How Private Equity Secretly Broke The Economy
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- เผยแพร่เมื่อ 22 พ.ค. 2024
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00:00 - What's happening?
00:31 - What is Private Equity?
03:13 - The beginnings of Private Equity
08:18 - How Private Equity took over the economy
10:03 - But there was a problem...
11:41 - The next target for Private Equity
13:22 - But this next target might be worse news
15:52 - How Private Equity could ruin the economy
642 US companies went bankrupt in 2023, the highest number since the great financial crisis. But what’s more surprising is that companies owned by private equity are 10 times more likely to go bankrupt. The problem is, 1 in every 14 workers in the US collect paychecks from companies owned by private equity.
But what is private equity? How do they have more money than Apple, Microsoft, Amazon and Tesla combined? And what are they doing to the US economy?
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As a physician I have been SCREAMING about PE in healthcare since I was in training. It’s a BIG part of our problems in the US.
Funny, the PE guys are SCREAMING the problem is the Physicians
Seeing as they are the fee simple property of their own greed I'll stick with the doctors. @@spacecoyote6646
Ehh, don't leave out the merger-mania mess Obamacare facilitated.
MD's have to play whackamole with medical coding just to get procedures approved.
Medicine has become bureaucratic paint by numbers. We have acturial medical care.
Because PE wants to deny patient care and minimize staffing. They win and the patients(especially) and individuals taking care of them lose.
i'll trust a doctor over a wall street chad 10/10 times. @@spacecoyote6646
I’m actually writing a case study on ethics of P/E in my ethics class, honestly will probably use your video as one of my citations, it was very well made
wow thank you so much, that really means a lot :). what have you found out so far regarding your case study? any interesting info that you're able to share?
Using Private Equity and ethics in the same sentence is your first misstep. Private Equity will kill everything in its path.
So basically, super-consolidations of money for 100 people ruin it for the other 350,000,000 people. Makes sense this is still legal.
👏👍💥💯
The separation of ownership and authority from responsibility and risk is the first sign of corruption in any 3rd world or authoritarian nation. It's not enough that such things be resisted in the way we behave socially and politically, it must also be guarded against economically.
Yes, but the only way to go from a corrupt system to a just system is, frankly, to roll heads. And we aren’t quite ready for that as a nation.
@@hueco5002oh I wouldn't say that.
@@angelainamarie9656 show me an example where a society went from unjust to just without violence.
The dentist office I went to for years went to PE when one of the partners retired. It had been a great place. Now, many of the good staff are gone and much cheaper ones brought in. All the employee perks are gone and so the staff esprit has vanished. Prices have gone up and now they try to sell you dental work you don't need so the trust is damaged. Before, if a cap broke, they replaced it free ... now, too bad. .... Yep, time to find an office run by the dentist themselves ... run by people who care.
Remember: a PE company can own a hospital. I, as a physician, can not. Yay rules that are broken.
I know a veterinarian office that went pe and the story there is basically identical.
@@JamesDecker7how can a physician start his own hospital?
@@belovedstrummer6140 anyone can start/found a hospital. But due to current federal rules a Physician cannot own one. That is apparently a no-no. But private equity can. It’s a dumb rule.
Blame the partner who sold out to PE firm, and to the banks who allowed it to leverage its investment.
There aren't companies, there aren't banks, there aren't institutions...there are people. Understand that. These people have names, they're part of powerful and untouchable groups, and they're impoverishing you.
I work for an RE PE firm in Canada, and this is exactly what we do. Our PE firm continues to charge the AUM fees despite severely devalued commercial real estate valuations and year to year net losses as vacancies are high. We are still getting bonuses though. What a life for a PE firm.
Why would banks lend to PE owned businesses if there is a greater risk of bankruptcy?
Holy fuck. This is all completely new to me. This should be a required watch. I've noticed for awhile how corporate healthcare seems to be these days, and providers have jam packed schedules and an overall decline in quality. I wonder if it also explains all the retail stores/restaurants cropping that seem to be flush with cash and can afford to put together a nice establishment, but are missing the soul of true individually owned small business
I borrow money, and you pay it back. How is this even legal?
I'm stumped by this, too. No wonder the US is going to the dogs. How many people know about leveraged buyouts?
You never noticed that is how government deficit spending and the national debt is financed?
Wonder why banks would loan to companies owned by PE firms if the bankruptcy rates were so high?
