Half Of All Nonfinancial Firms That Defaulted Last Year Were Backed By Private Equity: CJR

cjr.org:

Ryan Chittum writes that companies backed by private equity firms have disproportionately high default rates because:

"...they levered up their acquisitions with cheap debt to goose their returns, and now these companies, who employ (or employed) lots of people, can't meet their debt service, much less invest in the business. That's helping choke the economy.

This raises a critical point about private equity: Why isn't that industry being included in financial reform? What about Blackstone?"

Read the whole story: cjr.org

Comments

[martin2]

10:07 PM on 03/29/2010

I never thought I would agree withThe Chinese but they are right about this.
Up against the wall with all the big financial crooks.
To destroy a company and put people out of work is terrorism.

[efmo]

07:41 PM on 03/29/2010

The Buyout of America by Josh Kosman is a good book on this subject. It was published last fall, I think & I am waiting to see if his predictions come to pass.

[drkazmd65]

03:15 PM on 03/28/2010

Any private equity firm stupid enough to leverage themselves into oblivion needs to be allowed to go under.

[jsarets]

03:46 PM on 03/28/2010

A lot of these companies were sold to private equity by their shareholders, who would accept any terms of acquisition as long as they could offload their shares at a good price. The management, let alone the regular employees, wouldn't have had much say in the matter.

That's one of the many perverse aspects of the joint stock corporation. The owners don't have any non-financial interest and may not have any long-term interest in the business. It's just an asset they have an option to sell, and they have no reason to care about it after they sell it.

[drymartini3]

01:23 AM on 03/29/2010

owners of a company should have the option to sell their shares to a party that maximizes their value. thats just simple business.

the perverse aspect is that whereas the management should act in the best interests of the shareholders do not do that a lot of the time. its called "principal-agent" problem. look it up.

[drymartini3]

12:55 AM on 03/28/2010

I thought huffington posters didnt like shareholders.....Only publicly listed companies have sharedholders.

I thought they would be happy if a publicly listed company gets bought out and taken private....the sensibilities of the posters here wont be offended any more because there are no shareholders..its a private company now.

[therealredstateblues]

01:25 PM on 03/28/2010

taking a company private is a far different matter than the mission of private equity firms, whose sole pupose is to find a profitable/viable/cash rich company, milk them for overything they are worth and leave them a hollowed out shell to flipped

[drymartini3]

02:23 PM on 03/28/2010

its actually the same.

Take a company private with borrowed money (debt)
pay a huge one time dividend with the cash on the books.

this replaces equity with debt.

restructure the company and reengineer the processes to do cost savings.
pay off the debt.

sell off the company at a higher multiple.

now some people think this as strip and flip operations but VALUE IS CREATED otherwise, the nobody will be lending money to the PE company if they were not convinced that the bondholders will get paid.

if the PE companies could not deliver then they would not be able to issue the bonds...which is essential for the buyout.

got it?

[jsarets]

03:51 PM on 03/28/2010

Who do you think agreed to load up of the companies with debt? The shareholders, who were anxious to unload their shares at a good price! They said "adios, we got our leveraged buyout, good luck with all that debt."

[drymartini3]

01:21 AM on 03/29/2010

If the shareholders thought that sticking around would create more value. they would.

a lot of good companies going through hard times are taken private because shareholders are looking for a way out.

[GoodRead]

11:14 PM on 03/27/2010

So, wealthy people with at least 3 to 5 million dollars available to give to hedge funds lost a little money. I think they will be able to make the mortgage on the cottage in The Hamptons, still pay their kid's Ivy League tuitions, and get the Bentley’s oil changed every 3,000 miles.

I'm more concerned about the families with a 10-year old Ford under the carport.

[billw8017]

11:43 PM on 03/27/2010

When Enron went down, Ken Lay's family had a yard sale. I believe it was at the Texas mansion.

[ErnestineBass]

12:21 AM on 03/28/2010

I wonder if his wife is still receiving their farm subsidy on the mansion's yard.

(True story - look it up.)

[StacheService]

10:58 PM on 03/27/2010

Things are bad when even the banker in Monopoly resorts to dumpster diving:

http://www.youtube.com/watch?v=266CviLQYz0

[TruEngineHearing]

06:11 PM on 03/27/2010

The greedy little world of private equity is a public menace. Scratch at this just a little bit and you'll find a whole bunch of bad players that have made major fortunes by carving away at the wealth of our nation. It is a scam, and if karma really exists, its players should go down in flames. For a perfect picture of what this is about, unfurl the financial history of Mitt Romney and you can see how America's prosperity is being routinely stolen by unsavory players.

[BKFactor]

01:20 PM on 03/27/2010

And just how much did Shelby and Dodd (and others) receive from the financial services industry?

