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CEOs of Top 6 Publicly Traded Private Equity Firms Get Paid Average of $211 Million Per Year
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From the NYT:

Deals like Hostess have helped make the men running the six largest publicly traded private equity firms collectively the highest-earning executives of any major American industry, according to a joint study that The Times conducted with Equilar, a board and executive data provider. The study covered thousands of publicly traded companies; privately held corporations do not report such data.

The oxymoronic concept of the publicly traded private equity firm is one of the funnier ones in the world of high finance. A talking point of the private equity business is that being publicly traded degrades the efficiency and corrupts firms: The executives should use their help to take their publicly traded companies private!

But many of the most lucrative private equity firms have themselves gone public, yet continue to lavishly pay their CEOs.

For example, Stephen A. Schwarzman of the Blackstone Group paid himself $800 million last year. Blackstone went public in 2007.

You can’t say they didn’t warn you.

P.S. Here’s Michael Kinsley on the private equity game in 2007.

 
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  1. Meanwhile a meeting of Wall Street elites…

    “Quick we need a diversion, any ideas?

    “Er, what about middle-class women being grossly underpaid?

    “Is that really true?

    ” Well, not really, but some white collar women over 35 make about 6 percent less than their male counterparts, so we can probably massage the stats to make out women in general are paid a third less than men”

    “Great idea, hit the business MSM round the clock.”

    • Replies: @Jefferson
    Meanwhile a meeting of Wall Street elites…

    “Quick we need a diversion, any ideas?

    “Er, what about middle-class women being grossly underpaid?

    “Is that really true?

    ” Well, not really, but some white collar women over 35 make about 6 percent less than their male counterparts, so we can probably massage the stats to make out women in general are paid a third less than men”

    “Great idea, hit the business MSM round the clock.”

    Another fake news diversion created by the elites in the mainstream media is that 25 percent of all female college students in The U.S have been raped. So the odds of getting raped in college is almost as high as the odds of getting raped in prison? If college is that extremely dangerous for women than why do so many parents keep sending their daughters to college if they have a 1 in 4 chance of being raped at these institutions? Those are very high odds of getting raped. Are most male college students in America refugees from Syria, South Africa, Pakistan, and Somalia? Or are they just using a very broad definition of rape? Hey gorgeous can I take you out on a date, OH MY GOD RAPE.
  2. >>A year after the layoffs at the Hostess plant in Illinois, Apollo and Metropoulos arranged for the company to borrow about $1.3 billion. Apollo and Metropoulos used most of that sum to pay themselves, and their investors, an early dividend on their investment.<<

    Hostess will likely be bankrupt again in a few years.

    In Nicholas Pileggi's Wiseguy, from which the Scorcese directed movie was taken, the gangster Henry Hill described how he and his mob confederates would muscle their way into restaurants – the owner having fallen into debt to the mob somehow – and using the restaurant's credit with suppliers immediately acquire as much as they could on credit: seafood, beef, lamb, wine, produce, tableware, booze, everything, and then hawk it on the streets or to other restaurants (paying themselves a dividend, so to speak) , leaving the restaurant a hopelessly in debt and soon to be bankrupt shell.

    So when Hill and his mob buddies loaded up a business with unsupportable debt, took the proceeds from the debt and walked away it was called racketeering, when private equity firms load up a business with unsupportable debt, use that debt not to invest in plant, labor, development and operations but to pay themselves a "dividend" it is called smart finance and is to be applauded and envied. Well, we shouldn't get too upset about this. I am sure that Apollo management and Blackstone group are transgender friendly and that is what really matters in Manhattan in 2016.

    • Replies: @eD
    A lot of current finance is racketeering, but by a different ethnic group.

    (and if you are wondering, the Mafia always had a few non-Italian senior members)
    , @Anonymous
    Yes, it's called a "bust out" by the mafia, and it's the same basic business model as private equity, just on a lone, small business scale. There's a Sopranos episode about it:

    https://www.youtube.com/watch?v=ZXcBvq2Jscw
    , @Opinionator
    using the restaurant's credit with suppliers immediately acquire as much as they could on credit: seafood, beef, lamb, wine, produce, tableware, booze, everything, and then hawk it on the streets or to other restaurants (paying themselves a dividend, so to speak) , leaving the restaurant a hopelessly in debt and soon to be bankrupt shell.

    So when Hill and his mob buddies loaded up a business with unsupportable debt, took the proceeds from the debt and walked away it was called racketeering


    Reminds me a little bit of what is being done to the United States.
  3. Jealous, Steve?

  4. At least 6 of the 8 executives listed are Jewish. Conway is Irish Catholic. I don’t know what Edens’s background is.

    • Replies: @Dave Pinsen
    Blackstone was cofounded by a Greek and a Jew (Their last names translate to "black" and "stone").
  5. A year after the layoffs at the Hostess plant in Illinois, Apollo and Metropoulos arranged for the company to borrow about $1.3 billion. Apollo and Metropoulos used most of that sum to pay themselves, and their investors, an early dividend on their investment.

    GM did the same thing a decade or so ago, floating around $20B in bonds while still paying dividends of over $2/sh.

    In the 1990’s, I knew two different men who pulled roughly the same scam with their closely-held companies. One went to jail for bank fraud. The other was able to cough up the principal, so he didn’t go to jail. I guess this isn’t really considered a crime any more.

    • Replies: @Anonymous
    It's just usury and predatory lending. When they buy the companies, they're effectively moneylending, and then using the purchased companies' assets as collateral to take out other loans that pay the return (the interest) for the original purchase of the company (the original loan).
    , @Corvinus
    This is capitalism in its most glorious form. Wall Street Elitism? Hardly. It's entrepreneurship by high IQ men and women. Current finance is not racketeering. Regulatory burdens would only thwart their innovations and reduce profit potential.
  6. These salaries represent the free market at work: supply and demand. Obviously.

    Reality: a company could find an equally competent person to be CEO at one of these companies by paying them around $200,000-300,000/yr.

    • Replies: @Negrolphin Pod Pool Party

    Reality: a company could find an equally competent person to be CEO at one of these companies by paying them around $200,000-300,000/yr.
     
    I'd do it for $30k/year. I'm not the least bit competent but I am a quick study. I'm not going to say that $811 million a year is unreasonable. I play the piano and I could probably demonstrate that I'm 26,161 times better than another person somewhere, or at least that much better than their cat. So I'm sure its possible Mr. Schwartzman is that much better than me at running billion dollar shell games. But there's probably someone out there who would do it for $30k who's actually qualified. What's the exact nature of these scams? Are they like 5D 3 card monte? 25 street No Limit Omaha?

    I play poker too and I'm also pretty good at that. But even with a profound game like 200 big blind heads up No Limit Hold'em it would be really tough to come up with any measure by which I could claim to be 26,161 times better than an opponent, no matter how bad they are. Maybe the kind of scams these guys run are incomprehensible to nobodies like me. Maybe this Schwartzman really is the Gary Kasparov of Bernie Madoffs.

    , @ben tillman

    These salaries represent the free market at work: supply and demand. Obviously.

    Reality: a company could find an equally competent person to be CEO at one of these companies by paying them around $200,000-300,000/yr.
     
    Yep, it's all about leveraging connections to stake out the most profitable ecological niche.
  7. @Daniel H
    >>A year after the layoffs at the Hostess plant in Illinois, Apollo and Metropoulos arranged for the company to borrow about $1.3 billion. Apollo and Metropoulos used most of that sum to pay themselves, and their investors, an early dividend on their investment.<<

    Hostess will likely be bankrupt again in a few years.

    In Nicholas Pileggi's Wiseguy, from which the Scorcese directed movie was taken, the gangster Henry Hill described how he and his mob confederates would muscle their way into restaurants - the owner having fallen into debt to the mob somehow - and using the restaurant's credit with suppliers immediately acquire as much as they could on credit: seafood, beef, lamb, wine, produce, tableware, booze, everything, and then hawk it on the streets or to other restaurants (paying themselves a dividend, so to speak) , leaving the restaurant a hopelessly in debt and soon to be bankrupt shell.

    So when Hill and his mob buddies loaded up a business with unsupportable debt, took the proceeds from the debt and walked away it was called racketeering, when private equity firms load up a business with unsupportable debt, use that debt not to invest in plant, labor, development and operations but to pay themselves a "dividend" it is called smart finance and is to be applauded and envied. Well, we shouldn't get too upset about this. I am sure that Apollo management and Blackstone group are transgender friendly and that is what really matters in Manhattan in 2016.

    A lot of current finance is racketeering, but by a different ethnic group.

    (and if you are wondering, the Mafia always had a few non-Italian senior members)

  8. I bet at least 2 are black. Black women, that is.
    Or isnt affirmative action working yet?

  9. Wait. This is not a problem because by an immutable law of economics no one is paid more than he produces.

    • Replies: @ben tillman

    Wait. This is not a problem because by an immutable law of economics no one is paid more than he produces.
     
    I know you're kidding, but these people aren't "paid". They don't have employers. They just take.
  10. • Replies: @Almost Missouri

    "Given the allegedly high IQ’s"
     
    You really want to provoke a response, huh?
    , @Difference maker
    What do you look like?
    , @SPMoore8
    Different languages associate different colors with different moods, emotions, or feelings. Thus, e.g.,


    Word associations or verbal synesthesia between concepts of color and emotions were studied in Germany, Mexico, Poland, Russia, and the United States. With emotion words as the between-subjects variable, 661 undergraduates indicated on 6-point scales to what extent anger, envy, fear, and jealousy reminded them of 12 terms of color. In all nations, the colors of anger were black and red, fear was black, and jealousy was red. Cross-cultural differences were (a) Poles connected anger, envy, and jealousy also with purple; (b) Germans associated envy and jealousy with yellow; and (c) Americans associated envy with black, green, and red, but for the Russians it was black, purple, and yellow. The findings suggest that cross-modal associations originate in universal human experiences and in culture-specific variables, such as language, mythology, and literature.
     
    One can also find evidence for other languages, e.g., French, or other languages you might have learned, and be aware of, for similar colloquial expressions. e.g., "blue funk", "brown study", etc. Or you might have simply listened to "Axis: Bold as Love" too many times.

    Other influences would include more or less arbitrary associations of colors with systems, e.g., "four humours" and/or astrology (either Western or Eastern.)

    It's similar with music, but it doesn't have to be something as rare as "synesthesia" it's more an OCD projection whereby however many categories you have you have to be able to associate it with one color, one spirit animal, etc. So for example it's commonplace to associate E-flat with dark blue, the sea, and heroism, and D major with gold and majesty, etc. Why? Who knows. But it does reinforce, over time.