@@johnl.7754they get paid off first in bankruptcy?
careerist politicians e.g. Nancy Pelosi etc
Privatizing profit while socializing risk is how billionaires are made. There should be laws against these kind of scams but all the offenders have to do is make a few political donations (more legalized corruption) and the law makers who are supposed to be working for us go to work for the billionaires instead. It's time for a populist revolution. And no, populism isn't fascism like the influence peddling corporate media keeps telling us. It simply means government of the people, by the people and for the people.
Most of the equity in PE funds is owned by pension plans. GP makes a sick 2/20, but has to usually generate a minimum of 8-12% IRR before getting the juicy 20% after the hurdle. PE funds retirement.
I just love that retirement funds are funded by negative production.
Its easy to stop this, make the buyout firm responsible for the debt without limited liability for the investors. This is legalized theft, not building real wealth.
It's not easy at all. As swiftly as you can regulate they'll merely switch to other methods of leveraging debt that are often even more damaging.
I knew the PE firms loaded the companies they buy with debt but didn’t think about how easy it would be for them to for example put 1% down, say 1 million on a $100 million company, suck out 10 million in fees,, selling off assets etc. and then just let the company go bankrupt that is not officially part of the PE firm
yeah LBOs are pretty wild D:
So do they get a loan to buy the corp and the corp is just held responsible because of that being how the system works or does. The corporation get a loan that the firm takes and then the firm buys it that way while the corp still has to pay the debt?
And how would a company be considered not OFFICIALLY apart of the pr firm?
Wonder why banks would loan to companies owned by PE firms if the bankruptcy rates were so high?
@@johnl.7754because it's not their money either. They find wealthy suckers and sell them the investment. Collect their own slice of the pie in the form of their management fees and call it a day.
And the problem is, those wealthy suckers are often pension funds, and other collective investors.
One has to keep in mind, most PE funds underperform the stock market. But PE companies employ a ton of charming Harvard graduates who make fancy PowerPoints promising X% ROI - without anything to back it up, since they don't need to disclose their financial situation.
I used to work for a company owned by a PE firm. It was wild how they took this profitable debt-free but slow-growing company, piled on a bunch of debt, got a new CEO who went all-in on growth just as the economy took a nosedive lol. Our spending skyrocketed along with interest expenses but revenue growth was pathetic. Our cash flow was awful and could barely keep up with the payables.
It's not Vincent Chan.
It's Vincent CHAD.
LOL thanks. what did you think of the video?
Oh, thank you for making this one. Been feeling this for at least a decade.
thank YOU for watching! How did you first discover PE funds and what they did? Was it a big topic of discussion 10 years ago?
Incredible video. I really recommend viewers to read the book “barbarians at the gates”, speaks on how P/E destroyed great businesses during the late 70’s and early 80’s
thank you for the book recommendation! which businesses do they go into in the book?
RJR Nabisco. It was also a movie.
Wow, now I know what happened to my favorite local sandwich chain here in Arizona, Eegees. When the company was bought out the prices were raised, the quality dropped, and they charged extra for dips. They were acquired by 39 North Capital, an investment firm.
I noticed the same with Eegees, almost felt like an overnight change
My dad long ago instilled a hatred of PE firms. He ran multiple oil companies while regional, went toe to toe with the lines of Exxon and Chevron. The first company he ran was purchased by a PE. He took his pay out and left. 30 years later he still says PE ruins firms, short term gains is what they want. Not building a long term business. He also says it takes the fun out of running a company.
Love your narrative style and the controversial subjects you're covering. I'm starting to comprehend how bleeped we are. Please continue. Thank you for your hard work!
We could always push for repeal of carried interest… it won’t fix everything, but it will make a dent in the incentives
why do you think it will reduce their incentives?
@@VincentChan what kind of tax would apply if partnership distributions weren’t treated as capital gains but as income? It would be a higher tax, right? That reduces the incentive by nearly 20%. Makes one wonder what kind of impact would have on cost benefit models which drive investment and restructuring decisions.
@@sc52243 Or it could incentivise PE firms to cut costs and jack up prices even more aggressively. If that results in more bankruptcies and job losses that is then still not their problem.
@@sc52243 interest payments are tax deductible. This probably just leads to more debt on companies to offset the extra tax. I'd rather a GP pay less in taxes on carry to offset the extra risk they may take if it was taxed as income. They will aim for the same payout, and the principal-agent problem creates a degree of moral hazard.
Sounds like fraud. Private fruad.
