Imagine you have a lemonade stand, and you’re doing pretty well. A rich person comes along and says, I’ll buy your stand and make it even better!
But instead of using their own money, they borrow a LOT of money in your lemonade stand’s name. Now, your stand has to pay back that big debt.
Then, the rich person takes a bunch of the money your stand makes and gives it to themselves and their friends. But your stand still has to pay the debt, and soon, there’s no money left to buy lemons or cups.
Now your stand is out of business, and the rich person walks away with a big bag of money.
Why are lenders making these kind of loans? It's like giving a mortgage without a lien on the house, then the homeowner sells the house, pockets the cash, and tells the bank tough luck. I'm surprised lenders are dumb enough to fall for it if this is indeed what happens.
I've also asked this question. The answer is surprisingly hard to find.
Private equity often works. They specialize in finding businesses that have a good central business idea that are being run poorly. They buy it, whip it into shape, and sell it. Often, poor leadership means over hiring. Either the business has contracted or the leadership doesn't know how to deal with a high number of employees that don't share the company's vision. I.e. you have to hold some feet to the fire unlike your brother and best friend who share a vision of success - and maybe have equity in the company.
Lenders may give some leeway to a firm as failure means they take a nasty hit - but at some point they aren't going to throw good money after bad.
The stories of PE failure are classic rage bait pieces. Successes are ignored or only focus on layoffs, without highlighting the fact the company was failing and, without a PE firm, going to close and leave no one with a job.
160
u/Borntwopk Feb 14 '25 edited Feb 14 '25
Imagine you have a lemonade stand, and you’re doing pretty well. A rich person comes along and says, I’ll buy your stand and make it even better!
But instead of using their own money, they borrow a LOT of money in your lemonade stand’s name. Now, your stand has to pay back that big debt.
Then, the rich person takes a bunch of the money your stand makes and gives it to themselves and their friends. But your stand still has to pay the debt, and soon, there’s no money left to buy lemons or cups.
Now your stand is out of business, and the rich person walks away with a big bag of money.