Ex-Wall Street Trader: The $8 Trillion Bubble Ready to Burst | Jared Dillian

That old private equity model is mostly extinct. In its place, former Wall Street trader Jared Dillian sees an $8 trillion bubble, built on massive layers of debt across 17,000 private equity firms.

Jared says this bubble poses a systemic threat to the entire financial system, with the potential to implode in ways similar to what we experienced during the 2008 financial crisis. He also explains the opportunities it presents for investors who get ahead of it.

Jared just released a comprehensive white paper on the private equity bubble—and what he’s calling the “Big Short 2.0.” Access your FREE copy by clicking the link below.

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Time stamps:
00:00 – Introduction
01:23 – The nuts and bolts of private equity
04:30 – The old private equity model is mostly extinct
06:46 – The place everyone in finance wants to be
07:47 – The time horizon conflict
09:04 – Massive leverage and systemic risk
12:21 – Vulture capitalism
14:24 – Shorting PE firms and Kim K.
15:02 – Chicago Bears’ Caleb Williams launched 888 Midas
16:01 – Why private equity is a true bubble
19:21 – How higher interest rates amplify the risk
23:23 – Big bubble signs
26:33 – How individuals can get positioned
30:11 – The Big Short 2.0

[Justin-pupb]

This is one of the best conversations I heard on YouTube or anywhere on this private equity. I hope you have this guest on again.

[Nonya]

Work for a company owned by PE; will cosign a lot of this. Lean operation with prices going up up up, no new investments to improving the company, no customer focus at a senior management level, 12% interest rate on a LBO, PE leader (ie VP) under 40, pinching pennies at every turn, asset stripping when possible.

Edit: In the chemicals industry

[Slide]

PE should be renamed EE - equity extraction.

[RichardBassett-kmfn]

How do PE firms make money? It's not just capital gains and dividends; it's the fees that guarantee that the PE firm earns a return even when the limited partners lose money.

Fees for closing a deal, fees for raising debt, management fees from LP's, fees from the company for governance and "management" and fees for exit. Fees drive more decision making and pricing decisions than the prospects of capital gains, which are uncertain.

[twhelostl]

It is just a polite way to label the non-bank sector. Corporate pirates who have almost no constraints. BlackRock is Larry Fink's ship, he has DC and BOA in his corner. TARP from 08-09 got handed off to these firms by the FED. PE owns and rents these single family homes. Some others are Air BNB. No wonder that buying a home is so hard for individuals.

[RWROW]

Private equity sounds like a disaster for the country long term.

[actualfacts]

A big con in Australia is private companies raising capital to list on the stock exchange but never do.

[RightTailAngst]

Super interesting. In my opinion caused by too low of rates for too long. Regardless you can see how poorly run everything PE touches from nursing homes to hospitals. One constant everyone from customer to employee feel screwed

[reallyso]

Biggest issue with PE is the leverage as much as possible so less equity is needed. If companies at some point have issues, they reduce costs, but there is only so much they can do. If things really go bad and the business shrinks, the lenders get the company and it either closes or gets sold. If there wasn't so much debt, the business many times could have survived because they wouldn't have to pay so much interest. This happened to Toys R US, which the CEO said could have remained in business if it didn't have so much debt.

[cooperrichard]

Great interview, I thought this has been going on since the late 80's.

[sbain]

Sounds like private equity firms have come to resemble the conglomerates of old, and they'll no doubt fail for the same reasons.

[bpb]

we are in an everything bubble... why would private equity be excluded?

[robertdoell]

The Debt bubble is far larger than a measly 8 Trillion. He is dismissing the derivatives of at least 1 Quadrillion in debt that is used in OFF BOOKS transactions of gambling and those who correctly use derivatives to hedge their transactions.

[auwz]

If you want to see how this can all go wrong have a look at what happened to the Woodford Fund in the UK a few years ago.

[Canadian_Eh_I]

Phenomenal interview. Jared really shining here.

[gmb]

Financial engineering coupled with an attitude that the P/E investor "doesn't care" with the stated objective of stripping the company of cash are at the heart of the problem. Handing equity to outsiders is letting the wolves into the chicken house.

In my 38 year career I was an asset based lender providing revolving lines of credit with advances against percentages of eligible accounts receivable and inventory. Equity in smaller, private companies, is centered in current assets with an underlying value in fixed assets. The objective of asset based lending is to smooth out the flow of funds in the company in collecting receivables and paying suppliers.

Leveraged buyouts have to bring added value to the company through the expansion of the core business (examples manufacturing, adding product lines for selling to existing and expanded customer lists). The idea is to take out the majority owners to replace them with (hopefully) better management that can maintain and expand the business.

The added cash to the balance sheet is not there to strip it out in fees and carving out the needed liquidity to maintain credit ratings and to satisfy suppliers. That is where the private equity firms come in with their flim-flam and blue sky promises.

A bunch of wet-behind-the-ears MBA's working their jacked up appetite to do "big deals" is a poison to the economy. These jake-legs have never had to liquidate a company that goes bankrupt; real value is the fire sale price that bottom feeders will pay for inventories and machinery.

Traditional business brokers help owners to cash out by essentially selling assets in a property transaction. The departing owner retains his outstanding accounts receivables to collect and hopefully give a favorable reference in the hand off to the new owner. The new owner has the inventory, and fixed assets to continue the business as a going concern.

A few sharp guys like Henry Kravis made the transition to private equity; he really created the current model. But Kravis was grounded in basic business principles, knew how to evaluate assets and operations. But his acumen can't be "stamped out" on a metal pressing machine.

Only knowing the top level of how it's done is tantamount to handing a loaded gun to a child. So the day is coming when all the "headline" front end deals will come due and many people are going to be hurt by the rash actions of crooks that fleeced companies.

[lak]

Very true about IPOs. I don't think I've heard of a significant one since Saudi Aramco.

[PowerYAuthority]

I work in PE at a solid firm. Some people aren't as smart as you would think but they are extremely risk addverse and it's good for business.

What I have learned working here tho is PE is full of underpreforming average intellectual people (this is when I look at some other firms in my building / people I meet at socials)

My 2 cents, if a firm struggles to return 2x then they're constantly overpaying or buying shit. A good firm will average at least a 3x return

[KENTUCKYUSA]

"Vulture capitalism." Yeah. Nailed it!

[MetallurgyMonday]

The layoff folks and raise prices was done at Thermal Process Holdings and the impact was seen immediately not in 3-5 years. PE is driving it into the ground since you have those "33 year old B school VP's" who know nothing. I expect bankruptcy for them.