long as there's a bigger game in town is often a dangerous thing, & 2. that a company needs to know what it is, and if it doesn't have a clear understanding of its own identity, no strategy can save it.
I believe TGI Fridays was an LBO as well, and Borders was a private equity thing? Either way, both stores by me seemed very succesful when they closed.
Really miss the Borders.
Not sure you ever pencil it out but the PE firm delivered a negative return on Joanns right? They bought for 1.6b and loaded 1b in debt, paid themselves 50m in fees and IPOd for 130m before they declared bankruptcy? I think it matters a lot here whether this was a success or not for whether people will keep doing it