How Private Equity Works - a personal experience

Discussion in 'Economy' started by rdean, May 22, 2012.

  1. rdean
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    rdean rddean

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    The company I work at just went through a classic equity buyout and sell off. Let me explain how it works.

    First, there is a myth that private equity starts off with failing companies and turns them around. They are an investment firm with the goal of making money from their investment. This is not a trash piece but an explanation of how they actually work..

    The company I worked at was family owned. It had grown into a substantial company that wasn't going bankrupt or falling apart. In fact, one of the sellers ended up on the BOD at the private equity company the family company was sold to.. The family just got tired, after four generations of working. They took their share and went their own seperate ways.

    Typically, a private equity firm works and sells a company in 5 to 7 years. They aren't in it to "own" companies, but to make money. The first thing they did was replace the CEO and then bring in people to "study" the company. They studied it for about six months. Over the next year, they let go R&D Department and about two thirds of engineering. About three quarters of the middle management. They weren't destroying the company, they were just reducing cost. Remember, they are making this company more attractive to a new buyer, whoever that might be.

    We had three years of listening to nothing but "EBITDA, EBITDA, EBITDA":

    Definition of 'Earnings Before Interest, Taxes, Depreciation and Amortization - EBITDA'
    An indicator of a company's financial performance which is calculated in the following EBITDA calculation:

    Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) Definition | Investopedia

    During the next three years, engineering worked to take cost out of of the equipment and to support the product line and existing equipment. Money was put into marketing to improve sales. After those stellar years of low cost and high profits, they started looking around to shop the now, very attractive company. Over the next couple of years, there were two investors who were seriously interested in buying the company. Both companies sent observers for months, and finally, the company that bought the company I worked at made the deal at nearly twice what the company was bought for the first time.

    Since the company was sold, the engineering department is close to the level it was before it was sold the first time. The R&D Department was back. Some of the simpler products from the product line has been moved to be made in China. So there a a few less people working in production.

    Overall, the company is close to the same, but there are fewer people working there. The company also went through a "lean" manufacturing re-organization and that reduced the number of those on the floor and in the stock room.

    Now, we talked to those reps from the private equity firm. There was no "ill will". It's a job. Everyone was getting paid to do what they were getting paid to do. In this case, more jobs were lost than were made. And that's what usually happens.

    Now this company was family owned and the family just wanted out. Some companies are actually "spun off" from larger companies because what they make or do doesn't fit with the core business. Or the company is going through a managed bankruptcy and the company is bought for it's assets or it really can be "turned around".

    But you can see here, this is not a place to "create tens of thousands of jobs". It just doesn't happen. This is about buying a company, sprucing it up and selling it for a profit. That's it. That's what happens. That's ALL that happens.

    There is a dark side. Some equity companies have a reputation for loading down companies with debt, seeing them go bankrupt, selling off the assets and walking away with a tidy profit. But that profit is small compared to building up a company or making it more profitable and selling it for a huge profit.
     
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    Last edited: May 22, 2012
  2. syrenn
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    syrenn BANNED

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    And?

    Welcome to the world of business. Nothing new here rdean.
     
  3. rdean
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    rdean rddean

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    When Mitt Romney said he made a 100,000 jobs. Then said 10,000, then just "thousands", probably all three are lies.
     
  4. syrenn
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    syrenn BANNED

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    And?


    Welcome to the world of business.


    And what does your personal experience have anything to do with romney? I see zero connection. Or is your whole OP just a lead in to say something else?
     
  5. Toro
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    Toro Diamond Member

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    rdean's description is actually pretty good. That is a good overview how many private equity investments work.

    It's also true that many firms PE buys are not failing but are generally pretty good companies. However, the majority of firms PE buys are companies that underperform. Usually, costs are high and margins are low relative to the rest of the industry, so the PE firm sets to cut costs to get costs and margins in line with the industry. However, not all companies are like this. Often, as in rdean's case, the owners just want to sell out, even if its a good company. Those are actually pretty attractive to PE firms because there is less heavy lifting with higher quality companies than struggling companies. In higher quality companies, PE companies will often put on more debt than the company had prior to the buyout.
     
  6. Amelia
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    Amelia BANNED

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    Not gonna agree with all rdean's conclusions and generalizations but that was a very interesting example, nonetheless.

    Thanks for taking the time to write that up, rdean.
     
  7. rdean
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    rdean rddean

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    I think that when Mitt Romney said he made a 100,000 jobs. Then said 10,000, then just "thousands", pretty much says it all. Wouldn't you say?
     
  8. rdean
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    rdean rddean

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    You're welcome. Would be interested in how your conclusions would differ.
    Thanks
     
  9. Mr. H.
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    Mr. H. Diamond Member

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    Ok so you're an intelligent idiot.

    Next!
     
  10. Mad Scientist
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    Mad Scientist Deplorable Gold Supporting Member Supporting Member

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    Company was sold willingly, not under threat or bankruptcy or corporate raiders.

    Company was sold and put under new management style that rdean doesn't agree with.

    Rdean should quit, start his own business and show them all how its done.
     

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