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77 of 82 people found the following review helpful:
4.0 out of 5 stars
A redefinition of "equitable", November 16, 2009
This review is from: The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis (Hardcover)
In the Introduction, Josh Kosman offers what he calls a "little primer" on how private equity firms operate, explaining that they "buy businesses the way that homebuyers acquire houses. They make a down payment and finance the rest. The financings are structured like balloon mortgages, with big payments due at some point in the future. The critical difference, however, is that while homeowners pay the mortgages on their houses, PE firms have the businesses they buy take out the loans, making THEM responsible for repayment. They typically try to resell the company or take it public before the loans come due." It soon gets even more interesting. "As long as the PE firms could refinance, or turn around and sell off their holdings before the biggest loan payments came due, spectacular flameout bankruptcies could be avoided...PE firms would like to have us all think the reason they try so hard to raise earnings in their businesses [by `starving companies of operating and human capital'] is so that companies can use these profits to pay down the money they borrowed to finance their own acquisitions. But the records show that during the 2003-7 buyout rush, that wasn't generally the case. Instead, they used the profits s a basis to borrow more money. The new loans, which were piled in top of the original debt taken on to finance the LBO, were used to issue dividends" to the (you guessed it) PE firms. What if all, most, or even only some of the companies collapse? No problem. The PE firms have incurred no debt while receiving dividends as well as substantial management fees. "Despite the credit crisis in 2009," Kosman notes, "PE firms are sitting on roughly $450 billion in unspent capital and itching for more deals." Of course they are. Given their circumstances, would wouldn't?
Kosman explains how and why PE firms "put their companies into crippling debt and, unlike entrepreneurs, who manage their businesses to succeed in the marketplace and grow, they manage their companies largely for short-term gains." PE firms hurt their businesses competitively by limiting their growth, cutting jobs without reinvesting the savings, do not even generate good returns for their own investors. According to Kosman, they are "about to cause the Next Great Credit Crisis," one that could leave about two million of the 7.5 million Americans who work at PE-owned companies unemployed, and more than one thousand businesses bankrupt. "Leadership is needed to rally opposition to close the tax loopholes that make this very damaging activity possible."
In a book certain to generate controversy, Kosman provides a wealth of information (financial data and statistics as well as real-world situations) to support his observations, recommendations, and especially his accusations. After reading the book and then re-reading several key passages that I highlighted, I wish Kosman had included other perspectives on the issues he raises. For example, the thoughts of those who head the most active PE firms, of federal officials associated with relevant regulatory agencies, and of analysts who are best qualified to discuss PE firms. It seems that PE firms could play an important role in the process of what Charles Darwin characterizes as "natural selection," one from which some businesses survive (and perhaps even thrive) while others do not. Kosman asserts that these firms must not be allowed "unnatural" advantages that corrupt free market competition. Whether or not his call for action results in any significant reforms of what he calls "tax loopholes" remains to be seen.
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2 of 2 people found the following review helpful:
5.0 out of 5 stars
Excellent book, November 28, 2011
Ive read alot of books this year, this one is tops. Very well written; very well researched. Makes an excellent case
for the chaotic influence of private equity on our economy. The chapter on what private equity did to the mattress industry is a major eye opener. You can't believe what you're reading, and PE is so pervasive it is really scary. Author really talented guy. Obviously a guy with some integrity who "chose" to avoid a career in PE. And if you're thinking about voting for Romney;
you might read chapter 6. Wow -- it's hard to believe this guy is still credible as a businessman and/ or job creator. Great book. Wish I'd read it sooner.
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2 of 2 people found the following review helpful:
5.0 out of 5 stars
I'll Never Think of Private Equity the Same Way Again, July 19, 2011
This book is about the history of private equity, what it means, how it operates, and the wreckage the industry generates. Private equity means making money. Money is more important than jobs, than lives, than the environment, than investors, and cash in the pocket is much more important than long term gains.
A PE [private equity] company wants to buy a well performing company with an LBO [Leveraged Buyout Offer] in order to loot the company for as much cash as possible. First the PE firm finds investors, usually retirement funds because they promise extremely unrealistic return percentages, and then they put up about 10% of the purchase price and borrow the rest from a fee loving bank. They get the company.
OK, the first thing the PE firm does is take out a huge amount of loans, or more accurately, they make the successful firm they just bought take out loans in *the name of the firm* -- that means the business is liable, not the PE firm (who also scored a transaction fee from their investors as part of the deal). Then the PE firm fires 5-10% of the company workforce, usually the entire research division and most of customer service, in the name of 'leanness', but what they are really doing is raising as much short term cash as possible. The goal of the PE company is to flip this (formerly) successful business after gutting it of money. If the successful company is a conglomerate, the PE firm 'spins off' and sells the less profitable divisions as separate companies (after loading them with debt).
At this point the PE firm is sitting on a pile of money. First they use this money to pay off the bank loan which they took out to buy the company, which is why banks love PE firms -- fast loans, some paid off, some sold off as arcane securities (CDO's) and huge fees accrued. Next the PE firm issues dividends to themselves for 'leadership', and they may include the CEO, CFO, or board members in this windfall, if those people were instrumental in selling the cash cow company to the PE firm. At this point the PE firm has always made it's money back, maybe more. The firm may stay on for about 3-5 years, milking the cash cow before it dies of starvation, because paying off company debt is federally tax deductible in the USA. Depending on the robustness of the company, they may issue one or more IPO (Initial Public [stock] Offerings) to raise additional money, or alternatively, make the company take out more loans to issue more dividends to the PE firm.
After the PE firm has bleed the formerly healthy company dry of assets, they sell it, or let it go bankrupt, re-investing *as little as possible* back into the company. In the spirit of the 'quick flip', once a PE firm has quadrupled it's investment, the company is often sold to another PE firm, which proceeds to cut deeper, loot harder, until bankruptcy happens.
This will eventually precipitate a crisis of some sort when all these unpayable loans taken out by companies controlled/owned by PE firms come due. The author estimates about 3 million American jobs will be lost from this looting of industry.
In a nutshell, that is what a PE firm does. For more supporting details and additional money making obfuscations, read the book. Kosman really taught me about how Private Equity enriches a handful of connected men at the cost of thousands of jobs.
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