EP24 - Private Equity
60yo founder wants to retire.
He spent over 40 years on his company. It's his life's work. A legacy for his family.
I have 30 years of experience in private equity, so he comes to me to sell.
He thinks I'm his successor.
I dont think he understands.
I'm about to end this man's career. With dignity, of course.
First, I buy his company. A fair price. He leaves happy. Then, the real work begins.
The building he owned? Now owned by a separate company I control.
The machinery? Same deal.
His company now owns nothing but a brand and a payroll.
Then, my new real estate company leases all those assets back to his old company. At a very, very high price.
I call it "unlocking the value of fixed assets"
Suddenly, his profitable business is drowning in "operating expenses."
The profits that used to go to him, now come to me as lease payments.
In two years, the company declares bankruptcy.
The media calls it a tragedy. The employees blame the economy.
They say the market just wasn't working out. They are absolutely right.
The market for their salaries wasn't working out. And the market for my lease payments was working out perfectly.
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Context
Private equity is too easy. Most people in the public already knew this trick.
There is a case where PE is good for the economy though. Notably, letting old profitable businesses die on its own is quite wasteful as it creates a lot of overhead and switching costs for customers who used to rely it.
It's easy to hate PE, not understanding the options that grant to old owners to liquidate their company is still a net positive thing.
That said, the dirty trick is practiced so often.
> Buy business with debt
> Rent the new business from yourself
> Pay the debt back with your "rent profits"
> You basically took over another old guy's business for free.
> Guess who still gives a shit for those who used to work there?
Its like Adam Neumann, CEO of WeWork trade-marking the word "We" and using investors money to pay for the rights to use the word "We" in the name of his company.