    At bottom I think there are two elements involved, one, is filling out the category card; if there are say ten cardinal emotions then every emotion has to have its unique color or planet or animal, and second, "it sounds good", in other words, it comes down to phonological appropriateness in different languages. So, for example, in Western Euro languages "death" is usually a male personage, but in Slavic death is usually a female, because the word "Smert'" is a female noun, by class. That word exists in Western Euro languages, but it means pain in German (Schmerz) and minor irritation (smart) in English. But that's because we have the "Tod/death" and "mort" roots to work with. Interestingly, the Greek "thanatos" doesn't really come up, except as a possible re-naming for Theranos.
  11. anonymous • Disclaimer says:

    Looking for globalist elites? You could much worse than to look at who the people leading these private equity firms are. For instance, The Carlyle Group:

    “…Carlyle has amassed a portfolio of $193 billion in assets

    …Carlyle was ranked No. 1 as the largest private equity firm in the world…

    …founded in 1987 as an investment banking boutique by five original partners with backgrounds in finance and government …named the firm after the Carlyle Hotel in New York City…

    …In its early years, Carlyle also advised in transactions including a $500 million investment by Prince Al-Waleed bin Talal, a member of the Saudi royal family…

    …initially developed a reputation for acquiring businesses related to the defense industry…

    …Carlyle’s 2001 investor conference took place on September 11, 2001. In the weeks following the meeting, it was reported that Shafiq bin Laden, a member of the Bin Laden family, had been the “guest of honor”…

    …Lou Gerstner, former chairman and CEO of IBM and Nabisco, was appointed chairman of Carlyle in January 2003… to reduce the perception of Carlyle as a politically dominated firm

    …On December 18, 2007, David Rubenstein, representing the Carlyle Group, purchased the Magna Carta (one of seventeen copies)…

    …In September 2007, Mubadala Development Company, an investment vehicle for the government of Abu Dhabi of the United Arab Emirates, purchased a 7.5% stake for $1.35 billion…”

    Who’s been playing?

    “…Chairman of the Archer Daniels Midland Company
    …CEO of General Motors
    …managing director at Lehman Brothers
    …CEO of Bombardier
    …Managing Director of Nielsen Australia
    …CEO of Freddie Mac
    …former President of the Bundesbank
    …(half-brother of Nicolas Sarkozy, former President of France)… managing director of its recently launched global financial services division…
    George H. W. Bush, former U.S. President
    …James Baker III, former United States Secretary of State
    …Frank C. Carlucci, former United States Secretary of Defense… Carlyle Chairman and Chairman Emeritus from 1989 to 2005…
    …Richard G. Darman, Director of the Office of Management and Budget in the Bush Administration
    chairman of the Federal Communications Commission
    Chairman of the U.S. Securities and Exchange Commission (SEC) under President Bill Clinton
    …Mexican… former Secretary of Communications and Transportation under the Felipe Calderón administration and former Secretary of Energy under the Zedillo administration
    …former Under Secretary of the U.S. Treasury under President George W. Bush
    John Major, former British Prime Minister, Chairman, Carlyle Europe from 2001–2004
    …former Prime Minister of Thailand (twice)
    …former president of the Philippines
    editor-in-chief of Time magazine from (1995–2005)…”

    Good to see so many fine folks just wanting to live a life of service and ‘giving back’. Real good to hear tell they’re no longer a politically dominated group. What is ‘politics’ anyway? Just doing well by doing good…

  12. @The Anti-Gnostic

    A year after the layoffs at the Hostess plant in Illinois, Apollo and Metropoulos arranged for the company to borrow about $1.3 billion. Apollo and Metropoulos used most of that sum to pay themselves, and their investors, an early dividend on their investment.
     
    GM did the same thing a decade or so ago, floating around $20B in bonds while still paying dividends of over $2/sh.

    In the 1990's, I knew two different men who pulled roughly the same scam with their closely-held companies. One went to jail for bank fraud. The other was able to cough up the principal, so he didn't go to jail. I guess this isn't really considered a crime any more.

    It’s just usury and predatory lending. When they buy the companies, they’re effectively moneylending, and then using the purchased companies’ assets as collateral to take out other loans that pay the return (the interest) for the original purchase of the company (the original loan).

    • Replies: @Dieter Kief
    Okay, but I'd like to add a tiny bit to your analysis: Lending alone is the means - the outcome is - ehe - : Income (= grossing in).
    But all in all, it's incredibly simple.

    As simple as this observation here too from S. Sailer's article above:


    The oxymoronic concept of the publicly traded private equity firm is one of the funnier ones in the world of high finance.
     
    It's funny, because it's suprisingly simple ( and a little bit at least of a taboo - - cf. Freud on jokes and the unconscious).

    If this is all so clear and obvious (and I d o think, it really is), then w h y does critisism of such - economic strategies hardly work? I tend to think one answer to this manyfold question is: Because the base of the economic predator-pattern is exactly this: In itself very appealing and plausible, because it's predatory.

    The next question at this point would be: What kind of mindset is needed to understand, that this predator-pattern of the private-equity business (for example...) is problematic.
    (That's usually the point, where movies on the topic fail - but that's too much for my sort remarks (I want to keep them short now)).

  13. @Daniel H
    >>A year after the layoffs at the Hostess plant in Illinois, Apollo and Metropoulos arranged for the company to borrow about $1.3 billion. Apollo and Metropoulos used most of that sum to pay themselves, and their investors, an early dividend on their investment.<<

    Hostess will likely be bankrupt again in a few years.

    In Nicholas Pileggi's Wiseguy, from which the Scorcese directed movie was taken, the gangster Henry Hill described how he and his mob confederates would muscle their way into restaurants - the owner having fallen into debt to the mob somehow - and using the restaurant's credit with suppliers immediately acquire as much as they could on credit: seafood, beef, lamb, wine, produce, tableware, booze, everything, and then hawk it on the streets or to other restaurants (paying themselves a dividend, so to speak) , leaving the restaurant a hopelessly in debt and soon to be bankrupt shell.

    So when Hill and his mob buddies loaded up a business with unsupportable debt, took the proceeds from the debt and walked away it was called racketeering, when private equity firms load up a business with unsupportable debt, use that debt not to invest in plant, labor, development and operations but to pay themselves a "dividend" it is called smart finance and is to be applauded and envied. Well, we shouldn't get too upset about this. I am sure that Apollo management and Blackstone group are transgender friendly and that is what really matters in Manhattan in 2016.

    Yes, it’s called a “bust out” by the mafia, and it’s the same basic business model as private equity, just on a lone, small business scale. There’s a Sopranos episode about it:

    • Replies: @ben tillman
    There's also an iSteve comment about it. It might have been from you, since it's from an "Anonymous":

    http://isteve.blogspot.com/2012/04/memories-misty-water-color-memories.html


    In 1992 I had just taken a job with a paging transmitter company in Quincy, Ilinois. They made a fortune for about five years. They went bankrupt because the owners, Canadian Jews from Vancouver, not only refused to spend money on the emerging cellphone market but sold off everything but paging from the Quincy company they bought. I knew trouble was imminent when their test equipment quit working because _all the manufacturing employees had cell phones_ and the RF was interfering. Sure enough paging became obsolete a couple of years later and they folded the Quincy plant. At the time I thought they were really stupid.

    I was the stupid one, because what it was, was a bust-out. The mobsters buy a small retail business in New Jersey and "bust it out" buy ordering everything possible on credit, leveraging the reputation and creditworthiness of the store, then take everything out and wholesale it or sell it at flea markets while burning the store down or otherwise bankrupting it.

    These guys played the bigger game: they issued stock (GEMS), got it up to the mid-70s, sold out and watched it drop to $1 and delisted. Like "The Producers" they had it planned from the beginning.
     

  14. @anony-mouse
    Good question: (and yes some eyes are green)

    https://www.quora.com/Why-does-the-Chinese-language-associate-jealousy-with-red-eyes-while-English-language-associate-jealousy-with-green-eyes-given-that-human-eyes-are-neither-red-nor-green-What-is-the-origin-of-these-associations

    Given the allegedly high IQ's of Unz.com readers maybe someone here can give a good answer.

    “Given the allegedly high IQ’s”

    You really want to provoke a response, huh?

  15. @Anonymous
    At least 6 of the 8 executives listed are Jewish. Conway is Irish Catholic. I don't know what Edens's background is.

    Blackstone was cofounded by a Greek and a Jew (Their last names translate to “black” and “stone”).

    • Replies: @PiltdownMan

    Blackstone was cofounded by a Greek and a Jew (Their last names translate to “black” and “stone”).
     
    Pete Peterson and Steve Schwarzman. Makes sense.
  16. @anony-mouse
    Good question: (and yes some eyes are green)

    https://www.quora.com/Why-does-the-Chinese-language-associate-jealousy-with-red-eyes-while-English-language-associate-jealousy-with-green-eyes-given-that-human-eyes-are-neither-red-nor-green-What-is-the-origin-of-these-associations

    Given the allegedly high IQ's of Unz.com readers maybe someone here can give a good answer.

    What do you look like?

  17. Goldman Sachs went public in 1999, after having been a partnership from the beginning in 1869. But it is a publicly held company in name only, for all practical purposes.

    I’m told that they still appoint “partners” internally in a completely non-transparent manner. These individuals get enhanced compensation, similar to what they would have received if Goldman had still been a true partnership. Apparently, even senior non-partner employees at the managing director level very often find themselves not entirely sure who among them has been “partnered.”

  18. @S. Johnson
    These salaries represent the free market at work: supply and demand. Obviously.

    Reality: a company could find an equally competent person to be CEO at one of these companies by paying them around $200,000-300,000/yr.

    Reality: a company could find an equally competent person to be CEO at one of these companies by paying them around $200,000-300,000/yr.

    I’d do it for $30k/year. I’m not the least bit competent but I am a quick study. I’m not going to say that $811 million a year is unreasonable. I play the piano and I could probably demonstrate that I’m 26,161 times better than another person somewhere, or at least that much better than their cat. So I’m sure its possible Mr. Schwartzman is that much better than me at running billion dollar shell games. But there’s probably someone out there who would do it for $30k who’s actually qualified. What’s the exact nature of these scams? Are they like 5D 3 card monte? 25 street No Limit Omaha?

    I play poker too and I’m also pretty good at that. But even with a profound game like 200 big blind heads up No Limit Hold’em it would be really tough to come up with any measure by which I could claim to be 26,161 times better than an opponent, no matter how bad they are. Maybe the kind of scams these guys run are incomprehensible to nobodies like me. Maybe this Schwartzman really is the Gary Kasparov of Bernie Madoffs.