The larger context is that this issue and many other economic issues facing the country today has it’s origins in the deregulation of the financial services industry, primarily beginning in the 1980s with Ronald Reagan. In the olden days banks mostly just pooled depositor’s money and lent it out to others. Now financial institutions are creating riskier and riskier financial “products”. It is not by accident that we had the savings & loan crisis in the late 80s under Reagan. then the 2008-09 financial meltdown after 8 years of Bush. then the silicon valley bank crisis just recently. The deregulation has also been accompanied by the defunding of the federal oversight agencies which generally occurs under republican administrations. The SVB problem might have been averted without these cuts by Trump a few years before. Younger folks maybe see these events as “natural” economic problems that come up from time to time unavoidably. There’s nothing natural about it. These are policy decisions made by government and pushed for by financial interest groups.
Thank you for the valuable information. Your video was quite educational. 😊
Really good info, very well presented.
So using the house analogy, PE uses LBO to purchase a house, but instead of the PE owning the debt, the 'house' assumes the debt.
So, PE buys the house using LBO, sells the house, pockets 100% of the sale, but doesn't need to pay the debt because the debt is linked the house, not the PE.
And this is legal? O.o
Uh, this is how a mortgage works. If you don’t pay it, the bank seizes the house.
But if a corporation goes bankrupt there's nothing to seize except debt
You can also thank the Fed. Borrowing costs (bank interest rates) dropped to almost zero from 2000 to 2022 and loan material adverse change clauses disappeared. All that profit ended up in the PE firms’ and LPs’ pockets.
Great video. Thanks for the quality content
❤One of your best Bids Vincent...great Nostalgia Info...The New Old Money...✌
I think you can include public equity here too. Satisfying investors requires a profit margin so massive that companies do whatever it takes to achieve it. This is the reason cars are designed to break down after a certain mileage, and why all the other stuff you buy seems like such junk despite being super expensive.
As long as all of our work and effort goes towards enriching a handful of people and the rest of our concerns are meaningless, then we will have this garbage system.
Thanks for the clear presentation.
great video! difficult topic well explained
Very educational.
It’s baffling how private equity had become an umbrella term for things like Infrastructure and private credit, which is completely different to private equity
Could you share some of those sources that you found on the PE research papers and their effects? Really would like to read those and the houdaille industries. Great video.
A debt based (banking) economy is the cause of it all. The deregulation of the Reagan era was the beginning of the gradual economic decline over the last few decades. It will continue to the point of feudalism returning to the world population and the cycle will begin anew.
I think another factor that is the cause for the drop off in IPO are two things. 2001, there was a recession. In 2002 the Sarbanes-Oxley Act was passed, and that has increased costs of being a public corporation. I think that could me another variable, that caused IPOs to drop off.
Do the P&E eliminate competition, basically acting as a backdoor monopoly by buying up similar businesses?
This is a whole mess and taxpayers will no doubt be forced to bail out. Either in unemployment or "loans" which they use to buy back stocks
some of them do! I talked about a specific case in Texas near the end of the video 16:08. Let me know what you think about that
@VincentChan sorry, I did watch. I meant to ask, does this break antitrust laws? I know it's back door but it still restrains open competition.
You make the best videos! I wanted to update you that my son was successful in his side gig. He followed your recommendation and gave tours to our city during the summer. He and his friends loved it!
Very informative and well made. Thanks.
thank you very much! did you learn anything new?
Wow! This is revelatory!
Please please please talk more about topics similar to this. I feel this is the number one reason Americans are financially struggling. There is only so much we can do individually when on a structural scale companies are doing this.
Nieman Marcus used to be high quality products. then I noticed a sharp decline, and stopped shopping there
good point - any other companies that you've noticed?
@@VincentChanPanera
This is so good
So basically, PE main obectives:
1. Use cash to buy companies
2. ????
3. Profit
It's an older meme, but it checks out
In the late 1980’s I started working for a east coast retailer who had done an LBO. My role was working for the CFO doing financial planning, budgeting. We were highly leveraged, eventually going Chapter 11. I was laid off in 1993, but I learned a lot.
Yay! New vid!
there's more ads in this videos than actual explanations of how PE works
There is no gambling here, it's entirely theft.
2:30 many private companies need to share info with regulators (FINCEN) beginning this year. This doesn’t apply to larger companies, so it might affect private equity less, but there is a move to recording who the beneficial owners of a company are
Very good.
