So, there are a lot of salty people replying to this who kind of have the right idea but I think are being biased by their seeming disdain for private equity.
PE is about growing businesses but also extracting value for investors. Also, with PE, there is usually a defined exit at around 5 years but this is not a rule.
Using the lemonade stand as an example.
You own a lemonade stand and you have net revenue (gross revenue minus operating expenses….we assume no debt, depreciation, or taxes at this point) of $100/yr. You really want to open another lemonade stand but to do that it’s going to cost you $500. So you’d have to save for at least 5 years to do that. And that would mean you wouldn’t be able to take any profit from your current stand.
Seeing your plight, a hypothetical PE firm comes along, let’s call them Apollon Capital. They love tour business so they will give you $1000 to start 2 more lemonade stands. Oh and btw they borrowed that $1000 from a bank. So now you can open 2 more lemonade stands and you’re making $300/yr. Except now you have to pay back the loan. And you have to distribute profits to the investors aka Apollon. So all of a sudden your $300 is getting eaten up pretty quickly.
From here, 2 things can happen:
You raise lemonade prices and make your operation more efficient by reducing your expenses. If this happens, you get to keep the lemonade stands and everyone makes money, and maybe you borrow another $2000 and open 4 more lemonade stands and the next thing you know you’re the biggest lemonade stand in the world. At that point, the PE firm, who has a controlling share in your (now their) company, will sell it to an even larger firm at a multiple of the original investment, and everyone wins.
OR
You aren’t able to figure a way to both pay the debt, satisfy the investors, and still make a profit, and you go bankrupt. Maybe people don’t like higher lemonade prices so they stop buying it. Or you can’t keep your costs under control. Or there’s a lemon blight and the cost of lemons goes through the roof. End of story, try again next time, oh and you still have the debt to pay so you have to declare bankruptcy to discharge the debt. Or the PE firm forces a sale for pennies on the dollar since they have majority ownership now.
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u/Phatty8888 Feb 14 '25 edited Feb 15 '25
So, there are a lot of salty people replying to this who kind of have the right idea but I think are being biased by their seeming disdain for private equity.
PE is about growing businesses but also extracting value for investors. Also, with PE, there is usually a defined exit at around 5 years but this is not a rule.
Using the lemonade stand as an example.
You own a lemonade stand and you have net revenue (gross revenue minus operating expenses….we assume no debt, depreciation, or taxes at this point) of $100/yr. You really want to open another lemonade stand but to do that it’s going to cost you $500. So you’d have to save for at least 5 years to do that. And that would mean you wouldn’t be able to take any profit from your current stand.
Seeing your plight, a hypothetical PE firm comes along, let’s call them Apollon Capital. They love tour business so they will give you $1000 to start 2 more lemonade stands. Oh and btw they borrowed that $1000 from a bank. So now you can open 2 more lemonade stands and you’re making $300/yr. Except now you have to pay back the loan. And you have to distribute profits to the investors aka Apollon. So all of a sudden your $300 is getting eaten up pretty quickly.
From here, 2 things can happen:
OR