  19. @Dave Pinsen
    Blackstone was cofounded by a Greek and a Jew (Their last names translate to "black" and "stone").

    Blackstone was cofounded by a Greek and a Jew (Their last names translate to “black” and “stone”).

    Pete Peterson and Steve Schwarzman. Makes sense.

  20. @unpc downunder
    Meanwhile a meeting of Wall Street elites...


    "Quick we need a diversion, any ideas?

    "Er, what about middle-class women being grossly underpaid?

    "Is that really true?

    " Well, not really, but some white collar women over 35 make about 6 percent less than their male counterparts, so we can probably massage the stats to make out women in general are paid a third less than men"

    "Great idea, hit the business MSM round the clock."

    Meanwhile a meeting of Wall Street elites…

    “Quick we need a diversion, any ideas?

    “Er, what about middle-class women being grossly underpaid?

    “Is that really true?

    ” Well, not really, but some white collar women over 35 make about 6 percent less than their male counterparts, so we can probably massage the stats to make out women in general are paid a third less than men”

    “Great idea, hit the business MSM round the clock.”

    Another fake news diversion created by the elites in the mainstream media is that 25 percent of all female college students in The U.S have been raped. So the odds of getting raped in college is almost as high as the odds of getting raped in prison? If college is that extremely dangerous for women than why do so many parents keep sending their daughters to college if they have a 1 in 4 chance of being raped at these institutions? Those are very high odds of getting raped. Are most male college students in America refugees from Syria, South Africa, Pakistan, and Somalia? Or are they just using a very broad definition of rape? Hey gorgeous can I take you out on a date, OH MY GOD RAPE.

    • Replies: @27 year old
    >25 percent of all female college students in The U.S have been raped.

    They hit me with this fake stat at my freshman orientation. Some assistant dean of whatever actually said to a group of students and our parents that 1 in 4 women would experience a sexual assault this year. I raised my hand and asked "We have approx 16 thousand undergrads and assume half are girls, so you're saying that's about two thousand rapes that will happen this year?". The ridiculousness of that figure seemed to temporarily cross the speaker's mind before she blurted out something along the lines of "well, it's impossible to say, because most are unreported".
  21. @Anonymous
    It's just usury and predatory lending. When they buy the companies, they're effectively moneylending, and then using the purchased companies' assets as collateral to take out other loans that pay the return (the interest) for the original purchase of the company (the original loan).

    Okay, but I’d like to add a tiny bit to your analysis: Lending alone is the means – the outcome is – ehe – : Income (= grossing in).
    But all in all, it’s incredibly simple.

    As simple as this observation here too from S. Sailer’s article above:

    The oxymoronic concept of the publicly traded private equity firm is one of the funnier ones in the world of high finance.

    It’s funny, because it’s suprisingly simple ( and a little bit at least of a taboo – – cf. Freud on jokes and the unconscious).

    If this is all so clear and obvious (and I d o think, it really is), then w h y does critisism of such – economic strategies hardly work? I tend to think one answer to this manyfold question is: Because the base of the economic predator-pattern is exactly this: In itself very appealing and plausible, because it’s predatory.

    The next question at this point would be: What kind of mindset is needed to understand, that this predator-pattern of the private-equity business (for example…) is problematic.
    (That’s usually the point, where movies on the topic fail – but that’s too much for my sort remarks (I want to keep them short now)).

  22. The Mayfair Set: Destroy The Technostructure. James Goldsmith goes to America and becomes battering ram/front man for Milken. At about 13 minutes in Galbraith talks about the modern corporation set up, what he dubbed technostructure, whereby the managers rab things for the good of all and were not shareholders. The first and paradigmatic case was Goldsmith pried Crown Zellerbach and asset stripped (“downsizing”, sacking workers ). The pension funds said they had to act in the exclusive interests of the people on the pension funds, not the corporations. So the corporate raiders got access to the pension funds. Giuliani put a stop to that. But with the pension fund money still available to bankers they didn’t have to stage an actual hostile take over, they could force existing management to downsize and boost share price that way, which is still how it is being done by private equity firms.

  23. David Stockman in his book, “The Great Deformation: The Corruption of Capitalism in America,” outlines how hedge funds loot corporations of their wealth through leveraged buyouts (LBO) that leave the companies “debt zombies”. The key to the looting is forcing the acquired companies to borrow money to pay for the acquisitions; this includes hefty fees for the new owners.

    According to Stockman, this systematic looting is what caused the last crisis in the US auto industry: The auto parts suppliers had been looted without the financial ability to afford a downturn in the industry. From the comments, it looks like Hostess suffered a similar fate.

    The predators on Wall Street try to put a patina of economic and moral virtue on the looting. You see, the dangerously high debt imposed on the companies by the looters force them to improve their processes and efficiencies as they scramble to survive. This makes them “leaner and meaner” as they shed unnecessary costs and workers. In short, looting companies is good for the economy (and Wall Street) by rooting out market inefficiencies. If companies do fold, the hedge funds can then seize and sell off their assets to cover the acquisition loans. This is clearly a win-win for markets and Wall Street … is it not?

    Being part of this criminal process is what made it insane for the Republicans to run Mitt Romney as their candidate for President in 2012. What were they thinking?

    • Replies: @Corvinus
    So, hotshot, how do you propose to regulate this aspect of capitalism? Detailed answers.
    , @Daniel H
    >>Mitt Romney as their candidate for President in 2012. What were they thinking?

    They were thinking that they could continually fool us and get away with it. Same with the Democrats. The ball is in Trump's hands to do something about this and make a great name for himself, or he can fold and cuck out. We shall se.
    , @Rod1963
    The GOP ran Romney because the party is run by a bunch of Chamber of Commerce and beltway types that are oblivious to what the average voter wants in a candidate.

    Romney didn't help in that he came off as a cold blooded and creepy version of Gordon Gecko. That's the thing I love about the GOP, they always find a candidate who makes their Democratic opponent look good. Trump is the exception since he knocked off the GOP anointed (Jeb!!).
  24. @The Anti-Gnostic

    A year after the layoffs at the Hostess plant in Illinois, Apollo and Metropoulos arranged for the company to borrow about $1.3 billion. Apollo and Metropoulos used most of that sum to pay themselves, and their investors, an early dividend on their investment.
     
    GM did the same thing a decade or so ago, floating around $20B in bonds while still paying dividends of over $2/sh.

    In the 1990's, I knew two different men who pulled roughly the same scam with their closely-held companies. One went to jail for bank fraud. The other was able to cough up the principal, so he didn't go to jail. I guess this isn't really considered a crime any more.

    This is capitalism in its most glorious form. Wall Street Elitism? Hardly. It’s entrepreneurship by high IQ men and women. Current finance is not racketeering. Regulatory burdens would only thwart their innovations and reduce profit potential.

    • Replies: @cucksworth

    current finance is not racketeering, It’s entrepreneurship by high IQ men and women
     
    https://www.bloomberg.com/features/2016-goldman-sachs-libya/

    entrepreneurship? Your comment while clever and concise, doesn't even pass the smell test.

    , @Daniel H
    >>Regulatory burdens would only thwart their innovations and reduce profit potential.

    Oh, the horror, the horror.
  25. @TheJester
    David Stockman in his book, "The Great Deformation: The Corruption of Capitalism in America," outlines how hedge funds loot corporations of their wealth through leveraged buyouts (LBO) that leave the companies "debt zombies". The key to the looting is forcing the acquired companies to borrow money to pay for the acquisitions; this includes hefty fees for the new owners.

    According to Stockman, this systematic looting is what caused the last crisis in the US auto industry: The auto parts suppliers had been looted without the financial ability to afford a downturn in the industry. From the comments, it looks like Hostess suffered a similar fate.

    The predators on Wall Street try to put a patina of economic and moral virtue on the looting. You see, the dangerously high debt imposed on the companies by the looters force them to improve their processes and efficiencies as they scramble to survive. This makes them "leaner and meaner" as they shed unnecessary costs and workers. In short, looting companies is good for the economy (and Wall Street) by rooting out market inefficiencies. If companies do fold, the hedge funds can then seize and sell off their assets to cover the acquisition loans. This is clearly a win-win for markets and Wall Street ... is it not?

    Being part of this criminal process is what made it insane for the Republicans to run Mitt Romney as their candidate for President in 2012. What were they thinking?

    So, hotshot, how do you propose to regulate this aspect of capitalism? Detailed answers.

    • Replies: @ben tillman

    So, hotshot, how do you propose to regulate this aspect of capitalism? Detailed answers.
     
    Requiring executive compensation beyond, say $2 million per annum, to be escrowed for four or six years (matching the applicable limitations period for fraudulent transfer liability) would be a good start. Creating a presumption (perhaps irrebuttable) that executive compensation (beyond a certain amount) is a fraudulent transfer under at least certain circumstances. Etc.
  26. @anony-mouse
    Good question: (and yes some eyes are green)

    https://www.quora.com/Why-does-the-Chinese-language-associate-jealousy-with-red-eyes-while-English-language-associate-jealousy-with-green-eyes-given-that-human-eyes-are-neither-red-nor-green-What-is-the-origin-of-these-associations

    Given the allegedly high IQ's of Unz.com readers maybe someone here can give a good answer.

    Different languages associate different colors with different moods, emotions, or feelings. Thus, e.g.,

    Word associations or verbal synesthesia between concepts of color and emotions were studied in Germany, Mexico, Poland, Russia, and the United States. With emotion words as the between-subjects variable, 661 undergraduates indicated on 6-point scales to what extent anger, envy, fear, and jealousy reminded them of 12 terms of color. In all nations, the colors of anger were black and red, fear was black, and jealousy was red. Cross-cultural differences were (a) Poles connected anger, envy, and jealousy also with purple; (b) Germans associated envy and jealousy with yellow; and (c) Americans associated envy with black, green, and red, but for the Russians it was black, purple, and yellow. The findings suggest that cross-modal associations originate in universal human experiences and in culture-specific variables, such as language, mythology, and literature.

    One can also find evidence for other languages, e.g., French, or other languages you might have learned, and be aware of, for similar colloquial expressions. e.g., “blue funk”, “brown study”, etc. Or you might have simply listened to “Axis: Bold as Love” too many times.

    Other influences would include more or less arbitrary associations of colors with systems, e.g., “four humours” and/or astrology (either Western or Eastern.)