Great video
thank you haha appreciate it :)
The debt is migrated down onto the portfolio company from the finco SPV after acquisition closes as it gives the lenders a more senior claim on the company's assets. Please do the research, you kinda missed a really important aspect of the debt migration. It's the banks and private debt funds that want the debt structured that way. It literally makes no difference to the PE firm if the SPV or the portfolio company is the debtor or not. They are still protected from the bankruptcy via the capital structure used to hold the investment.
This is a good note. The lender becomes, for lack of a better term, the buyer of last resort for assets. Like, covenants exist... It's not like the lender is letting them strip it down and sell off the collateral for the loan. They sell of the EBITDA generators and then the bankers sell off the harder to sell assets. Plus PE pays hefty interest on these structures, so bankers get paid for the risk.
Same thing with RJR Nabisco. Firms just ruined it
Bravo USA keep up the good work.
Cannibalizing ones own economy for personal gain is tantamount to stealing from neighbors. Why the government of the people (including neighbors) allows it is the question.
Nice viddd
I'm thinking about this from 1 year and one more point is that these PE companies are destroying individual investors how because individual investors can't buy privately owned companies because they are not listed and also is that you can't invest in them with less amount if money it means that poor people and middle class people are now out of the game to become rich from investing and this bad very very bad...😢
It's like PE found and exploited a loophole(in a way), however, it doesn't seem sustainable. They're pretty much destroying everything they touch. Seeing as this doesn't seem to go well if PE continues to swallow up everything, there should be some legal regulations against this. Don't see how this is going to be a good thing moving forward. And keep PE out of healthcare, the goals of each don't align well.
Good analogy- flipper
thank you! what did you think of the video?
making money off of money is easy. it's hard to make/manufacture something new. this is a perfect example of " killing the host " per michael hudson .
Better make money of money than build crazy factories that pollute our planet
I kind of wish this video had brought up maybe the greatest disaster of private equity history: Freedom Group. Cerberus Capital Management basically invented our modern mass shooting crisis and it’s gone barely reported on.
I didn't come across that during my research. Can you share a bit more details about it here?
This makes no sense, so a PE can buy some company, all that debt/borrowed money responsibility is on that company to pay it back, NOT the PE (who bought it). So there's really no interest the PE has on how that company does, so as long as it can make a profit from this transaction. Essentially destroying that company with all this new debt. How is this allowed to happen? Also, who the heck would buy the companies from PE in the first place? I feel like I'm missing something. Doesn't PE need a buyer to get the profit ? Who the heck would buy from a PE?
I feel like Vincent is really good at keeping us watching. He made the video kind of scary and then at the end put a link to another video saying that it's something even worse. Then after that video he made a link to another video saying the same thing. Really smart, though it does make me feel a little used. Still good info in the videos, though I think he might be spinning it a little bit
THANK YOU! Brilliant synopsis of this Economic-Social Structure and its dynamics.
Hostile takeovers and stock buybacks need to be illegal... buuuut that ain't happening. Sigh.
what did you think of the video? :)
Stock buybacks are good because it cuts the number of shares that are owned resulting in the stock more valuable for the shareholders.
@VincentChan that firms like Blackrock and vanguard make me don't want to live anymore
@gmv0553 yep that comment is dumb
Informative, clear and concise, great video!
While it's easy to blame PE players, lenders i.e. banks are equally to blame for this problem. Why are banks putting tax payer money at risk by lending to PE ventures that are weakening the economy ? And why are the Federal Reserve and FDIC not regulating bank lending to PE shenanigans ?
The ethos plug / rise of PE in the life/annuity business over the same time period is funny
Did i miss the part where you tallked about what happened to the banks who were holding the loans for Houdaille/KKR?
If I know corporate America at all, and I think we all know the color of their stripes by now, then I'm willing to bet the "repairs" being done to pump and dump houses aren't up to code.
I think I should, I think a lot of us should, go take some classes and become home inspectors. If I'm right, that's a potentially ground breaking, industry changing class action lawsuit, the kind that's likely to get congresses attention.
Congress is all up in the PE markets. Doesn't matter whose in power.
These firms bought out the Congress a long time ago. They will do nothing of any significance.
I flip condos/townhomes and am a realtor. I always get inspections when I buy and my buyers always get inspections when they purchase. Little room for shenanigans.
Good video. What usually doesn't get covered is that the banks that provide the debt are taking losses when the firms acquired by PE go bankrupt. Why do they keep lending to this industry? I'd appreciate coverage of this angle if you do another video on privage equity.
Does india have any examples of leveraged buyout by PE firms ...
