What did you go for in college? Im interested in learning more about the type of thing but dont really know where to go and what I should choose to do so.
@@nikn1250 i can understand when people give exemples in a shalow way on their videos ... the videos may get to complex . here is not about complexity .. its about wrong info ... amortization of debt (when you consider interest) is basic and should be considered in the shalowest video ... if amortization was considered, the operation had no viability at all
@@dwfeath Nothing wrong with shorting stocks, it helps in price discovery which is important in any market. You want to only sell and grow and have things burst in a bubble later? If something is weak and had issues, you want it to get discovered sooner so less people will get hurt. Shorting a stock adds a profit motive to people who can identify flaws in companies, which helps get the market to true price discovery sooner. Besides shorting is not some easy get rich quick scheme. It's extremely risky with literally unlimited risk and liability (unlike LBO where there is almost zero risk on the owner doing the LBO and all on the company taking the debt). Contrast with normal purchases where your risk is capped at just what you bought. They are of course short sellers who use underhanded and illegal tactics but that is different from the concept of short selling itself, just like they are underhanded/illegal tactics in normal stock trading as well.
LBOs also are designed in such a way that the firms themselves are not held accountable if the company they bought out fails. If the company fails, all the debt is loaded onto the company rather than the firm itself, since the loan’s assurance came from the company’s assets. So basically if it goes belly up during an LBO, it results in the company drowning in debt while the firm gets off Scott free except for the morsel it put in upfront.
Wow, great explanation of a concept I just heard about 2 days ago. The "Twitter" deal. I guess, students spend hours in boring classes to learn about it. In just 5 min, you made me understand the basic idea and how it works. Amazing! Thank you so much!!
Came here after watching Barbarians at the Gate, an HBO 1993 TV movie comedy drama based on the book by Bryan Burrough and John Helyar, starring James Garner as the CEO of RJR Nabisco who tries to buy his own company in 1988. The film follows the bidding war, the corporate intrigues and the humorous scenes of the tobacco industry. It tells the true story of F. Ross Johnson, who was the president and CEO of RJR Nabisco who decides to take the tobacco and food conglomerate company private in 1988 by a leveraged buyout after receiving advanced news of the likely market failure of the company's smokeless cigarette called Premier, the development of which had been intended to finally boost the company's stock price.
The scary thing is how pervasive private equity has become in the U.S. Private nursing homes, real estate, restaurant chains, companies, you name it. I think over 30% of businesses are now controlled by private equity and growing. Given their track record it is not hard to see why so many in the U.S. are struggling. Bye, bye Red Lobster and reasonable rent.
Well, the PE firm put their $10m deposit and a sign a legal contract with the company under the condition that if the PE firm does not successfully secure a loan from a bank, the PE firm has the right to get the deposit back. Then the PE firm go to the bank with that legal document to prove that the xyz company agree to sell their company if the bank grant the PE firm a loan. Then the bank start valuing the asset to see if it worth 10m or not, if it is the loan will be granted.
You also have to pay the principal based on debt schedule. The return is calculated by interest payment only, while the debt must've an scheduled payment. I think it is not entirely true with the 40% yield. To make this beneficial, I think the best way to issue a bond, with fixed coupon payment and bullet payment.
Hello, excellent video but I really need to raise a point of misunderstanding: for the repayment of the loan with interest, what about the repayment of the capital? We pay back 9 million a year in interest, but how much in capital? I hope to have an answer.
Usually you’re paying a little bit of the principal as well but that number goes down very slowly. Essentially you don’t start paying down the principal until most of the interest is already paid. It’s how it works with loans, it’s very annoying. If you run a loan calculator online you’ll notice it
But at what point does the principal get paid? $9M is just the interest. Is the principal paid annually on top of that or is it deferred and taken out when the PE sells the company?
The 40% return makes sense since the PE firm put down 10 million of its own money, the debt is secured with the assets of the acquired company, and after making interest payments they have a net of 2 million/yr. They don't face any repercussions if this deal doesn't work out since they can just asset strip the company itself as needed to pay off the loan, which in reality is more times than what Mitt Romney would admit.