    It’s similar with music, but it doesn’t have to be something as rare as “synesthesia” it’s more an OCD projection whereby however many categories you have you have to be able to associate it with one color, one spirit animal, etc. So for example it’s commonplace to associate E-flat with dark blue, the sea, and heroism, and D major with gold and majesty, etc. Why? Who knows. But it does reinforce, over time.

    At bottom I think there are two elements involved, one, is filling out the category card; if there are say ten cardinal emotions then every emotion has to have its unique color or planet or animal, and second, “it sounds good”, in other words, it comes down to phonological appropriateness in different languages. So, for example, in Western Euro languages “death” is usually a male personage, but in Slavic death is usually a female, because the word “Smert’” is a female noun, by class. That word exists in Western Euro languages, but it means pain in German (Schmerz) and minor irritation (smart) in English. But that’s because we have the “Tod/death” and “mort” roots to work with. Interestingly, the Greek “thanatos” doesn’t really come up, except as a possible re-naming for Theranos.

  27. Like a lot of things in the investment world, this thrives on ignorance — the ignorance of the sheep being fleeced.

    They can’t put Hostess in this though. The guy who bought it was doing a favor for all of us who grew up with Twinkees.

  28. @Corvinus
    This is capitalism in its most glorious form. Wall Street Elitism? Hardly. It's entrepreneurship by high IQ men and women. Current finance is not racketeering. Regulatory burdens would only thwart their innovations and reduce profit potential.

    current finance is not racketeering, It’s entrepreneurship by high IQ men and women

    https://www.bloomberg.com/features/2016-goldman-sachs-libya/

    entrepreneurship? Your comment while clever and concise, doesn’t even pass the smell test.

    • Replies: @Corvinus
    "entrepreneurship? Your comment while clever and concise, doesn’t even pass the smell test."

    Yes, entrepreneurship. A willing client sought the expertise of financial experts. Not every transaction will end up in a lucrative deal for both parties involved.
  29. “Being part of this criminal process is what made it insane for the Republicans to run Mitt Romney as their candidate for President in 2012. What were they thinking?”

    They must have been thinking that no one would be smart enough to connect the dots.

  30. @Daniel H
    >>A year after the layoffs at the Hostess plant in Illinois, Apollo and Metropoulos arranged for the company to borrow about $1.3 billion. Apollo and Metropoulos used most of that sum to pay themselves, and their investors, an early dividend on their investment.<<

    Hostess will likely be bankrupt again in a few years.

    In Nicholas Pileggi's Wiseguy, from which the Scorcese directed movie was taken, the gangster Henry Hill described how he and his mob confederates would muscle their way into restaurants - the owner having fallen into debt to the mob somehow - and using the restaurant's credit with suppliers immediately acquire as much as they could on credit: seafood, beef, lamb, wine, produce, tableware, booze, everything, and then hawk it on the streets or to other restaurants (paying themselves a dividend, so to speak) , leaving the restaurant a hopelessly in debt and soon to be bankrupt shell.

    So when Hill and his mob buddies loaded up a business with unsupportable debt, took the proceeds from the debt and walked away it was called racketeering, when private equity firms load up a business with unsupportable debt, use that debt not to invest in plant, labor, development and operations but to pay themselves a "dividend" it is called smart finance and is to be applauded and envied. Well, we shouldn't get too upset about this. I am sure that Apollo management and Blackstone group are transgender friendly and that is what really matters in Manhattan in 2016.

    using the restaurant’s credit with suppliers immediately acquire as much as they could on credit: seafood, beef, lamb, wine, produce, tableware, booze, everything, and then hawk it on the streets or to other restaurants (paying themselves a dividend, so to speak) , leaving the restaurant a hopelessly in debt and soon to be bankrupt shell.

    So when Hill and his mob buddies loaded up a business with unsupportable debt, took the proceeds from the debt and walked away it was called racketeering

    Reminds me a little bit of what is being done to the United States.

    • Agree: ben tillman
  31. @Jefferson
    Meanwhile a meeting of Wall Street elites…

    “Quick we need a diversion, any ideas?

    “Er, what about middle-class women being grossly underpaid?

    “Is that really true?

    ” Well, not really, but some white collar women over 35 make about 6 percent less than their male counterparts, so we can probably massage the stats to make out women in general are paid a third less than men”

    “Great idea, hit the business MSM round the clock.”

    Another fake news diversion created by the elites in the mainstream media is that 25 percent of all female college students in The U.S have been raped. So the odds of getting raped in college is almost as high as the odds of getting raped in prison? If college is that extremely dangerous for women than why do so many parents keep sending their daughters to college if they have a 1 in 4 chance of being raped at these institutions? Those are very high odds of getting raped. Are most male college students in America refugees from Syria, South Africa, Pakistan, and Somalia? Or are they just using a very broad definition of rape? Hey gorgeous can I take you out on a date, OH MY GOD RAPE.

    >25 percent of all female college students in The U.S have been raped.

    They hit me with this fake stat at my freshman orientation. Some assistant dean of whatever actually said to a group of students and our parents that 1 in 4 women would experience a sexual assault this year. I raised my hand and asked “We have approx 16 thousand undergrads and assume half are girls, so you’re saying that’s about two thousand rapes that will happen this year?”. The ridiculousness of that figure seemed to temporarily cross the speaker’s mind before she blurted out something along the lines of “well, it’s impossible to say, because most are unreported”.

  32. @TheJester
    David Stockman in his book, "The Great Deformation: The Corruption of Capitalism in America," outlines how hedge funds loot corporations of their wealth through leveraged buyouts (LBO) that leave the companies "debt zombies". The key to the looting is forcing the acquired companies to borrow money to pay for the acquisitions; this includes hefty fees for the new owners.

    According to Stockman, this systematic looting is what caused the last crisis in the US auto industry: The auto parts suppliers had been looted without the financial ability to afford a downturn in the industry. From the comments, it looks like Hostess suffered a similar fate.

    The predators on Wall Street try to put a patina of economic and moral virtue on the looting. You see, the dangerously high debt imposed on the companies by the looters force them to improve their processes and efficiencies as they scramble to survive. This makes them "leaner and meaner" as they shed unnecessary costs and workers. In short, looting companies is good for the economy (and Wall Street) by rooting out market inefficiencies. If companies do fold, the hedge funds can then seize and sell off their assets to cover the acquisition loans. This is clearly a win-win for markets and Wall Street ... is it not?

    Being part of this criminal process is what made it insane for the Republicans to run Mitt Romney as their candidate for President in 2012. What were they thinking?

    >>Mitt Romney as their candidate for President in 2012. What were they thinking?

    They were thinking that they could continually fool us and get away with it. Same with the Democrats. The ball is in Trump’s hands to do something about this and make a great name for himself, or he can fold and cuck out. We shall se.

  33. @Corvinus
    This is capitalism in its most glorious form. Wall Street Elitism? Hardly. It's entrepreneurship by high IQ men and women. Current finance is not racketeering. Regulatory burdens would only thwart their innovations and reduce profit potential.

    >>Regulatory burdens would only thwart their innovations and reduce profit potential.

    Oh, the horror, the horror.

    • Replies: @Corvinus
    "Oh, the horror, the horror."

    It is horrific that companies would be subject to stricter government laws bordering on intrusion that would lessen opportunities to advance their product lines and stimulate new investment opportunities. Certainly, regulations could be passed, but so would the costs to the consumer. Do you want higher priced goods and services?
  34. @TheJester
    David Stockman in his book, "The Great Deformation: The Corruption of Capitalism in America," outlines how hedge funds loot corporations of their wealth through leveraged buyouts (LBO) that leave the companies "debt zombies". The key to the looting is forcing the acquired companies to borrow money to pay for the acquisitions; this includes hefty fees for the new owners.

    According to Stockman, this systematic looting is what caused the last crisis in the US auto industry: The auto parts suppliers had been looted without the financial ability to afford a downturn in the industry. From the comments, it looks like Hostess suffered a similar fate.

    The predators on Wall Street try to put a patina of economic and moral virtue on the looting. You see, the dangerously high debt imposed on the companies by the looters force them to improve their processes and efficiencies as they scramble to survive. This makes them "leaner and meaner" as they shed unnecessary costs and workers. In short, looting companies is good for the economy (and Wall Street) by rooting out market inefficiencies. If companies do fold, the hedge funds can then seize and sell off their assets to cover the acquisition loans. This is clearly a win-win for markets and Wall Street ... is it not?

    Being part of this criminal process is what made it insane for the Republicans to run Mitt Romney as their candidate for President in 2012. What were they thinking?

    The GOP ran Romney because the party is run by a bunch of Chamber of Commerce and beltway types that are oblivious to what the average voter wants in a candidate.

    Romney didn’t help in that he came off as a cold blooded and creepy version of Gordon Gecko. That’s the thing I love about the GOP, they always find a candidate who makes their Democratic opponent look good. Trump is the exception since he knocked off the GOP anointed (Jeb!!).

  35. @Anonymous
    Yes, it's called a "bust out" by the mafia, and it's the same basic business model as private equity, just on a lone, small business scale. There's a Sopranos episode about it:

    https://www.youtube.com/watch?v=ZXcBvq2Jscw

    There’s also an iSteve comment about it. It might have been from you, since it’s from an “Anonymous”:

    http://isteve.blogspot.com/2012/04/memories-misty-water-color-memories.html

    In 1992 I had just taken a job with a paging transmitter company in Quincy, Ilinois. They made a fortune for about five years. They went bankrupt because the owners, Canadian Jews from Vancouver, not only refused to spend money on the emerging cellphone market but sold off everything but paging from the Quincy company they bought. I knew trouble was imminent when their test equipment quit working because _all the manufacturing employees had cell phones_ and the RF was interfering. Sure enough paging became obsolete a couple of years later and they folded the Quincy plant. At the time I thought they were really stupid.

    I was the stupid one, because what it was, was a bust-out. The mobsters buy a small retail business in New Jersey and “bust it out” buy ordering everything possible on credit, leveraging the reputation and creditworthiness of the store, then take everything out and wholesale it or sell it at flea markets while burning the store down or otherwise bankrupting it.

    These guys played the bigger game: they issued stock (GEMS), got it up to the mid-70s, sold out and watched it drop to $1 and delisted. Like “The Producers” they had it planned from the beginning.

  36. @S. Johnson
    These salaries represent the free market at work: supply and demand. Obviously.

    Reality: a company could find an equally competent person to be CEO at one of these companies by paying them around $200,000-300,000/yr.

    These salaries represent the free market at work: supply and demand. Obviously.

    Reality: a company could find an equally competent person to be CEO at one of these companies by paying them around $200,000-300,000/yr.

