Why Does Everyone Hate Private Equity?

00:00 - Introduction
02:51 - What is Private Equity?
05:33 - The Problem
08:46 - Why So Reckless?
15:00 - Other Considerations

Private equity has a pretty bad reputation, and some of it is well-deserved. In today's video, I dive into why private equity keeps getting into trouble.

DISCLAIMER:
This channel is for education purposes only and does not constitute financial advice - Richard is not responsible for investment actions taken by viewers. Please seek out a registered advisor if you require assistance (while Richard is a registered portfolio manager at WDS Investment Management, he does not provide advice through The Plain Bagel, which is not affiliated with his employer).

[ThePlainBagel]

Correction: It has come to my attention that Red Lobster was sold a few days ago to new owners and has exited bankruptcy. Sorry for failing to include this very important update.

[karlstrauss]

“Private equity don’t inherently need their companies to succeed to make money… there’s not much financial liability that the funds face for their company failings… companies are often to able to dodge responsibility for the actions of the company they effectively run.” There you go Plain Bagel, now you know why so many people distrust private equity.

[averagewhiteguy]

Filing bankruptcy just to get out of paying a pension liability, and re-purchasing the company is just so scummy. That's abominable.

[jamesodell]

Bankruptcy courts should be allowed to claw back money private equity firms have stripped out of companies.

[Erok]

The difference between creating wealth and simply extracting it.

[Dan-uofw]

Some of the strategies you described as being problematic are straight up evil. Intentionally destroying the livelihood of other people.

[KathyClysm]

I think the problem largely is not the fact that private equity exists, but that they are getting involved in sectors that should really never have been privatised in the first place. Nursing homes, hospitals, prisons, public transport, etc. should never be a "for profit" type business as they are a public institution/service/etc.

[ieuanhunt]

Leveraged buyouts are pure insanity.

A private equity firm can take out a loan. Buy a company. Then saddle that company with most of the dept from that loan. Insanity

[johnroberts]

I lost a 17 year job as a result of a private equity acquisition. They ruined the company and eventually bowed out, and the company is now owned by the banks. It's a mere shadow of what it once was. Many jobs were lost.

[fleabagmr.]

Blackstone bought the company I worked for and stripped it clean and sold off parts. Wages and benefits were destroyed while CEO made hundreds of millions over 10 years. Greed at Blackstone is impressive at the very least!

[Fireclaws]

My problem with private equity is that they’re allowed to do leveraged buyouts, which is insane, and mostly lead to the death of the company they saddle with debt. Also that they aren’t regulated on the industries they can take over. As you’ve pointed out, they have disastrous effects on healthcare.

They need rules, instead of being able to operate in a wild west of strapping a company with insane debt, firing half the employees, and ruining the pensions of the rest when it inevitably fails. No risk and no consequences.

[sav]

I like how he casually just says "saddling the debt" onto the already declining business like thats not messed up.

[proy]

You know PE is bad when even The Bagel Man is like "Yeah... the populists have a point."

[carterwgtx]

I don’t think it’s that private equity exists - it’s that private equity moves into otherwise perfectly fine businesses and switching the entire business into a machine to extract profit to the benefit of the equity firm. Away goes any care for workers, the community, broader society at large, the environment, and even their customers. Upon PE acquisition nothing matters except the bottom line and everything simply boils down to lines in the spreadsheet set up to maximize the next quarters profits. People hate them because they are the classic men in suits who show up with a checkbook and immediately start running the town.

[jameskeefe]

Oh i dont know, perhaps buying a company with its own debt then to bleed it dry and extract as much as possible from it as possible, screwing over its employees and customers, to make a few wealthy people who own it wealthier, is a little bit vile. Its contrary to how publicly traded companies should be run which is to make the company more successful, so that the public who can buy shares and benefit can grow their wealth by the companies success rather than by bleeding it dry.

[addanametocontinue]

Pre-PE, you might have gotten a $5, 000 raise a year because the company does well and they appreciate loyalty. When PE comes into the picture, fuck that, they pay you the market rate and nothing more--who cares that the company made tons of profit the prior year, the company's profit belongs to the company, not you.

Am I biased? No. I worked at a company that was acquired by PE and got taken public and I was given a good number of shares to stay during this period. So, I made a good amount of money, thanks to PE, but there's no question the company is no longer the nice place to work at that it used to be.

[geldan]

Because they've bought out all of the veterinarians in the area and increased prices 5x+ while severely reducing the quality of care.

[Zilkat]

When even The Plain Bagel piles onto PE without really having anything positive to say, you know it's just a bunch of bloodsucking thieves.

To me, it sounds like the leveraged buyout is basically a legal way of butchering a company. While the current owners cannot liquidate the assets and take the money (that would be embezzlement), what they can do is sell it to PE, who saddles the debt for the buyout onto the company and absorbs it by liquidating its assets. At the right price, both the previous owners and the PE firm win, while everyone else at the company (shareholders and employees) loses.

[PXAbstraction]

Almost like big business can't be trusted to regulate itself. 🤔

[frequentfrenzied]

A private equity firm bought the local high-speed internet provider in the town where I lived. After the acquisition, they did exactly what you explained in the video. Fired almost all of the staff, sold anything of value, and stopped all maintenance on the internet infrastructure that allowed them to deliver service to their customers. They were the only game in town when it came to high-speed internet, so customers were forced to stick with them even though their service was essentially non-functional. That's just the way it was for six years, until another local internet service provider got the funding they needed to build out their service into town. As soon as that happened, everyone switched to the new service provider that was locally owned and operated, and the PE firm sold the old internet service provider that they had looted to the first company that was dumb enough to put in an offer for it.