There's a decently successful chain of restaurants that owns properties across the county for its locations, let's say the priorities alone are worth $500m collectively
Private equity firm does a "leveraged buyout", so they borrow $500m against the value of those properties and put up the rest to cover the additional value of the business themselves and buy out the chain for $800m, assigning the $500m of debt they borrowed to the acquired company.
Then they start up another company that they own separate from the acquired company and start selling off the properties to it and converting the restaurants to leasing them. Now the restaurant chain is paying $20k/mo in rent to their new company instead of just paying property taxes on the land they used to own. Pretty soon the chain locations are all losing money because the PE firm is also cutting corners everywhere and they didn't have this huge rent expense before. Locations start getting closed and people lose jobs and communities lose what was once a totally viable business. Restaurant chain is eventually bankrupt under the massive debt that was assigned to them, PE firm still owns all the land and gets to sell it off on top of all the rent they collected.
So it should be illegal for the original founders of the restaurant chain to make $800m on their successful business? Or for the PE firm to move assets or charge fees between two companies they own? Or for PE firms to mismanage their own investments and lose their own money? Or for restaurants to go out of business? Or for new ones to start?
To be clear, moving assets away from companies and/or charging fees between related companies is actually tightly controlled and audited.
If it’s 100% your own companies, that’s fine but as soon as third parties are involved ( banks, minorities shareholders) you need to follow market value.
Moving assets away to another company and declaring bankruptcy is defrauding the banks and very illegal.
Siphoning cash away from another company through inflated fees/ rents is also fraud if the company has other shareholders (it’s their money too)
Yes of course—fraud is illegal and there should be no tolerance for it. I’d argue though that fraud occurs much less often in PE than the vast majority of industries—to your point, their transactions are highly scrutinized and fines / lawsuits are quite simply bad for business.
OP asked how PE firms bankrupt businesses. The best answer is that they generally don’t—the best investment is one that grows and thrives forever. When they do, sometimes it’s simply because they made a bad investment and just cut their losses. Sometimes, yes, they maximize value out of a slowly declining business and eventually sell it off for assets—as is the prerogative—but this isn’t always a bad outcome. When stagnant companies die, newer and better businesses can take their place.
PE has its problems no doubt but it’s really not the bogeyman many want it to be.
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u/themightychris Feb 14 '25
Here's a common scenario:
There's a decently successful chain of restaurants that owns properties across the county for its locations, let's say the priorities alone are worth $500m collectively
Private equity firm does a "leveraged buyout", so they borrow $500m against the value of those properties and put up the rest to cover the additional value of the business themselves and buy out the chain for $800m, assigning the $500m of debt they borrowed to the acquired company.
Then they start up another company that they own separate from the acquired company and start selling off the properties to it and converting the restaurants to leasing them. Now the restaurant chain is paying $20k/mo in rent to their new company instead of just paying property taxes on the land they used to own. Pretty soon the chain locations are all losing money because the PE firm is also cutting corners everywhere and they didn't have this huge rent expense before. Locations start getting closed and people lose jobs and communities lose what was once a totally viable business. Restaurant chain is eventually bankrupt under the massive debt that was assigned to them, PE firm still owns all the land and gets to sell it off on top of all the rent they collected.
Yes, it should be illegal