    Yep, it’s all about leveraging connections to stake out the most profitable ecological niche.

  37. @David
    Wait. This is not a problem because by an immutable law of economics no one is paid more than he produces.

    Wait. This is not a problem because by an immutable law of economics no one is paid more than he produces.

    I know you’re kidding, but these people aren’t “paid”. They don’t have employers. They just take.

    • Replies: @Dieter Kief
    Again . Very simple.
    And therefor, it's hard to be kidding about. It's almost, as if it was kid's stuff already. There's hardly any space left for irony.

    - Maybe that's another reason, why there is no real upheaval about such behaviour: It's so simple and kid-like, that it's almost charming.

  38. @Corvinus
    So, hotshot, how do you propose to regulate this aspect of capitalism? Detailed answers.

    So, hotshot, how do you propose to regulate this aspect of capitalism? Detailed answers.

    Requiring executive compensation beyond, say $2 million per annum, to be escrowed for four or six years (matching the applicable limitations period for fraudulent transfer liability) would be a good start. Creating a presumption (perhaps irrebuttable) that executive compensation (beyond a certain amount) is a fraudulent transfer under at least certain circumstances. Etc.

    • Replies: @Jim Don Bob
    Except that what they are being paid is not technically "compensation" which is why their "carried interest"compensation is taxed at 15% instead of the cap gains rate of 35%.

    Changing the tax treatment of "carried interest" is the solution. Heretofore, neither party has been interested in doing this; both parties get lots of $ from Wall Street and it is a nice place to land for a few years and get "paid" 3 or 4 or 10 million dollars, e.g. Eric Cantor, Rahm Emanuel, etc. We shall see if DJT wants to drain this swamp.

    The other problem is that the regulatory bureaucracy (SEC, CPFB, etc.) is composed of people who were not smart enough to make it on Wall Street.
    , @Corvinus
    "Requiring executive compensation beyond, say $2 million per annum, to be escrowed for four or six years (matching the applicable limitations period for fraudulent transfer liability) would be a good start."

    A proposal that is absolutely unrealistic and unconstitutional.

    "Creating a presumption (perhaps irrebuttable) that executive compensation (beyond a certain amount) is a fraudulent transfer under at least certain circumstances. Etc."

    Another yet ludicrous idea, one also that is unconstitutional.

    I should have prefaced my question with "So, hotshot, how do you propose to regulate this aspect of capitalism that would pass constitutional muster"?
  39. @ben tillman

    So, hotshot, how do you propose to regulate this aspect of capitalism? Detailed answers.
     
    Requiring executive compensation beyond, say $2 million per annum, to be escrowed for four or six years (matching the applicable limitations period for fraudulent transfer liability) would be a good start. Creating a presumption (perhaps irrebuttable) that executive compensation (beyond a certain amount) is a fraudulent transfer under at least certain circumstances. Etc.

    Except that what they are being paid is not technically “compensation” which is why their “carried interest”compensation is taxed at 15% instead of the cap gains rate of 35%.

    Changing the tax treatment of “carried interest” is the solution. Heretofore, neither party has been interested in doing this; both parties get lots of $ from Wall Street and it is a nice place to land for a few years and get “paid” 3 or 4 or 10 million dollars, e.g. Eric Cantor, Rahm Emanuel, etc. We shall see if DJT wants to drain this swamp.

    The other problem is that the regulatory bureaucracy (SEC, CPFB, etc.) is composed of people who were not smart enough to make it on Wall Street.

  40. @ben tillman

    So, hotshot, how do you propose to regulate this aspect of capitalism? Detailed answers.
     
    Requiring executive compensation beyond, say $2 million per annum, to be escrowed for four or six years (matching the applicable limitations period for fraudulent transfer liability) would be a good start. Creating a presumption (perhaps irrebuttable) that executive compensation (beyond a certain amount) is a fraudulent transfer under at least certain circumstances. Etc.

    “Requiring executive compensation beyond, say $2 million per annum, to be escrowed for four or six years (matching the applicable limitations period for fraudulent transfer liability) would be a good start.”

    A proposal that is absolutely unrealistic and unconstitutional.

    “Creating a presumption (perhaps irrebuttable) that executive compensation (beyond a certain amount) is a fraudulent transfer under at least certain circumstances. Etc.”

    Another yet ludicrous idea, one also that is unconstitutional.

    I should have prefaced my question with “So, hotshot, how do you propose to regulate this aspect of capitalism that would pass constitutional muster”?

    • Replies: @ben tillman

    “Creating a presumption (perhaps irrebuttable) that executive compensation (beyond a certain amount) is a fraudulent transfer under at least certain circumstances. Etc.”

    Another yet ludicrous idea, one also that is unconstitutional.
     
    The law's already on the books with different details, and I've never heard any questions about its Constitutionality.
  41. @cucksworth

    current finance is not racketeering, It’s entrepreneurship by high IQ men and women
     
    https://www.bloomberg.com/features/2016-goldman-sachs-libya/

    entrepreneurship? Your comment while clever and concise, doesn't even pass the smell test.

    “entrepreneurship? Your comment while clever and concise, doesn’t even pass the smell test.”

    Yes, entrepreneurship. A willing client sought the expertise of financial experts. Not every transaction will end up in a lucrative deal for both parties involved.

  42. @Daniel H
    >>Regulatory burdens would only thwart their innovations and reduce profit potential.

    Oh, the horror, the horror.

    “Oh, the horror, the horror.”

    It is horrific that companies would be subject to stricter government laws bordering on intrusion that would lessen opportunities to advance their product lines and stimulate new investment opportunities. Certainly, regulations could be passed, but so would the costs to the consumer. Do you want higher priced goods and services?

  43. First, I’m finding it entertaining how many commenters seem perfectly comfortable with the liberal trick of countering a basic principle (free market economics works) with an anecdote (a friend of a friend knows some guys who were crooks) in order to demonize a multi-billion dollar industry. I expect this on MSNBC but hoped for better here. I guess envy as the basis for public policy decisions, really is non-partisan.

    I have 25 years experience in the Hedge Fund industry as a PM (a senior decision making role) at several large respected firms, and I made a transition to the private equity space about 5 years ago. The reason I decided to make that shift is that the public markets no longer work in a way that allows someone to be both uncorrelated to the markets and profitable, without taking on more risk than is justified by the return. This is the only thing that honest hedge funds (which is the vast majority of them) ever did. The uncorrelated part is actually harder to accomplish than the profitable part, but it’s necessary in order to justify the high fees that hedge funds have in the past demanded. But that idiosyncrasy of return is a given in the private equity space.

    Most of what happens in private equity is that a company is improved internally. Unprofitable ventures are cut or changed, profitable ones are expanded, and key decision makers are replaced with better candidates or are automated. Sometimes when a company is at a different stage in it’s growth, it requires a different kind of decision maker to choose the direction. And that’s a component too. Often it’s just the culture of the company which needs to change and is enough to make it more profitable.

    What the key people in a private equity venture do is they change the strategy and execution process of a company. If done successfully, it’s a genuine improvement of efficiency. That’s never popular with the people who were working in the inefficient areas, but that does not make it illegal. On the contrary, it’s ‘creative destruction’ in microcosm. And regulating it won’t help because the people who write the regulation are simply not smart enough to counter the efforts of people who work in the industry and are in the end, much smarter than they are. The regulators want equality but the industry wants inequality. And since there is a meaningful IQ differential between the regulator and the regulatee, inequality will out.

    I started my career in derivatives trading. You’ll be hard pressed to get a well known face to admit to this in public, but virtually all derivatives were invented as a legal means of getting around some bit of idiotic regulation designed to limit risk taking. Those regulations were in effect, an effort to make being smart and less smart, equal. The invention of the derivative was a response to that effort. I’ve written about this at some length over the years. Here is two of my favorite examples offered in the form of movie reviews:

    http://freenj.blogspot.com/2011/03/subprime-crisis-revisited.html
    http://freenj.blogspot.com/2015/12/big-short-brad-pitt-proves-hes-idiot.html

    I suppose it’s natural that the advocates of equalism will now begin trying to regulate the private markets as well, and that effort will just as naturally foster an explosion in the kind of creativity we’ve seen in the last 20 years in the public markets. Because it simply isn’t possible to make smart and stupid equal to one another with regulation. That’s a fact I’d have thought would be a bit more obvious in this forum.

    • Replies: @res

    First, I’m finding it entertaining how many commenters seem perfectly comfortable with the liberal trick of countering a basic principle (free market economics works) with an anecdote (a friend of a friend knows some guys who were crooks) in order to demonize a multi-billion dollar industry.
     
    Thanks for the alternative informed view. Many good points in your post, but I'm curious about your take on the two issues that bother me most.

    Criminal anecdotes aren't a great reason for blanket criticism, but it is hard to stomach the criminals who seem to either completely get away with things or get their hands slapped. Arguably even worse IMO are "non-criminal" activities like the asset stripping followed by bankruptcy being discussed above.

    Then there is carried interest. IMO the tax treatment of carried interest is scandalous. What I find fascinating is how everyone seems to be against this (for example Trump and Clinton: http://www.businessinsider.com/what-is-carried-interest-2016-10 )
    but nothing ever seems to get done. I'm not confident Trump is going to change anything there though (unless he succeeds in lowering the wage income tax rate to be the same, which seems unlikely to me).

    What are your thoughts on these issues? Do you see them as problems?

    To be clear, I think there is an important role for hedge funds and derivatives in our financial system (and am far from an equalist). There is substantial good accomplished by having them that should not be taken lightly when people attempt to impose onerous regulations. It is just that I think we would be better off with a Glass-Steagall equivalent, reasonable criminal laws and associated punishments (i.e. sufficient to deter problem behavior), and more equitable tax treatment of the proceeds.
  44. @Corvinus
    "Requiring executive compensation beyond, say $2 million per annum, to be escrowed for four or six years (matching the applicable limitations period for fraudulent transfer liability) would be a good start."

    A proposal that is absolutely unrealistic and unconstitutional.

    "Creating a presumption (perhaps irrebuttable) that executive compensation (beyond a certain amount) is a fraudulent transfer under at least certain circumstances. Etc."

    Another yet ludicrous idea, one also that is unconstitutional.

    I should have prefaced my question with "So, hotshot, how do you propose to regulate this aspect of capitalism that would pass constitutional muster"?

    “Creating a presumption (perhaps irrebuttable) that executive compensation (beyond a certain amount) is a fraudulent transfer under at least certain circumstances. Etc.”

    Another yet ludicrous idea, one also that is unconstitutional.