As the loan continues to be paid down, theoretically the PE firm "owns" more of the company as their balance sheet would show less debt against the value of XYZ company. Someone please correct me if I'm wrong!
And the answer is: you actually bought the company with 100kk which 90kk in debt, producing 9kk of interests. Since the company is now yours, 15kk revenue can be used for paying interests, after that you subtract taxes and you get the 4kk of net profit that is 40% of the 10kk you put down
am i missing somthing here ...or you forgot the amortization to be payed to the bank ? ..you´ve just considered 9 million of the 10% interest rate ... like that...after 10 years you still own the bank 90 million... cause you have payed only interest
Earnings and cash flow are connected, but aren’t the same. Cash flow isn’t being shown here, but I guess an amortization table could clear the myth. Interest, at the highest level of debt, is 9M the first year, but will gradually be smaller.
Wouldn’t it be more fair if the PEF gets the revenue equivalent to the money down? So if they put 10 percent down they get 10 percent of the revenue, once they pay of bank and get another 10 percent down they get another 10 percent of the revenue, etc etc. That just seems like common sense to me but maybe I’m missing something. I guess it would force the equity firms to pay their fair share which is a big Nono these days lol
@@mikefranco76but generally banks won’t let you leverage a house you don’t yet own to get money to buy that house. In fact doing so even in 1-2% off loans is what is said to have caused the large majority of the damage leading to the Great Recession
@@mikefranco76Company is a separate legal entity and there are laws preventing the owner from just transfering money from the company to his account. You can only pay money in form of dividends. The payout is that you don't answer with your own property if the company goes bankrupt. Unlike if you are private businessman, then you answer with your property. I don't get how this loophole with leverage buyout is still allowed.
I have 0 ideas about it practically but from what I've gathered from the video, if a company gets a higher return on their capital from an LBO vs acquiring a company all out in cash, they would go ahead with an LBO.
This is what glazers did to manutd.
Great video, great explanation.
Wow, i spent a semester trying to learn financial management and you've explained this topic more comprehensive!
What did you go for in college? Im interested in learning more about the type of thing but dont really know where to go and what I should choose to do so.
@@uboyjarvis MBA
here you dont learn nothing ... this business would be bankrupt in less then a year time .
@@andrecamacho7660 Calm down, just a simple analysis on the topic. Obviously deals are much more complex than this...
@@nikn1250 i can understand when people give exemples in a shalow way on their videos ... the videos may get to complex .
here is not about complexity .. its about wrong info ... amortization of debt (when you consider interest) is basic and should be considered in the shalowest video ... if amortization was considered, the operation had no viability at all
Your explanation is actually more complete than most "big" YT channels on LBO's, big up!
Thank you! Means a lot 🙏
@@dwfeath Nothing wrong with shorting stocks, it helps in price discovery which is important in any market. You want to only sell and grow and have things burst in a bubble later? If something is weak and had issues, you want it to get discovered sooner so less people will get hurt. Shorting a stock adds a profit motive to people who can identify flaws in companies, which helps get the market to true price discovery sooner.
Besides shorting is not some easy get rich quick scheme. It's extremely risky with literally unlimited risk and liability (unlike LBO where there is almost zero risk on the owner doing the LBO and all on the company taking the debt). Contrast with normal purchases where your risk is capped at just what you bought.
They are of course short sellers who use underhanded and illegal tactics but that is different from the concept of short selling itself, just like they are underhanded/illegal tactics in normal stock trading as well.
LBOs also are designed in such a way that the firms themselves are not held accountable if the company they bought out fails. If the company fails, all the debt is loaded onto the company rather than the firm itself, since the loan’s assurance came from the company’s assets. So basically if it goes belly up during an LBO, it results in the company drowning in debt while the firm gets off Scott free except for the morsel it put in upfront.
Sounds similar to a mortgage. I'm confused why that wouldn't make sense in this situation?
Wow, great explanation of a concept I just heard about 2 days ago. The "Twitter" deal. I guess, students spend hours in boring classes to learn about it. In just 5 min, you made me understand the basic idea and how it works. Amazing! Thank you so much!!
