Huh?
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I can’t generalize beyond my experience, but here’s what I’ve seen in my own back yard where it seems that the private equity guys have discovered the home services industry. My plumber, my HVAC folks, and my irrigation guy were all local people who were either one man or small family-run operations. We’ve been using these same folks for 20 years (since we built our house). In the last 2-3 years, all of these little guys were brought up by private equity firms who were buying out many HVAC/plumbing companies in my area (MA). While I imagine it was a good deal for the owners who cashed out, customers may not be getting a great deal. From a service perspective, we’ve found that the folks who are now providing services are a disaster. For example, the heating guys have been out 4 times to try to get our generator to stop running at random times. We installed a new heat pump system in 2022 and there are still glitches. In the case of the irrigation guy, the new owners asked him to stay on and help run the business. He says the current owners don’t pay people what he paid them and can’t find people to work. The plumber is overbooked and overworked and is scheduling 6 weeks out, unless there’s an emergency situation (e.g., pipes that froze).
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Seems like this thread contains a lot of general laments about capitalism, without much related specifically to Private Equity, which seems to just be used as a vaguely derogatory term about successful investors, much like “Hedge Fund” was a dirty word in the 2008 housing crash:
The irony is that some of the most high profile and damaging blow-ups of the last decade have been public companies throughout that time, most notably Boeing, which has been an utter disaster since the McDonnell Douglas merger:
“Private equity” is often seen as a type of investment accessible only to the very wealthy, rather than ordinary investors. Note also that “ordinary investors” is only a subset of the adult population at large, since many people have no (or very little) savings or investments (including 401k etc. plans and indirect investments like stakes in defined benefit pensions). Even among those who own any stock, the richest 10 percent of households controlled 84 percent of the total value of these stocks in 2016.
This type of division between a capitalist class that is getting smaller, wealthier, and more powerful and a labor class that is increasingly detached from any stake in capital is dangerous for the future of a well functioning capitalist economy.
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So maybe this thread would be better titled “Capitalism is Everywhere…”.
Then my reaction would be “Doh!” But perhaps the expressions of discontent would be more accurately targeted to the debate over what corporate behavior is incentivized by the US tax system and stock market.
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I have worked for many different types of ownership over the past 28 years. My view is that anyone can screw up a company. Public, P/E, Family Owned, etc.
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Yes, good management is critical. Board oversight is needed too, more so if the management are poor. Some CEOs have a tendency to hide the bad stuff, whether by omission or deliberately, especially if that aligns with their incentive packages. PE firms should have more information than public market investors to help figure that out. Not all do.
Capitalism is everywhere, but if capital is not everywhere (meaning everyone has savings and investments, or a non-trivial stake in capital), that is the situation where a capitalist economy is in danger of becoming less well functioning.
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“I think the difference is now that you can no longer earn enough to eat as an academic, social worker, journalist, or civil servant.”
Huh?
In my immediate family we have all of the above…and we all manage to eat, own houses, drive cars which we own and insure etc.
You want to have a lifestyle which has you skiing in Aspen and spending summers sailing off Nantucket? A civil service job won’t get you there. But you can have a perfectly fine life, contribute to society and your community in any of the professions you’ve listed.
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Wasn’t helping this person….
https://www.cnn.com/2023/02/16/health/er-doctors-khn-partner/index.html
This enrages me. For what? So rich people can make more money? People in the USA don’t get to see a doctor in the ER?
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But cost cutting is in no way unique to private equity, just ask Boeing:
“By the time of the 737 MAX, the board was scared of new plane lines and hundreds of years of experience had been laid off. When your ultimate concern is RONA, making more money off an old asset (the 737) seems like a good idea, even if it is an engineering impossibility. Then you sell aeroplanes without testing them, disaster becomes fate.”
If your point is – other iterations of capitalism also kill people in pursuit of profit, no argument here! Since all investment is predicated on producing profit as its end goal, not healthcare, not safe planes, just profit, that’s a pretty good argument for more regulation.
