RSS Feed
 |
 |
 |
|||||
If you are working for a company owned by a PE firm, you better get ready to change jobs very quickly.
Josh Kosman makes an interesting analysis of the Private Equity industry, shedding light on how they actually make money. Did you ever wonder how they made money? How come one of KKR's founders has a net worth of $6 billion ?
I simply thought that PE firms made a living of improving the efficiency of the companies with hard work and some financial knowledge to improve ratios. Well, I can tell you my surprise while reading the book by Josh Kosman, The Buyout of America, whatever I thought was completely wrong, and my guess is that it applies to you too!
Simply put, PE firms dump a shitload of loans onto the firm they buy out, cut the costs such as customer service, R&D, and safety to increase the profits. Increasing profits can happen very quickly by decreasing customer service and R&D, but the long term prospects of teh company are going down the drain. In a couple of years the company won't have anything to sell anymore and it will be kicked out of the market by the competition.
Anyway, that is not what the PE firms care about, they care about short-term profits. Why? Because with a better profit margin, the PE firm can go back to the bank to get a second loan. This loan is then used to pay the PE firm a huge dividend while damaging even more the company since it has to repay even more than before. And the cost cutting goes on.
The dividends that a PE firm can get out of such a scheme are more than the money they put down to buy the company in the first place. So, if you think about returns, the return is higher if you can get a quick dividend compared to try to make the company grow and sell it for a capital gain. So in the end, if the PE firm sells the company for a lower value, it simply does not care, most of the value has been extracted already.
Anyway, since the long term prospects for a company owned by a PE firm are not bright, on the contrary, you better start looking for a job before it is too late.
|
|||||||
 |
 |
 |
