> The debt buyers are the same people that created that debt (the people doing the LBO in the first place)
Sometimes, but not always. I did a quick search on who it is for EA, but didn't find anything.
> They force the company they just bought to pay them loan terms they set for the privilege of buying the company they just bought.
If the buyers are also the lenders, yes.
> That's why LBOs are pretty much a corporate Ponzi scheme.
It's not a Ponzi scheme because it's not multi-level and no one's left holding the bag. In the case of buyers also lending, there isn't even a sucker in the deal. If the company goes bankrupt, it either goes into chapter 13 bankruptcy, restructures debt (that the owners are paying?!), then continues doing business, or it goes into chapter 7 bankruptcy, liquidates, and pays debt holders with assets that are sold off. If you bought it and this is your goal, it seems easier to buy the company and immediately sell off its assets. Why bother with the hassle of LBO if the company is worth more dead than alive? Holding the debt is actually a sign of confidence in the company.
With the LBO cases you hear about PE doing, the debt holders can end up holding the bag. It's also not a Ponzi scheme because they're big boys making big boy deals. It's risky debt that's hard to price and everyone knows it.
You could argue employees are left holding the bag, but not really, since the company didn't owe them anything beyond a last paycheck. They're affected, but that's not the same. Bondholders actually lose money.
The brand reputation gets milked while cost cutting measures result in subpar products and services. Growth targets are gone, now you optimise for cutting costs faster than you lose market share.
Itβs not a Ponzi scheme, it just feels like a scam when consumer brands cash out at your expense (the loyal consumer) and slowly bleed the company dry.
You do have to note that this is not a universal feature of PE-backed business.
Take for example power tools, where most of the big players are privately held and owned by PE firms. Reputation and customer loyalty are profitable in this line of business, so QA and product development are alive and well.
"It's not a Ponzi scheme because it's not multi-level and no one's left holding the bag."
Not multi-level YET. I've seen many companies undergo multiple LBOs, which only inflate things and leave someone holding an empty bag at the end. It can become one very, very quickly.
Sometimes, but not always. I did a quick search on who it is for EA, but didn't find anything.
> They force the company they just bought to pay them loan terms they set for the privilege of buying the company they just bought.
If the buyers are also the lenders, yes.
> That's why LBOs are pretty much a corporate Ponzi scheme.
It's not a Ponzi scheme because it's not multi-level and no one's left holding the bag. In the case of buyers also lending, there isn't even a sucker in the deal. If the company goes bankrupt, it either goes into chapter 13 bankruptcy, restructures debt (that the owners are paying?!), then continues doing business, or it goes into chapter 7 bankruptcy, liquidates, and pays debt holders with assets that are sold off. If you bought it and this is your goal, it seems easier to buy the company and immediately sell off its assets. Why bother with the hassle of LBO if the company is worth more dead than alive? Holding the debt is actually a sign of confidence in the company.
With the LBO cases you hear about PE doing, the debt holders can end up holding the bag. It's also not a Ponzi scheme because they're big boys making big boy deals. It's risky debt that's hard to price and everyone knows it.
You could argue employees are left holding the bag, but not really, since the company didn't owe them anything beyond a last paycheck. They're affected, but that's not the same. Bondholders actually lose money.