    The law’s already on the books with different details, and I’ve never heard any questions about its Constitutionality.

    • Replies: @Corvinus
    "The law’s already on the books with different details, and I’ve never heard any questions about its Constitutionality.'

    What laws are you specifically referring to?
  45. @ben tillman

    Wait. This is not a problem because by an immutable law of economics no one is paid more than he produces.
     
    I know you're kidding, but these people aren't "paid". They don't have employers. They just take.

    Again . Very simple.
    And therefor, it’s hard to be kidding about. It’s almost, as if it was kid’s stuff already. There’s hardly any space left for irony.

    – Maybe that’s another reason, why there is no real upheaval about such behaviour: It’s so simple and kid-like, that it’s almost charming.

  46. @Tom from RFNJ
    First, I’m finding it entertaining how many commenters seem perfectly comfortable with the liberal trick of countering a basic principle (free market economics works) with an anecdote (a friend of a friend knows some guys who were crooks) in order to demonize a multi-billion dollar industry. I expect this on MSNBC but hoped for better here. I guess envy as the basis for public policy decisions, really is non-partisan.

    I have 25 years experience in the Hedge Fund industry as a PM (a senior decision making role) at several large respected firms, and I made a transition to the private equity space about 5 years ago. The reason I decided to make that shift is that the public markets no longer work in a way that allows someone to be both uncorrelated to the markets and profitable, without taking on more risk than is justified by the return. This is the only thing that honest hedge funds (which is the vast majority of them) ever did. The uncorrelated part is actually harder to accomplish than the profitable part, but it’s necessary in order to justify the high fees that hedge funds have in the past demanded. But that idiosyncrasy of return is a given in the private equity space.

    Most of what happens in private equity is that a company is improved internally. Unprofitable ventures are cut or changed, profitable ones are expanded, and key decision makers are replaced with better candidates or are automated. Sometimes when a company is at a different stage in it’s growth, it requires a different kind of decision maker to choose the direction. And that’s a component too. Often it’s just the culture of the company which needs to change and is enough to make it more profitable.

    What the key people in a private equity venture do is they change the strategy and execution process of a company. If done successfully, it’s a genuine improvement of efficiency. That’s never popular with the people who were working in the inefficient areas, but that does not make it illegal. On the contrary, it’s ‘creative destruction’ in microcosm. And regulating it won’t help because the people who write the regulation are simply not smart enough to counter the efforts of people who work in the industry and are in the end, much smarter than they are. The regulators want equality but the industry wants inequality. And since there is a meaningful IQ differential between the regulator and the regulatee, inequality will out.

    I started my career in derivatives trading. You’ll be hard pressed to get a well known face to admit to this in public, but virtually all derivatives were invented as a legal means of getting around some bit of idiotic regulation designed to limit risk taking. Those regulations were in effect, an effort to make being smart and less smart, equal. The invention of the derivative was a response to that effort. I’ve written about this at some length over the years. Here is two of my favorite examples offered in the form of movie reviews:

    http://freenj.blogspot.com/2011/03/subprime-crisis-revisited.html
    http://freenj.blogspot.com/2015/12/big-short-brad-pitt-proves-hes-idiot.html

    I suppose it’s natural that the advocates of equalism will now begin trying to regulate the private markets as well, and that effort will just as naturally foster an explosion in the kind of creativity we’ve seen in the last 20 years in the public markets. Because it simply isn’t possible to make smart and stupid equal to one another with regulation. That’s a fact I’d have thought would be a bit more obvious in this forum.

    First, I’m finding it entertaining how many commenters seem perfectly comfortable with the liberal trick of countering a basic principle (free market economics works) with an anecdote (a friend of a friend knows some guys who were crooks) in order to demonize a multi-billion dollar industry.

    Thanks for the alternative informed view. Many good points in your post, but I’m curious about your take on the two issues that bother me most.

    Criminal anecdotes aren’t a great reason for blanket criticism, but it is hard to stomach the criminals who seem to either completely get away with things or get their hands slapped. Arguably even worse IMO are “non-criminal” activities like the asset stripping followed by bankruptcy being discussed above.

    Then there is carried interest. IMO the tax treatment of carried interest is scandalous. What I find fascinating is how everyone seems to be against this (for example Trump and Clinton: http://www.businessinsider.com/what-is-carried-interest-2016-10 )
    but nothing ever seems to get done. I’m not confident Trump is going to change anything there though (unless he succeeds in lowering the wage income tax rate to be the same, which seems unlikely to me).

    What are your thoughts on these issues? Do you see them as problems?

    To be clear, I think there is an important role for hedge funds and derivatives in our financial system (and am far from an equalist). There is substantial good accomplished by having them that should not be taken lightly when people attempt to impose onerous regulations. It is just that I think we would be better off with a Glass-Steagall equivalent, reasonable criminal laws and associated punishments (i.e. sufficient to deter problem behavior), and more equitable tax treatment of the proceeds.

    • Replies: @Tom from RFNJ
    I don’t want to seem to be dodging your concerns. There are bad actors everywhere, and I don’t dispute it. Those guilty of fraud she be punished. But I wonder at the ability of “a guy who knows a guy” to successfully identify bad acts. (Not you personally – just a general theme. Real perspective on what’s going on at a company isn’t always as obvious as it seems to the guy on the ground.)

    As an example, I recently saw a company stripped of its assets and sold off. But the reason for the asset sale was that the management of the company didn’t want to change its sales department structure so they could reach a portion of their market that would have made them profitable. Instead they insisted on “doing things the way we’ve always done them”. That decision and the results it brought was what led to the asset sale. The sale itself was just the shareholders trying to get what return they could from the effort.

    In effect the management said that they would rather be out of business than change. The investors felt differently about it. And to the guys who worked in their offices or warehouses, the process probably looked like a bunch of investment bankers coming in and trashing the place. In truth, the place was already trashed by management. The bankers were just the cleanup crew.

    Like I said, I don’t mean to imply that 100% of these deals are above board. And employees are stakeholders in the company and should be considered. But most people in the private equity industry are just like everyone else – playing the game with convoluted rules, and trying to make the best use of them.

    As for carried interest, it doesn’t seem quite as scandalous to me as it does to you. If we’re going to treat long term investments differently than short term, then I see no reason why the law shouldn’t apply to everyone. I don’t think private equity managers deserve different treatment, but I also don’t think a change to that law is out of the question – with the caveat that the law changes for everyone.

    That’s why I think it doesn’t actually change. While it’s politically popular to “hate the rich guy” you can’t explicitly punish such a small group of people without hurting a bunch of others. Any effort to make the new “don’t make too much money” rule will only result in the structure of the private equity industry changing, and the new rules no longer applying to them. Want to make the breakpoint 5 years? 10 years? Fine. So long as it's one rule.

    Don’t hate the player, hate the game.

    As for your broader view about reasonable and transparent regulation, I’m all for it. But that isn’t what we have. What we have is a byzantine attempt to pick winners and losers. And every time they try to choose the winners and losers in Washington, the smarter ‘lose’ players figure a way around the new set of regs and become ‘winners’ again. Then we get new rules, new winners and losers, and a change in behavior from the smarters 'losers'.

    It’s really too big a topic for this format, but I believe a simpler more transparent regulation philosophy would ideally set the smart players against each other. IMO economic excesses are much better constrained by market forces than they are by regulation. The briefest example for this I can think of is that more (and easier) short selling would prevent market crashes by providing the circumstances for people to be buying in the market when many others are selling. But short selling is considered immoral by some, so it’s restricted. And those restrictions increase the odds of no buyers being around when the market sells off.
  47. @ben tillman

    “Creating a presumption (perhaps irrebuttable) that executive compensation (beyond a certain amount) is a fraudulent transfer under at least certain circumstances. Etc.”

    Another yet ludicrous idea, one also that is unconstitutional.
     
    The law's already on the books with different details, and I've never heard any questions about its Constitutionality.

    “The law’s already on the books with different details, and I’ve never heard any questions about its Constitutionality.’

    What laws are you specifically referring to?

  48. @res

    First, I’m finding it entertaining how many commenters seem perfectly comfortable with the liberal trick of countering a basic principle (free market economics works) with an anecdote (a friend of a friend knows some guys who were crooks) in order to demonize a multi-billion dollar industry.
     
    Thanks for the alternative informed view. Many good points in your post, but I'm curious about your take on the two issues that bother me most.

    Criminal anecdotes aren't a great reason for blanket criticism, but it is hard to stomach the criminals who seem to either completely get away with things or get their hands slapped. Arguably even worse IMO are "non-criminal" activities like the asset stripping followed by bankruptcy being discussed above.

    Then there is carried interest. IMO the tax treatment of carried interest is scandalous. What I find fascinating is how everyone seems to be against this (for example Trump and Clinton: http://www.businessinsider.com/what-is-carried-interest-2016-10 )
    but nothing ever seems to get done. I'm not confident Trump is going to change anything there though (unless he succeeds in lowering the wage income tax rate to be the same, which seems unlikely to me).

    What are your thoughts on these issues? Do you see them as problems?

    To be clear, I think there is an important role for hedge funds and derivatives in our financial system (and am far from an equalist). There is substantial good accomplished by having them that should not be taken lightly when people attempt to impose onerous regulations. It is just that I think we would be better off with a Glass-Steagall equivalent, reasonable criminal laws and associated punishments (i.e. sufficient to deter problem behavior), and more equitable tax treatment of the proceeds.

    I don’t want to seem to be dodging your concerns. There are bad actors everywhere, and I don’t dispute it. Those guilty of fraud she be punished. But I wonder at the ability of “a guy who knows a guy” to successfully identify bad acts. (Not you personally – just a general theme. Real perspective on what’s going on at a company isn’t always as obvious as it seems to the guy on the ground.)

    As an example, I recently saw a company stripped of its assets and sold off. But the reason for the asset sale was that the management of the company didn’t want to change its sales department structure so they could reach a portion of their market that would have made them profitable. Instead they insisted on “doing things the way we’ve always done them”. That decision and the results it brought was what led to the asset sale. The sale itself was just the shareholders trying to get what return they could from the effort.

    In effect the management said that they would rather be out of business than change. The investors felt differently about it. And to the guys who worked in their offices or warehouses, the process probably looked like a bunch of investment bankers coming in and trashing the place. In truth, the place was already trashed by management. The bankers were just the cleanup crew.

    Like I said, I don’t mean to imply that 100% of these deals are above board. And employees are stakeholders in the company and should be considered. But most people in the private equity industry are just like everyone else – playing the game with convoluted rules, and trying to make the best use of them.