The man, the myth, the legend is back! Great video!
Wow great explaination! Understood finally with your video. Keep the good work.
Great channel, very clear explanations, thanks!!
This was really really good. I subscribed and liked straight away. Thanks for this.
this is a really good explanation. too often these types of videos almost assume you went to business school
Came here after watching Barbarians at the Gate, an HBO 1993 TV movie comedy drama based on the book by Bryan Burrough and John Helyar, starring James Garner as the CEO of RJR Nabisco who tries to buy his own company in 1988. The film follows the bidding war, the corporate intrigues and the humorous scenes of the tobacco industry. It tells the true story of F. Ross Johnson, who was the president and CEO of RJR Nabisco who decides to take the tobacco and food conglomerate company private in 1988 by a leveraged buyout after receiving advanced news of the likely market failure of the company's smokeless cigarette called Premier, the development of which had been intended to finally boost the company's stock price.
The scary thing is how pervasive private equity has become in the U.S. Private nursing homes, real estate, restaurant chains, companies, you name it. I think over 30% of businesses are now controlled by private equity and growing. Given their track record it is not hard to see why so many in the U.S. are struggling. Bye, bye Red Lobster and reasonable rent.
Great explanation. Thank you!
RIP Toys R Us
😂😂😂😂
And if you are a Man United fan, RIP Man United, too.
😊
Thank you so very much, it’s really helpful🙏🏼.
How can the bank secure the loan against assets that the P.E doesn't even own yet?
like exactly
Well, the PE firm put their $10m deposit and a sign a legal contract with the company under the condition that if the PE firm does not successfully secure a loan from a bank, the PE firm has the right to get the deposit back.
Then the PE firm go to the bank with that legal document to prove that the xyz company agree to sell their company if the bank grant the PE firm a loan. Then the bank start valuing the asset to see if it worth 10m or not, if it is the loan will be granted.
Most of the time these PE's have great relationships with banks that will give them the money.
Great explanation, keep going
You also have to pay the principal based on debt schedule. The return is calculated by interest payment only, while the debt must've an scheduled payment. I think it is not entirely true with the 40% yield. To make this beneficial, I think the best way to issue a bond, with fixed coupon payment and bullet payment.
Great explainer, cheers 😊
Great explanation.
Excellent video mate, cheers
So basically it's like a mortgage, but for a business instead of a home...
How so? If the house owner doesn't pay, the bank takes the house. They can resell the house. If the company goes under, the PE firm loses nothing.
Well explained. The only thing that confused me was the pronunciation of the letter z.
Hello, excellent video but I really need to raise a point of misunderstanding: for the repayment of the loan with interest, what about the repayment of the capital? We pay back 9 million a year in interest, but how much in capital? I hope to have an answer.
Usually you’re paying a little bit of the principal as well but that number goes down very slowly. Essentially you don’t start paying down the principal until most of the interest is already paid. It’s how it works with loans, it’s very annoying. If you run a loan calculator online you’ll notice it
I was curious about this too. Is it not the case that interest payments recur up until the principal is completely repaid?
But at what point does the principal get paid? $9M is just the interest.
Is the principal paid annually on top of that or is it deferred and taken out when the PE sells the company?
@KINGCADEMY this is what I'm wondering as well
The 40% return makes sense since the PE firm put down 10 million of its own money, the debt is secured with the assets of the acquired company, and after making interest payments they have a net of 2 million/yr. They don't face any repercussions if this deal doesn't work out since they can just asset strip the company itself as needed to pay off the loan, which in reality is more times than what Mitt Romney would admit.
Smashing, mate!
how much were the assets originally worth?
thank you this may have just saved my life well not real but yes
Great video bro!!
Thanks Diogo!
3:41 why does the equity of the firm increase at debt decreases?
As the loan continues to be paid down, theoretically the PE firm "owns" more of the company as their balance sheet would show less debt against the value of XYZ company.
Someone please correct me if I'm wrong!
