The Spectacular Rise (and Imminent Collapse) of Private Equity

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Ben's Channel @BenFelixCSI

My Other Channel: @HowHistoryWorks

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#investing #privateequity #business

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The rapid growth of Private Equity has been blamed for pretty much every problem in America today, from mass layoffs to unaffordable homes. Some of this hate is totally justified, and some of it is just coming from second generation Wharton grads that didn’t land a summer internship at Blackstone. Whatever YOUR reason is for hating private equity, you will be happy to know that after a meteoric rise, the whole model that this industry was based on is now facing a spectacular collapse.

Private equity is very simply any investment into assets not listed on public markets. There are hundreds of thousands of highly profitable and promising businesses in America and millions around the world that you would never be able to buy using Robin Hood and some pocket money.

Private companies that are not listed on public stock markets don’t have the same reporting requirements so it can be extremely difficult and time consuming for investors to get a good idea of if a business is worth buying and how much it would be worth if it is. This is where private equity FIRMS stepped in as middle men to offer rich investors access to this untapped market.

If you were a billionaire, or the manager of pension fund their pitch to you was simple, they could give you higher average investment returns than you could get in the boring old stock market, your returns would be less volatile, and your money would be safer from market crashes. They could do this because they employed a crack team of the best business analysts in the world to do all the hard work of finding and buying a private company or alternative asset on your behalf and extracting as much money as physically possible out of it.

Sounds too good to be true right? Well, it is…

Private equity has pushed it’s business model too far and now it has trillions of dollars’ worth of assets that nobody wants, which sounds like a good thing for regular people who have been the victim of the layoffs and cost cutting that private equity has become famous for right? Wrong… There are four reasons why Private Equity is failing, and four reason why all of us are going to be the ones paying for it.

Private equity managers could reinforce this idea by only selling their highest performing assets furthering the illusion that everything in the portfolio was doing equally well. The very fact that these assets don’t have instantly updated price information actually made them even MORE attractive with certain fund managers because it let them claim to their own investors that their money was growing steadily even during turbulent markets. For a while this was true, after all something is worth whatever a buyer will pay for it, but now the investing public has realized that private equity firms are holding onto a lot of garbage that is going to be very hard to sell.

All investment carries risk and if this were just a story about financial managers delivering bad returns to rich investors after making big promises it wouldn’t need its own video, but a lot of Private Equity money is YOUR money, and if this convenient lie unravels, it’s not going to be the private equity partners losing their jobs. So it’s time to learn How Money Works to find out how Private Equity failed to live up to it’s promises and how we are all going to pay the price of that lie.

[rumplstiltztinkerstein]

Prisons owned by private companies is so insanely dystopian.

[shellylofgren]

America is currently plagued by the hydra-headed evil duo of inflation and recession. The worst part about this recession is that consumers are racking up credit card debt. In April alone, credit card debt went up 20% while rates have doubled in a year. Inflation is so high that consumers are literally taking debt for basic life necessities. Collapse has indeed begun..

[drno]

If it's anything like '08, the government won't do crap until the crash comes, after which the companies get bailed out, executives get massive bonuses, and no criminal charges are pressed.

[chriswalter]

Private equity sounds like a mechanism that extracts the most amount of value from a business, and transfers that wealth to the few general partners.
Everyone loses - the business, the employees, the local consumers, the tax payers.... except for the general partners

[takethesquid]

So you're telling me those guys have been imposing austerity on society just to sustain the illusion of beating the market?

[andyt]

When I notice an uncharacteristic drop in the quality of service from a business I’ve solicited for years I’ve started checking out ownership. You’ll never guess what I often discovered.

[alexandrumih]

Private equity's ups and downs? It's like trying to assemble furniture without the instructions. Initially, there's unwarranted confidence, swiftly followed by utter confusion.

[sahajsharma]

Private equity was always destined to fail. It’s the epitome of the currently endemic system of short-term profit chasing our entire global economy is based upon.

[hunter]

It really is amazing the amount of times I've seen the mentality of cutting workers to increase profit. It always backfires down the line. But a lot of execs do it anyways because the repercussions don't show up quick enough for it to effect their bottom line. Hospitals are such a great example. One in particular I used to work with refused to hire the proper amount of tech, and cut cost of living raises significantly. Things started to spiral really quickly as more and more people left since they were being forced to work crazy hours with crazy workloads. It got to the point that they just straight up didn't have the correct personnel to legally run the labs.

[daveharrison]

the parasite kept growing until it killed the host

[vylbird]

Not just America! The same thing happens here in the UK. Thames Water got looted in the same way: Investors brought up the company, had it run huge debts to pay themselves dividends. Debts obtained by borrowing money from those same investors, so they can drain it by the interests. The genius move though? It's a utility. So even though the company is on the verge of bankruptcy, that can't be allowed to happen or else sewers will overflow and taps will run dry - so the government has little option but to bail the company out, including paying off those debts.

[phillipwombacher]

I’m a nursing home nurse these companies will come in buy up a nursing home cut staff and ignore patient safety I had one place try and tell me having 50 patients at a time was standard practice I got fired for trying to unionize lol

[Slide]

Too small to notice??? If you were one of the small towns that had your local factory liquidated or zombified via an LBO over the last 40 years (vs 20) you noticed.

[Josh-]

This happened because we deregulated the markets and refused to just say "no" to acquisitions and mergers.

We need to regulate the industry and simply stop allowing mergers and acquisitions. We need MORE companies in the market, not fewer. The American economy is stagnating because every time a new company starts innovating, a larger company with more annual income than the GDP of some nations buys the new entrant and invariably ruins it.

[ganymedeflowers]

I've held this view for a long time, and it seems to be an almost non-existent one in the American business landscape, but I very much feel that a truly good business shouldn't seek infinite growth and absolute maximization of profits. Rather, a good business should seek equilibrium. Try to reach a point where your turnover is minimized, your profits are stable, and you're firm in your spot in the market. Make changes not to increase revenue, but because those changes would be genuinely beneficial to customers and workers alike. A good business is a stable business, not an unstable one that's only concerned with short term profits and unsustainable growth.

[hawktondog]

"its collapsing " :D "and we'll be the ones who have to pay for it" D:

[thedawapenjor]

I always thought private equity was as close as you could get to a pump and dump without going to jail.

[mateo...]

Bain & Co. is a management consultant firm. Bain Capital is a private equity firm. This mistake has been made before on this channel. Please heed feedback from the comments section every once in a while.

[LifeInJambles]

Aight, I gotta "um actually" here.
Schrodinger's cat doesn't have a 50% chance of being alive and a 50% chance of being dead, it is BOTH dead AND alive until it's observed. Physicists didn't "use" it to describe quantum mechanics, it's specifically about quantum mechanics, and was a critique of the current understanding of quantum mechanics at the time. It was also, as stated, a critique and was not meant to suggest that that's how things actually work.
The cat having a 50/50 chance is how things would behave in the standard model, rather than quantum mechanics. The thought experiment isn't about the standard model though.

[kortyEdna]

The current market/economy is unnecessarily tougher for boomers/senior citizens, I’m used to just buying and holding assets which doesn’t seem applicable to the current rollercoaster market plus inflation is catching up with my portfolio. I’m really worried about survival after retirement.