    As for carried interest, it doesn’t seem quite as scandalous to me as it does to you. If we’re going to treat long term investments differently than short term, then I see no reason why the law shouldn’t apply to everyone. I don’t think private equity managers deserve different treatment, but I also don’t think a change to that law is out of the question – with the caveat that the law changes for everyone.

    That’s why I think it doesn’t actually change. While it’s politically popular to “hate the rich guy” you can’t explicitly punish such a small group of people without hurting a bunch of others. Any effort to make the new “don’t make too much money” rule will only result in the structure of the private equity industry changing, and the new rules no longer applying to them. Want to make the breakpoint 5 years? 10 years? Fine. So long as it’s one rule.

    Don’t hate the player, hate the game.

    As for your broader view about reasonable and transparent regulation, I’m all for it. But that isn’t what we have. What we have is a byzantine attempt to pick winners and losers. And every time they try to choose the winners and losers in Washington, the smarter ‘lose’ players figure a way around the new set of regs and become ‘winners’ again. Then we get new rules, new winners and losers, and a change in behavior from the smarters ‘losers’.

    It’s really too big a topic for this format, but I believe a simpler more transparent regulation philosophy would ideally set the smart players against each other. IMO economic excesses are much better constrained by market forces than they are by regulation. The briefest example for this I can think of is that more (and easier) short selling would prevent market crashes by providing the circumstances for people to be buying in the market when many others are selling. But short selling is considered immoral by some, so it’s restricted. And those restrictions increase the odds of no buyers being around when the market sells off.

  49. anonymous • Disclaimer says:

    “Most of what happens in private equity is that a company is improved internally….

    …What the key people in a private equity venture do is they change the strategy and execution process of a company. If done successfully, it’s a genuine improvement of efficiency.”

    I don’t think I have a problem with private equity in principle and I know little about it (not even enough to know if I really have a problem!), but I have some experience with it. I think one of the dangers is that, as smart as the key people are, they might not be smart enough. No one is ever really smart enough. In many areas, the future just can’t be predicted or directed as well as people would like, no matter how anxiety producing that is. And it seems from the sidelines that there is so much money demanding that something smart be done that what ends up happening is just more of the same, over and over, until something sticks if luck strikes. It’s the old “keep throwing jelly on the wall and eventually something might stick”. What private equity buys you is a few more rounds of the churn, which can be a good thing if things pick up again.

    As an expert, what’s the elevator-pitch explanation of how private equity works overall? It seems the idea is to put together a consortium to borrow from one of the international investment banks enough money to outright buy a company and pay yourself a fee for the risk you are taking. You have to pay off a big loan to the bank. So you need to drop any part of the company that is loosing money (or too much of an unknown quantity) and just make sure the company makes at least enough to pay off the bank loan. Of course, anything solid on top of that is gravy. After you pay off the loan, or perhaps to pay off the final part of the loan, you and the bank can do an IPO to take the company public again. Presumably the investment bank (and likely the fund) makes a good bit of its money off these IPOs.

    Is this sketch in the right ballpark?

    • Replies: @Tom from RFNJ
    I'd say that's in the ballpark yeah but there are a lot of dimensions to it. (And by the way, with 5 years in PE I'd hardly call myself an expert. I have a long history in finance, but my genuine 'expertise' is a very tiny sliver of the industry. I think I'm reasonably well informed on the rest, but that's far from what I would call expertise. With that said...)

    At its most abstract I'd say that PE firms look for companies which are not making the most of their investment for whatever reason. Poor management is the most common reason, but it's not the only one. Maybe they would do better merged (or partnered at some other level) with another company that complements them, like a commodity producer partnered with a logistics firm. Maybe in the case of a public company, their stock price has been driven down because of the politics of their product and the company is therefore worth more in private hands. Maybe they lack the infrastructure to make the most of their IP but have some attachment to it that prevents them from optimizing its return.

    I'd love to be sitting here saying that PE always looks longer term than shortsighted management, but that's simply not true. In some cases it's the management's focus on the long term that has them making investments that (in the opinion of the analysts) are unlikely to bear fruit. Every situation is different.

    As you mentioned, all corporations involve coping with some level of the unknown. Markets change over time, production and sales processes change. Advertising strategies change. Politics change. Maybe the PE firm simply believes it has a better handle on those unknowns than management does or has a less risky way to approach them. It can get pretty esoteric. Though from how you said it, I think you'd be surprised at how little is totally unknown. There is a lot of information available about economic and industry trajectory, and the data is there for forecasting if you have the time and ability.

    But you're absolutely right - the PE guys don't always know better. In my experience the right idea about what to do is usually worth very little, and it's the execution of the idea that makes the difference between success and failure. Even with that, many PE projects fail. But the effort is always to improve an underperforming asset, and I think you'd be hard pressed to find a company that would have been thriving but for the involvement of a PE firm.

    If an effort ends in liquidation, then when you drill into it, I think you'll find that the PE firm only brought on the inevitable a little faster or forestalled it a little rather than changed the direction of things altogether. Think of them as the 'better' (not always well) informed market participants, changing the company in a way to make it deliver more profit. Even in the case of an LBO and liquidation, it's the management being told by the marketplace that they can't ignore the interests of the shareholders.


    And with regard to Steve's initial irony, PE firms that are public entities themselves are usually less hierarchical than the companies they purchase. "Public" means a lot of things these days, and in the case of PE, it's usually just another source of investment capital with few managerial restrictions (non voting shares etc). So it doesn't result in the same kind political intrusion into the revenue producing processes that a company with other stakeholders will have. GE may be punished for opening a facility in Mexico if they want to do so next year (even to serve the local market), but no one cares if a PE firm opens an office in Mexico - public or not.

    PE is a part of the information economy. Comparatively small groups of highly skilled, highly intelligent people (in purely relative terms) with a very high return per man hour of labor. There are few hard assets, and few employees. Being public doesn't have the same kind of constraints in an industry like that as it does on something more labor or infrastructure intensive.
  50. @anonymous
    "Most of what happens in private equity is that a company is improved internally....

    ...What the key people in a private equity venture do is they change the strategy and execution process of a company. If done successfully, it’s a genuine improvement of efficiency."

    I don't think I have a problem with private equity in principle and I know little about it (not even enough to know if I really have a problem!), but I have some experience with it. I think one of the dangers is that, as smart as the key people are, they might not be smart enough. No one is ever really smart enough. In many areas, the future just can't be predicted or directed as well as people would like, no matter how anxiety producing that is. And it seems from the sidelines that there is so much money demanding that something smart be done that what ends up happening is just more of the same, over and over, until something sticks if luck strikes. It's the old "keep throwing jelly on the wall and eventually something might stick". What private equity buys you is a few more rounds of the churn, which can be a good thing if things pick up again.

    As an expert, what's the elevator-pitch explanation of how private equity works overall? It seems the idea is to put together a consortium to borrow from one of the international investment banks enough money to outright buy a company and pay yourself a fee for the risk you are taking. You have to pay off a big loan to the bank. So you need to drop any part of the company that is loosing money (or too much of an unknown quantity) and just make sure the company makes at least enough to pay off the bank loan. Of course, anything solid on top of that is gravy. After you pay off the loan, or perhaps to pay off the final part of the loan, you and the bank can do an IPO to take the company public again. Presumably the investment bank (and likely the fund) makes a good bit of its money off these IPOs.

    Is this sketch in the right ballpark?

    I’d say that’s in the ballpark yeah but there are a lot of dimensions to it. (And by the way, with 5 years in PE I’d hardly call myself an expert. I have a long history in finance, but my genuine ‘expertise’ is a very tiny sliver of the industry. I think I’m reasonably well informed on the rest, but that’s far from what I would call expertise. With that said…)

    At its most abstract I’d say that PE firms look for companies which are not making the most of their investment for whatever reason. Poor management is the most common reason, but it’s not the only one. Maybe they would do better merged (or partnered at some other level) with another company that complements them, like a commodity producer partnered with a logistics firm. Maybe in the case of a public company, their stock price has been driven down because of the politics of their product and the company is therefore worth more in private hands. Maybe they lack the infrastructure to make the most of their IP but have some attachment to it that prevents them from optimizing its return.

    I’d love to be sitting here saying that PE always looks longer term than shortsighted management, but that’s simply not true. In some cases it’s the management’s focus on the long term that has them making investments that (in the opinion of the analysts) are unlikely to bear fruit. Every situation is different.

    As you mentioned, all corporations involve coping with some level of the unknown. Markets change over time, production and sales processes change. Advertising strategies change. Politics change. Maybe the PE firm simply believes it has a better handle on those unknowns than management does or has a less risky way to approach them. It can get pretty esoteric. Though from how you said it, I think you’d be surprised at how little is totally unknown. There is a lot of information available about economic and industry trajectory, and the data is there for forecasting if you have the time and ability.

    But you’re absolutely right – the PE guys don’t always know better. In my experience the right idea about what to do is usually worth very little, and it’s the execution of the idea that makes the difference between success and failure. Even with that, many PE projects fail. But the effort is always to improve an underperforming asset, and I think you’d be hard pressed to find a company that would have been thriving but for the involvement of a PE firm.

    If an effort ends in liquidation, then when you drill into it, I think you’ll find that the PE firm only brought on the inevitable a little faster or forestalled it a little rather than changed the direction of things altogether. Think of them as the ‘better’ (not always well) informed market participants, changing the company in a way to make it deliver more profit. Even in the case of an LBO and liquidation, it’s the management being told by the marketplace that they can’t ignore the interests of the shareholders.

    And with regard to Steve’s initial irony, PE firms that are public entities themselves are usually less hierarchical than the companies they purchase. “Public” means a lot of things these days, and in the case of PE, it’s usually just another source of investment capital with few managerial restrictions (non voting shares etc). So it doesn’t result in the same kind political intrusion into the revenue producing processes that a company with other stakeholders will have. GE may be punished for opening a facility in Mexico if they want to do so next year (even to serve the local market), but no one cares if a PE firm opens an office in Mexico – public or not.

    PE is a part of the information economy. Comparatively small groups of highly skilled, highly intelligent people (in purely relative terms) with a very high return per man hour of labor. There are few hard assets, and few employees. Being public doesn’t have the same kind of constraints in an industry like that as it does on something more labor or infrastructure intensive.

    • Replies: @Dieter Kief
    Yes!
    You end up with the question, how PE firms work.
    Steve Sailer startet with a hint at how questionable/astonishing/dysfunctional it is, h o w they work ("paid himself 800 million last year").
    No?
  51. @Tom from RFNJ
    I'd say that's in the ballpark yeah but there are a lot of dimensions to it. (And by the way, with 5 years in PE I'd hardly call myself an expert. I have a long history in finance, but my genuine 'expertise' is a very tiny sliver of the industry. I think I'm reasonably well informed on the rest, but that's far from what I would call expertise. With that said...)

