Big PE firms are now setting up new investment vehicles that specialize in funding big investments of other PE firms. PE firms are starting to invest more and more into equity with their own investors money, thus amount of investments shrink - get more expensive - and the capital needed rises. But I am not sure that this causes more PE firms to close shop on a large scale, but more likely resulting in less transactions being done overall.
> Why is private equity ending up with all these resources?
Most of the cash (50-90% - changed through time to time) comes from the banks - leverage, the investing commitments to the PE firm by e.g. pension funds and private invetors, take only a small portion of the equity. The leverage enables the high returns of PE funds, the high debt burden on the company incentivizes the PE firm additionally to make the bough company more efficient and profitable. But this has changed through the last few years. PE firms are starting investing more of their investors money, due to lack of banks providing big loans for big transactions.
Wrong. Banks who provided billions in loans to PE firms for decades, are now getting more cautious. But not because they fear of a failed investment, but certain investors of the bank do and that means problem for the bank. The Banks actually don't care what happens to the company being bought. An investment bank which provides a loan never sits on its debt. They are bundled into financial products like CDO, CLO etc and sold to institutional and wealthy private investors. This bought the rise to a new ''era'' recently, where PE firms set up special investment funds to fund big acquisitions of other PE firms. The reason being the current situation of the financial markets and the general negative mood in the markets.
I wasn’t referring to the banks but the owners (or rather, the controllers) of the businesses that can obtain cash against the value of their property/assets or from the value of their business. These aren’t always individual loans in the hundreds of millions of dollars; the debt can be accrued piecemeal.
(I’m also not talking in general but rather about certain specific cases/forms.)
In a high interest rate and pessimistic market environment, raising funds for a stumbling business is not easy at all. PE firms are specialized in such risky investments, thus the option of a buyout from a PE firm is the best thing that can happen to an owner. Its the owners own free will to sell or getting the hard way and try to save his business.
The comment above completely fails to address the parent's claim. The parent claimed outright corruption in some cases, and cited an article which extensively documents such outright corruption.
"Wrong" is applicable to this reply rather than the original post.
Again, wrong. The original post completely fails in its argumentation. As I stated above the investment banks providing the loans are not 'perpetual suckers'. They know what they are doing. If PE financing were such a bad game nobody would provide loans in the first place. An industry achieving good returns for decades does simply not need to bribe capital providers. Bribing high ranking decision making bankers is the most ridiculous thing I've ever heard, this is not an governmental official. Claiming overall corruption as a fact and linking to one article (which isn't even about the capital providers for PE firms - the overall point of the original post) is simply irrelevant.
Wrong. PE investments today make a small portion of the overall portfolio of a pension fund (varies from state to state). In widely swinging markets a PE form that does not speculate in the market but buys and flips with a lot of expertise a private company, and often generates higher and more sustainable returns. This is a reason why PE investments by pension funds are increasing, but they still make a small portion of the pie. In addition, pension funds are not funded through tax money but through portions of ones wage. And not all pension funds are from the state (e.g. CalPERS), most of them are run by pension fund specialized corporations or if big enough by the employer itself.
> that uses the existing cash flow of the business to fund the loan repayments, but the business itself cannot get a loan to invest in new capital / buy the CEO a yacht etc
Loan repayment to banks and other financial institutions is the first and highest priority. During this process the company is constantly turned more efficient and profitable. If it adds value, jobs and capital in form of machines etc. is added, therefore PE firms do not only reduce employment. The goal is also to sell irrelevant jets / yachts and eliminate other expensive non-business related expenses from which often a few benefit. The goal is not to buy new yachts. In fact a PE firm is committed by contract and by incentives through own investments, to not use the company to fund lavish lifestyles. After on average 5 years the company is sold for a multiple.
> But where is the middle market where a PE firm makes an offer and the next day the business itself puts up a prospectus and is able to find enough semi-liquid capital to take the self same bet?
Why is it so hard to raise funds?
I think I don't really get your point here. There is no infrastructure which provides businesses this option, because it does not make sense. Private businesses are often sold through investment banks, and if the desire to sell comes from the owner, then there is often a form of auction involved. Companies with a solid business are getting a very good price this way. But raising funds for an existing business and selling a business are two completely different things. You don't accept a PE firms invitation to a call, and then turn the other way to get funding and keep ownership.
It is a free market, about 30% of all hospitals and doctor offices in the US are a for profit private corporation, thus they can be acquired as any other business by anyone. Like with pharma, most people have the very big misconception that just because its about health, that hospitals are excluded from free market and capitalistic principles. When someone offers hospital services or starts developing a new drug, he can charge whatever price he wants, and he will do it as long as profits are maximized and don't start to plunge due to too large price hikes (+ conflicts with insurance companies etc.). Hospitals in countries like Switzerland are known for the best medical treatment because they are almost 100% for profit - private / investor owned. Running a hospital is a business as any other + 95% of the US population has a healthcare insurance anyway. At topics like healthcare, most people are simply too much Hollywood educated and debate with irrelevant individual experiences.
The Swiss system isn't quite lassiez-faire capitalist:
> "The Swiss government... does keep down overall spending by regulating drug prices and fees for lab tests and medical devices
> Swiss insurance companies [must] offer the mandatory basic plan on a not-for-profit basis, although they are permitted to earn a profit on supplemental plans.
It does seem like a promising approach that's (largely) market-driven.