“Check out:

http://clevelandssecretclub.blogspot.com/2010/03/truth-about-financial-reform.html”

watch both videos

[bigOther]

12:32 PM on 03/27/2010

The NYT had an in-depth article on this a couple of months ago. I don't believe 'hostile' takeovers should be permitted. Well run companies are the main target of these predators, as the examples above show, and great old-line ones were their prey of choice. They dug out all the equity by mortgaging it, after borrowing to buy the company (and saddling the company with the debt). Truly a high crime.

[drymartini3]

12:52 AM on 03/28/2010

hostile takeovers should be permitted.

companies should not be allowed to implement poison pills.

Let the shareholders decide who provides the most value. Poison pills exist just to keep existing management in place even if they dont provide maximum value.

[therealredstateblues]

01:26 PM on 03/28/2010

so so many once great companies ruined by the hostile takeover.

if a company does not want to sell it should not be forced to

[chappelforpres]

02:29 PM on 03/28/2010

In theory. But bubble driven "values" usually bursts, spawning a beached whale. Gullible shareholders get fleeced, as privileged insiders / sharks have long since sold. Ballooning debt enriches the predators (plus fees and related) as phantom credit ratings and sell side hype keep things moving. When the cycle turns (and it always does), the overweight pig drowns.

Jobs evaporate, the stock tanks, plants, real estate and physical assets plummet and powerful lenders wind up holding the bag - conveniently passing on their losses to the taxpayer, who's fate it is to see which way the chips eventually fall fall.

What a system - free market profits / socialized losses.

[HmblDog]

11:15 AM on 03/27/2010

if you raise chickens for a living and let foxes live in the chicken house the foxes will come to believe that you are raising chickens for their (the foxes) benefit and may even feel let down if chickens become scarce.

[FoonTheElder]

09:29 PM on 03/26/2010

No surprise with that. I work for a firm owned by a private equity company.

The first thing they did was mortgage everything they could get their hands on. Then they paid themselves back about four times what they paid for the company in the first place. Since then the company management and employees have had to deal with an unprofitable company anchored down with heavy debt. Add to that, no raises and way below market wages.

The original plan was to sell the company quickly to the next burner and churner, but the recession put an end to that. The private equity company will win whether the company goes bankrupt or gets sold. They've already been paid handsomely.

[WIpatriot]

08:14 AM on 03/27/2010

Excellent, Foon. I was just about to say the same thing, as my friend worked for a company that went through the same thing last year and he was let go.

Many years ago I worked for a young man who spent a lot of time searching for "savings," some which were good and some which were "robbing Peter to pay Paul." A few months back I met with some of my old colleagues and we were talking about what happened to some of the people we worked with, and his name came up. He now works for a private equity company. I laughed when I hear that and explained to the group what a private equity company does. Everyone nodded in agreement that he'd found the perfect job.

[je7374]

11:39 AM on 03/27/2010

This is exactly what happened to National Steel.

[doubtingdavid]

08:41 PM on 03/26/2010

It's Bush's fault.

[FoonTheElder]

09:32 PM on 03/26/2010

It's corporate owned Washington's fault, which includes Reagan, both Bushes, Clinton and Obama. This is how Mitt Romney made his millions. Every time one Wall Street scam ends, like leveraged buyouts, another starts.

[billw8017]

06:55 PM on 03/28/2010

When Enron ripped California off, Bush and Cheney nodded wisely and said this was but "market forces." Despite this, I don't blame Bush or Cheney. In the first place, Enron and Kenny Boy were their good friends, and, perhaps, as McCain said of Phil Gramm, the smartest guys they knew. In the second place, you can't help being born as an idiot.

[billw8017]

07:27 PM on 03/26/2010

Hertz and Avis are examples of companies taken over by equity investors who then borrowed to the hilt, took their profits and salaries and sold the companies public again. These car rental places have struggled back and seem to be doing OK. Simplicity Patterns was a firm that had accumulated a rainy day fund of several million dollars back in the 1980s. They, too, were consumed by equity investors. In the 1950s, the major magazine and book distributor was consumed by equity investors who sold off their trucks and office furniture and let it vanish.

This seems to be a fact of American life and a challenge to our well being.

[je7374]

11:52 AM on 03/27/2010

I remember the Simplicity Patterns (Niles, Michigan) story well. In newspaper interviews the attitude of the guys doing the hostile takeover was basically, "tough, live with it." If I remember a local guy tried to save the jobs for his fellow townspeople. Is this a great country or what.

[ErnestineBass]

12:27 AM on 03/28/2010

It's called vulture capitalism.

Quite the apt description, doncha think?