Vulture Capitalism at its finest. I can't stand government involvement, but this is one of those unique situations where regulations would actually make sense.
wow. shared on facebook. incredible
Re: the Houdie example. What were the lenders thinking? They lost the value of their loan.
What kind of mouse was that? 7:16
Here's what else we need so we can do what we can do:
IDENTIFYING THE LEVERAGED BUYOUTS OF PE FIRMS THROUGH ALL THE HYPE OF CUSTOMER RELATIONS PROPAGANDA - PIERCING THE LEGAL STRUCTURES TO GET TO THE CULPABLE PEOPLE.
HELP US UNDERSTAND OTHER FORMS (REITS) and MULTIPLE SHELLS.
If liability can be an attained risk through RICO or other forms of nasty management practices - these forms of business entities can experience a cost of doing business that flat ruins their model.
The add shows where Chat gpt is being worked on at Folsom and 19th I believe.
You should try to get 10 sponsors per video. That would be so cool
I remember it seemed like every other day on the nightly News in the late 1980s there was another leveraged buyout😢😢😢!
What colleges are owned by PE?
Not a deep dive, but made things click in place on how US economy is structured, how it penetrates into politics and why certain simple problems are so hard to solve.
Im buying up US real estate to hedge out stock market risk
which markets are you looking into?
Why does the Houdaille case study sound like occupation colonisation? lol.
How private equity companies can be made legitimate is beyond mind boggling 😣.
Wonder why banks would loan to companies owned by PE firms if the bankruptcy rates were so high?
Bankruptcy doesn't inherently mean money disappears. It means that there is a restructuring event to change the pay off structure and assets are sold off. If I collect 12%/yr from a PE strategy and get a haircut of 10% in bankruptcy at year 5, thats a good loan.
Another one of those things about the US Economy that if explained to a 5-year-old, they would probably quickly come up with the solution: make the PE Firms responsible for the outcomes of their actions. They make money, they get a slice. They break shit, they gotta fix it.
It was a really bad idea to watch Dr Geoff Lindsey's video on Vocal Fry, before watching this video. I'm sure the content was great, but all I could concentrate on was Chan's vocal rasp! Interestingly, in the UK, the target for PE firms is veterinary services. People are prepared to pay stupid money for the continued well being of their pets and PE have spotted this and are acting accordingly by purchasing as many vets as they can and then pumping up the cost for treatment and medicine...
Private Equity is arbitraging money capital vs real capital.
What happens to all that debt in Houdai? Who paid for it all?
Nobody. They bankrupted.
If you rob someone on the street you go to jail, but if you do this you’ll never see a slap on the wrist. INSANITY
Two ad reads in a single vid? Get that money ig
Excellent coverage of this dastardly business. The only two things I think you should have fit in here are Ivan Boesky and Michael Milken. (they both went to jail at one point) Milken was particularly egregious. He was alleged to have illegally profited some $700 Million, and was forced to pay a fine of $300 Million. Where'd the other $400 Million go? I think he got like 2+ years and was banned, temporarily, from stock trading.
This video shows a complete lack of understanding of the PE industry. The analogy to home flippers is just dead wrong when most funds have a 7-10 year investment horizon; compare that to public companies that need to show financials every quarter.
Banks have no where else to invest. All manufacturers moved their factories off shore. Today many former American companies are now only doing marketing products that before where made in USA. Before banks had local businesses that they can make commercial business loans to. Now banks who before had no trouble finding loan customers. Today banks are struggling to find customers. Where 50 years ago there were only commercial banks who only made commercial business loans. Today banks would lend to against any collateral. Banks today invest in hospitals , doctor’s offices, law offices (if permitted), residential home mortgage. They have no where to park the billions of excess money that is not taxed and ends up in wealth management bank accounts.
Not sticking up for the investors, but that is what an investor does. Also, the banks are at fault by allowing such a small investment by the PE groups. If PE groups had to put up 20-40% of the cost of a LBO, there would be less quick sell off and such disastrous changes.
“pass on the savings to the customer” 😂
It’s worth noting that “Private Equity” is a very broad term. Venture Capital is also a form of Private Equity. But they don’t do the things you are stating in this video.
Very educating. I thought I was financially literate but these sleezy private firms are on another level. Now they want our houes! Protect yourselves with some crypto!
Crypto!?! That is the definition of jumping out of the pan into the fire!
Let's learn about money.
Thank god the government is looking out for our best interest and stoping (blank) like this 🤬🤬🤬🤬