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Before I retired, I was a professional investor in the stock market. So I understand the financial markets, but never worked in private equity.
My view on private equity is that, like the stock market, it’s a mixed bag. Done right, the company can do much better than in the public markets. Done badly, the company goes under faster due to debt that it cannot service.
That’s true of all private companies. What’s different about private equity is that the companies have specific timelines for achieving milestones. There is a specific window in a private equity fund when the investment occurs, and when the company needs to be sold because the fund is being liquidated. These timelines can make company performance better or worse.
As @Twoin18 wrote, a lot of union pension funds invest in these strategies, as do many colleges. It is literally the strategy that David Swensen at Yale used to generate great returns, allowing Yale to be very generous with financial aid.
So are you upset that the PE funds are right in thinking that the houses are undervalued? And in that case, aren’t they doing a service to get the market to the right point?
Or are you upset that the PE funds are wrong in that homes should not be worth that much, and that the seller got the better end of the deal? In which case, they will not be able to unload those homes for more money later on.
If a normal company operates in a capital intensive industry without using debt, than its ROE (Return on Equity) will be lower than companies that use debt, because debt magnifies both gains and losses. The stock market will penalize the company for being too conservative, to the point that the management can be replaced.
In general, the stock market will celebrate a company that uses as much debt as it can without having too much variation in earnings in a normal economy. This brings huge benefits to the company management in terms of A) keeping their jobs, an B) getting large bonuses. But during a significant recession, that same company will suffer much more than a company that was more conservatively run.
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This is my fear - the massive dividends they pay themselves, funded by debt, thus leaving the remaining company in despair while they’ve been paid out.
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For the most part the level of debt a company has increases/decreases the risk.
An investor can quickly sell their shares of a company when things start going bad. The investor might take a hit(loss) from where the company was once valued, but if the investor has a diversified portfolio then it won’t really affect the investor’s life that much. On the other hand when things go bad at a company because they took on debt employees have their lives turned upside down because of layoffs. For the most part management don’t have to worry about feeding their family and paying bills. Sure if they lost their job the might have reduce expenses by a lot, but most likely they are not going to be homeless.
I am not saying all debt is bad for a company, but at times you have to be careful because when you are wrong you screw up things for a lot of people.
CBS had a segment this morning about a private equity firm buying companies, then selling back to employees. I was not able to watch it, but here’s a description: MSN
It’s refreshing to see that they are spreading the wealth to the rank and file employees.
For those that haven’t read the linked article, all employees in the company were given stock with the amount based upon their position and seniority at the time the PE company bought them. The company was then sold for a profit, and everyone got a payout, with the average being 2.5x annual salary, or about $175k.
This approach of widespread ownership is actually the VC model. Glad to see it being applied to PE investments, as very often the lower level employees understand the problems and how to fix them.
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Inflated housing prices because a small percent of the economy can pay whatever they want, then rent them back to those who now can’t afford them, does not mean they were “undervalued”.
Your thinking is so twisted, to me, that I can’t even begin to understand someone thinks it’s okay.
But lots of people can justify anything that makes them richer. It’s the American way.
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You think that way because you assume that the current housing price is correct, and what the private equity owners are willing to pay is incorrect. But that would be silly. Why would they intentionally overpay?
The answer is that they don’t intentionally overpay. They believe that the home can generate a specific cash flow in terms of rent, and if they apply what they think is an appropriate discount factor to this set of cash flows, they come up with the max they are willing to pay. By the way, this is exactly how bonds are priced.
In simpler terms, you can think of it as investors are willing to buy a property for rental purposes when the rental yield (annual rental income / purchase cost) is above a specific target value.
And you made another incorrect assumption in that they can charge whatever they want for rent. In fact, they can only charge the market rent unless a single buyer has enough power to effectively control the rents in an area. Only then can they charge premium rents.
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