    At its most abstract I'd say that PE firms look for companies which are not making the most of their investment for whatever reason. Poor management is the most common reason, but it's not the only one. Maybe they would do better merged (or partnered at some other level) with another company that complements them, like a commodity producer partnered with a logistics firm. Maybe in the case of a public company, their stock price has been driven down because of the politics of their product and the company is therefore worth more in private hands. Maybe they lack the infrastructure to make the most of their IP but have some attachment to it that prevents them from optimizing its return.

    I'd love to be sitting here saying that PE always looks longer term than shortsighted management, but that's simply not true. In some cases it's the management's focus on the long term that has them making investments that (in the opinion of the analysts) are unlikely to bear fruit. Every situation is different.

    As you mentioned, all corporations involve coping with some level of the unknown. Markets change over time, production and sales processes change. Advertising strategies change. Politics change. Maybe the PE firm simply believes it has a better handle on those unknowns than management does or has a less risky way to approach them. It can get pretty esoteric. Though from how you said it, I think you'd be surprised at how little is totally unknown. There is a lot of information available about economic and industry trajectory, and the data is there for forecasting if you have the time and ability.

    But you're absolutely right - the PE guys don't always know better. In my experience the right idea about what to do is usually worth very little, and it's the execution of the idea that makes the difference between success and failure. Even with that, many PE projects fail. But the effort is always to improve an underperforming asset, and I think you'd be hard pressed to find a company that would have been thriving but for the involvement of a PE firm.

    If an effort ends in liquidation, then when you drill into it, I think you'll find that the PE firm only brought on the inevitable a little faster or forestalled it a little rather than changed the direction of things altogether. Think of them as the 'better' (not always well) informed market participants, changing the company in a way to make it deliver more profit. Even in the case of an LBO and liquidation, it's the management being told by the marketplace that they can't ignore the interests of the shareholders.


    And with regard to Steve's initial irony, PE firms that are public entities themselves are usually less hierarchical than the companies they purchase. "Public" means a lot of things these days, and in the case of PE, it's usually just another source of investment capital with few managerial restrictions (non voting shares etc). So it doesn't result in the same kind political intrusion into the revenue producing processes that a company with other stakeholders will have. GE may be punished for opening a facility in Mexico if they want to do so next year (even to serve the local market), but no one cares if a PE firm opens an office in Mexico - public or not.

    PE is a part of the information economy. Comparatively small groups of highly skilled, highly intelligent people (in purely relative terms) with a very high return per man hour of labor. There are few hard assets, and few employees. Being public doesn't have the same kind of constraints in an industry like that as it does on something more labor or infrastructure intensive.

    Yes!
    You end up with the question, how PE firms work.
    Steve Sailer startet with a hint at how questionable/astonishing/dysfunctional it is, h o w they work (“paid himself 800 million last year”).
    No?

  52. anonymous • Disclaimer says:

    “…I think you’d be surprised at how little is totally unknown. There is a lot of information available about economic and industry trajectory, and the data is there for forecasting if you have the time and ability.”

    A friend tried to convince me a few years before those Wall Street banks went bust when the Great Recession hit that it was all over, that the big investment banks had all the data, had all the computer models, ran all the Monte Carlos, and so on, so they could predict what was going to happen in the markets and just couldn’t loose, etc.. I dunno… They blew it, though the government saved them as an industry. (Maybe the government really doesn’t care as to the exact vehicle for all that Keynesian stimulus…)

    “I’d say that’s in the ballpark yeah but there are a lot of dimensions to it.”

    Okay, so I was trying to figure out the difference between what these guys do and what the rest of us mere mortals do. If I and some friends went to a local bank and did something like this with a company, we’d just be called guys who turned around or saved a company. Nothing out of the ordinary.

    These seem to be some factors that make the big PE firms different:

    * Scale. The PE company/fund wants to be doing this with many companies. Say, hundreds, all at different points of the process. That way they might be doing an IPO a week. Even if many of their companies flop, they’ll probably have a few big IPOs every quarter that pop high for good overall returns. The investment bank that does the IPO and gets its cut of the stock price pop has to love this. Me and my buddies probably couldn’t even do this with one burger stand.

    * Size of companies. These guys are able to buy large multinationals, companies that talk billions. Even if they flop, there’s a lot left over, buildings to sell, real estate, small spin-outs. These guys are not bootstraping startups. Me and my buddies would probably have a few tables and PCs left over after our startup flopped.

    * Government investor connections. These guys aren’t getting their grandmothers as angel investors. They are getting nation-state pension funds (often from socialistic European or Asian countries). Middle-east Arab monarchies are investing huge funds; the Bin Laden’s were not alone. A lot of the fund people are ex-government. They have the connections and know who/how to tap large government banks all over the world. Carlyle having ex British PM John Major as European Chairman is an example. Probably there are a lot of governments and government banks out there that honestly are running out of places to put money and get a decent return. The PE companies provide that alternative.

    * These guys are probably large enough to cycle the process over-and-over. They take over a company, do an IPO, 10 years later they do it again, rinse and repeat.

    * One way they could do this continually (and show a good return) is to, every 10 years or so, replace the company’s workforce with younger workers (say, low cost immigrant workers). Of course, in some industries that will not pay off because it’s a high “know-how” industry. But in many industries it might very well pay off.

    The big investment banks that normally structure those IPO deals have to love the PE guys, because these “restructured” companies are probably much more predictable and less trouble than startups. And with the PE guys, the banks are working with the same professionals that speak the same language over and over.

    • Replies: @Tom from RFNJ
    I'd say you're mostly right with just a few tiny quibbles.

    The return profile on a startup and the return profile on a turnaround are very different so there is an apples and oranges element to it. In my experience the companies that do well from a turnaround are those that are heavy in employees and assets. Startups don't usually have much in either, but have a big market potential. Today's Radio-Derb mentioned WhatsApp which had a multi-billion dollar valuation with only 55 employees. A company like that doesn't need much by way of turning around.

    An IPO for a company with 9,000 employees and that owns 500 trucks, a bunch of manufacturing equipment, and facilities all across the country won't get anything like the Return on Investment that Whatsapp has from either an IPO or from a private purchase.


    The public vs. private issue is also often one of fashion or politics. For a few years there gun companies were very unpopular so their stock price suffered through no fault of their own. At a low price in the public market, the return they offered looked good to private investors so they bought them and took them private. That way they could focus on the long term and not worry about the hyper-emotional political whims of a portion of the public investors who care about such things.

    As other industries fall back into favor (it happens) companies will focus on brining in that investment by going back to the public market because it's a comparatively cheap source of capital at that point. It's all really just about finding value.
  53. @anonymous
    "...I think you’d be surprised at how little is totally unknown. There is a lot of information available about economic and industry trajectory, and the data is there for forecasting if you have the time and ability."

    A friend tried to convince me a few years before those Wall Street banks went bust when the Great Recession hit that it was all over, that the big investment banks had all the data, had all the computer models, ran all the Monte Carlos, and so on, so they could predict what was going to happen in the markets and just couldn't loose, etc.. I dunno... They blew it, though the government saved them as an industry. (Maybe the government really doesn't care as to the exact vehicle for all that Keynesian stimulus...)


    "I’d say that’s in the ballpark yeah but there are a lot of dimensions to it."

    Okay, so I was trying to figure out the difference between what these guys do and what the rest of us mere mortals do. If I and some friends went to a local bank and did something like this with a company, we'd just be called guys who turned around or saved a company. Nothing out of the ordinary.

    These seem to be some factors that make the big PE firms different:

    * Scale. The PE company/fund wants to be doing this with many companies. Say, hundreds, all at different points of the process. That way they might be doing an IPO a week. Even if many of their companies flop, they'll probably have a few big IPOs every quarter that pop high for good overall returns. The investment bank that does the IPO and gets its cut of the stock price pop has to love this. Me and my buddies probably couldn't even do this with one burger stand.

    * Size of companies. These guys are able to buy large multinationals, companies that talk billions. Even if they flop, there's a lot left over, buildings to sell, real estate, small spin-outs. These guys are not bootstraping startups. Me and my buddies would probably have a few tables and PCs left over after our startup flopped.

    * Government investor connections. These guys aren't getting their grandmothers as angel investors. They are getting nation-state pension funds (often from socialistic European or Asian countries). Middle-east Arab monarchies are investing huge funds; the Bin Laden's were not alone. A lot of the fund people are ex-government. They have the connections and know who/how to tap large government banks all over the world. Carlyle having ex British PM John Major as European Chairman is an example. Probably there are a lot of governments and government banks out there that honestly are running out of places to put money and get a decent return. The PE companies provide that alternative.

    * These guys are probably large enough to cycle the process over-and-over. They take over a company, do an IPO, 10 years later they do it again, rinse and repeat.

    * One way they could do this continually (and show a good return) is to, every 10 years or so, replace the company's workforce with younger workers (say, low cost immigrant workers). Of course, in some industries that will not pay off because it's a high "know-how" industry. But in many industries it might very well pay off.



    The big investment banks that normally structure those IPO deals have to love the PE guys, because these "restructured" companies are probably much more predictable and less trouble than startups. And with the PE guys, the banks are working with the same professionals that speak the same language over and over.

    I’d say you’re mostly right with just a few tiny quibbles.

    The return profile on a startup and the return profile on a turnaround are very different so there is an apples and oranges element to it. In my experience the companies that do well from a turnaround are those that are heavy in employees and assets. Startups don’t usually have much in either, but have a big market potential. Today’s Radio-Derb mentioned WhatsApp which had a multi-billion dollar valuation with only 55 employees. A company like that doesn’t need much by way of turning around.

    An IPO for a company with 9,000 employees and that owns 500 trucks, a bunch of manufacturing equipment, and facilities all across the country won’t get anything like the Return on Investment that Whatsapp has from either an IPO or from a private purchase.

    The public vs. private issue is also often one of fashion or politics. For a few years there gun companies were very unpopular so their stock price suffered through no fault of their own. At a low price in the public market, the return they offered looked good to private investors so they bought them and took them private. That way they could focus on the long term and not worry about the hyper-emotional political whims of a portion of the public investors who care about such things.

    As other industries fall back into favor (it happens) companies will focus on brining in that investment by going back to the public market because it’s a comparatively cheap source of capital at that point. It’s all really just about finding value.

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