Is it possible to get an unsecured debt on basis of profit of the target company while doing an LBO
What is your view on this over Seller Finance
How the xyz company pays the debt that took by PE firm 🤔
And the answer is: you actually bought the company with 100kk which 90kk in debt, producing 9kk of interests. Since the company is now yours, 15kk revenue can be used for paying interests, after that you subtract taxes and you get the 4kk of net profit that is 40% of the 10kk you put down
@@heysupremee3883 did joe shmoe get his 100k
can you refuse to sell to pe firms
am i missing somthing here ...or you forgot the amortization to be payed to the bank ? ..you´ve just considered 9 million of the 10% interest rate ... like that...after 10 years you still own the bank 90 million... cause you have payed only interest
I think he did forget it. I'm guessing they still come out ahead than using cash to purchase.
Earnings and cash flow are connected, but aren’t the same. Cash flow isn’t being shown here, but I guess an amortization table could clear the myth. Interest, at the highest level of debt, is 9M the first year, but will gradually be smaller.
I think you meant profit when you were saying revenue...
I support the buyout
Don’t you have to pay taxes on the money used to pay down debt?
Liked and subscribed
Thank you kindly Eric. :)
You can make a new video with the twitter lbo as a real life example
Wouldn’t it be more fair if the PEF gets the revenue equivalent to the money down? So if they put 10 percent down they get 10 percent of the revenue, once they pay of bank and get another 10 percent down they get another 10 percent of the revenue, etc etc. That just seems like common sense to me but maybe I’m missing something. I guess it would force the equity firms to pay their fair share which is a big Nono these days lol
This whole scheme sounds like it should be illegal
Agreed. Toys r us died this way
No
It’s really not any different from buying a house with a mortgage, which is also secured by … the house.
@@mikefranco76but generally banks won’t let you leverage a house you don’t yet own to get money to buy that house. In fact doing so even in 1-2% off loans is what is said to have caused the large majority of the damage leading to the Great Recession
@@mikefranco76Company is a separate legal entity and there are laws preventing the owner from just transfering money from the company to his account. You can only pay money in form of dividends. The payout is that you don't answer with your own property if the company goes bankrupt. Unlike if you are private businessman, then you answer with your property. I don't get how this loophole with leverage buyout is still allowed.
Fractional reserve banking, exchanging paper tokens for gold is the perfect crime
10x is wild for most GPs in the LMM 😅
Sterling job!
Interests are tax deductible, aren't they?
Nice
Dear Friends,
I have a question:
1/ When and Why we should use LBO (Leveraged Buyout) to do M&A deal?. Thank you.
I have 0 ideas about it practically but from what I've gathered from the video, if a company gets a higher return on their capital from an LBO vs acquiring a company all out in cash, they would go ahead with an LBO.
Here after Elon Musk acquired Twitter 😂
So whos gonna pay the bank the principal repayment to the bank???
I guess no one? It sounds like the bank just sells the assets and hopefully gets the money that way?
141 Dereck Crossroad
👍
who's here because of Twitter? 😂
Hernandez Scott Miller Maria Rodriguez Anthony
came here for boeing and manchester united
Senger Crescent
Martinez Linda Rodriguez Edward Lopez Frank
Nicolas Forest
Marilie Greens
Grant Wall
Williams Donna Jones Larry Garcia Eric
Grady Burg
Bro just ripped the Khan Academy video lol
Erdman Canyon
Jones Mark Walker Elizabeth Martinez Linda
Perez Mary Walker Brian Martinez Thomas
Feeney Tunnel
Lessie River
Thompson Susan Garcia Kevin Moore Brenda
Your model here seems to ignore profitability. The debt can’t be serviced without sufficient positive margin from that turnover figure.
Taylor Mark Lee Jessica Miller Steven
Hernandez Scott Anderson Joseph Wilson Dorothy
Walker Brenda Hernandez Karen Brown Kevin
Jones Helen Hall Anthony White Elizabeth
Ted Brook
Dicki Mews
Hubba hubba
ban pe firms
Lewis Jeffrey Clark Christopher Jackson Helen