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Jeremiah Johnson 🌐
So there's a persistent idea floating around that goes like "Private equity firms buy up good companies and then run them into the ground, and this is a huge and persistent problem".
This confuses me: why would they buy companies just to ruin them? Wouldn't they lose money?
PE firms are also supposedly laser-focused on profits, so the whole thing doesn't make sense. I can see a few possible explanations here, but I've never gotten a comprehensive answer which story people think is true:
1) This doesn't actually happen, PE-owned companies fail at the same rate as non-PE-owned companies. It's just a media panic.
2a) PE firms are buying stable businesses and making high-risk-high-reward bets on scaling them. Sometimes they don't work, but when they do the payoff is large.
2b) PE firms are buying distressed companies with a high chance of failure. They buy at low prices knowing failure is likely but if they turn the business around profits could be huge.
In both 2a and 2b you'd see a higher rate of PE-owned businesses failing, but it could be economically rational and +EV to make high risk bets
3) PE companies are buying companies whose parts are worth more than the sum - they have more value just selling off the assets than keeping the business running.
4) PE companies are involved in some sort of contractual slipperiness, dirty tricks, or outright malfeasance where they make money even if the business fails.
Scenario (4) raises another question - who's the counterparty? If the PE firms are making money despite the purchased business failing, where's that money coming from? Sometimes I hear about them 'loading up the business with loans' which then presumably don't get paid back... but big banks are sophisticated players too. They typically don't give loans to parties unlikely to pay them back. So which big banks are habitually getting fleeced over and over here? Wouldn't they learn not to loan to these companies? And if it's not the banks, who is getting fleeced?
This has long confused me, and I'd be interested to see what people think. It's typically presented as "PE firms are evil vampires intentionally ruining things because they enjoy human misery" but the actual answer has to be something more than that.
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