Private equity (PE) is like when you own a family business: all the equity (ownership) is private, that is, the business is owned by your family and not by thousands of investors on a public stock market. But because your chain-making factory or whatever is so small, you probably wouldn't refer to your family as a private equity group, unless you have delusions of grandeur.
Now let's say that your chains become insanely successful, and you have to open another factory, and another; and still you can't meet demand. People all over the country are dying to buy your chains. You want to expand further by building a a few megafactories and tripling marketing expenditures to establish yourselves as the premier chain manufacturer in the country and the world - because you are all almost entirely empty as human beings. After all, you've been working like dogs for years without any time for personal development, so you have confused yourselves into thinking that accumulating money is the point of life. But you don't have the cash for such a huge expansion, nor the expertise to run such a mammoth enterprise even if you had the cash.
So that's where a boatload of lawyers and bankers come in, to take the company public. Whereas now your family owns 100% of a relatively modest Chains Inc., after the Initial Public Offering of stock - when gamblers buy pieces of ownership in your company from you (while giving a generous cut to the lawyers and bankers involved of course) - you will own only 40% of the company, but you will have tons and tons of cash from all of the gamblers who bought your stock. Now you can loan some of that money to Chains Inc., and raise additional money from many willing banks using your newly-issued stock as collateral. With this pile of cash you can afford a massive expansion of Chains, and some experienced managers to run it. Now you've got enough money to make sure 50 of your great-grandchildren live like kings and queens.
But is that enough?
Not for your kids, one of whom went to business school, graduated, and went to work for KKR - the trailblazers of PE - to make enough money to pay for his coke and pedophilia habits. But this kid is making it to the big leagues of pedophilia - trips to Thailand just aren't cutting it anymore - and needs to have billionaire money to buy protection from society and its annoying "laws". This kid learned the PE ropes, and decides to use some of his inheritance to strike it out on his own by founding a new private equity group, and using it to buy his family's company.
Chain Inc. stock is trading at $25 a share, and with 20 million shares on the market, is worth $500 million. The kid's got $35 million of his own money he can invest, so how is he going to buy the company, get his net worth up to the billionaire level to escape society's annoying attempts to keep kids out of his bed? The magic of PE, that's how.
He goes back to his boatload of lawyers and bankers, and says he wants to mount a takeover challenge for Chains Inc.: a $500 million company that he's going to try to take over with only $35 million in his pocket. Worse yet for him, once word got out that there's a takeover of Chains Inc. planned, speculators pushed the stock price up to $30 a share as they anticipated a rise in its price. Now he will need 20 times the money he has now, because he'll need to pay a premium on all those shares to get their present owners to sell. He needs to shoot for $35 a share - or $700 million for the whole damn company. So the bankers get to selling "junk" or "high-yield" bonds to finance the other $665 million dollars needed. These bonds are IOUs in the company's name - not the kid's - that pay very high rates of interest to compensate for the high risk involved (remember the company was valued at only $500 million before, and that's as an operating enterprise - if it gets forced into bankruptcy, then damn, when you chop the company up it might be worth only 3 or 4 hundred mil... and then the junk bond investors would be taking a bath.)
So, with a $35 mil payment of his own, and $665 mil in other people's money, the kid buys all the shares of Chains Inc., and takes the company private. Now he's a dictator with supreme control over the enterprise. Don't like how he's running the company? Get another fucking job. There isn't one out there? Then eat grass!
But damn, these junk bond IOU payments are fucking expensive, what with their 10-15% interest and all! The revenue stream ain't gonna pay for that. Well, that's where the kid's expensive business school education comes in. He breaks the union contract, lets the fuckers go on strike, and hires scabs. All the while he's shopping for buyers for his American factories, and looking to source all production in Vietnam. Once he sells the factories, he's got plenty of cash to pay the junk bonds with their high rates of interest, and maybe pay some of them back early. He doesn't need to actually buy the Vietnamese factories, he just pays them (very little) to make the chains. The formal costs of production are very low because most of them are borne (in the form of externalities) by the workers in Vietnam who get paid only a fraction of the value they add to production, and by those who live in the areas that suffer environmental degradation due to the mining of the metals and minerals that go into chain production, the factory production processes that create wastes and emissions, and the emissions required to ship the chains to rich markets in the U.S. and Europe.
Now all Chains Inc. actually owns is a management structure and intellectual property: brand, trademarks, patents, etc. The marketing is done on Madison Ave, and sales and logistics are handled in a relatively small office. Now the kid owns the entirety of Chains Inc., whose value other investors now estimate at over a billion, since he's cut so much "fat" from the company: non-slave-wage workers, and physical plant that's noncompetitively located in high-wage, no-slavery-allowed USA. With 100% ownership of Chains, Inc., the kid's a billionaire and can afford to be friends with enough politicians all over the country, and pay the media enough money in advertising, that no one wants to ask him too many questions about his collection of little shoes, and the little mounds of dirt scattered around his enormous backyard.
There you have it: private equity!
Now let's say that your chains become insanely successful, and you have to open another factory, and another; and still you can't meet demand. People all over the country are dying to buy your chains. You want to expand further by building a a few megafactories and tripling marketing expenditures to establish yourselves as the premier chain manufacturer in the country and the world - because you are all almost entirely empty as human beings. After all, you've been working like dogs for years without any time for personal development, so you have confused yourselves into thinking that accumulating money is the point of life. But you don't have the cash for such a huge expansion, nor the expertise to run such a mammoth enterprise even if you had the cash.
So that's where a boatload of lawyers and bankers come in, to take the company public. Whereas now your family owns 100% of a relatively modest Chains Inc., after the Initial Public Offering of stock - when gamblers buy pieces of ownership in your company from you (while giving a generous cut to the lawyers and bankers involved of course) - you will own only 40% of the company, but you will have tons and tons of cash from all of the gamblers who bought your stock. Now you can loan some of that money to Chains Inc., and raise additional money from many willing banks using your newly-issued stock as collateral. With this pile of cash you can afford a massive expansion of Chains, and some experienced managers to run it. Now you've got enough money to make sure 50 of your great-grandchildren live like kings and queens.
But is that enough?
Not for your kids, one of whom went to business school, graduated, and went to work for KKR - the trailblazers of PE - to make enough money to pay for his coke and pedophilia habits. But this kid is making it to the big leagues of pedophilia - trips to Thailand just aren't cutting it anymore - and needs to have billionaire money to buy protection from society and its annoying "laws". This kid learned the PE ropes, and decides to use some of his inheritance to strike it out on his own by founding a new private equity group, and using it to buy his family's company.
Chain Inc. stock is trading at $25 a share, and with 20 million shares on the market, is worth $500 million. The kid's got $35 million of his own money he can invest, so how is he going to buy the company, get his net worth up to the billionaire level to escape society's annoying attempts to keep kids out of his bed? The magic of PE, that's how.
He goes back to his boatload of lawyers and bankers, and says he wants to mount a takeover challenge for Chains Inc.: a $500 million company that he's going to try to take over with only $35 million in his pocket. Worse yet for him, once word got out that there's a takeover of Chains Inc. planned, speculators pushed the stock price up to $30 a share as they anticipated a rise in its price. Now he will need 20 times the money he has now, because he'll need to pay a premium on all those shares to get their present owners to sell. He needs to shoot for $35 a share - or $700 million for the whole damn company. So the bankers get to selling "junk" or "high-yield" bonds to finance the other $665 million dollars needed. These bonds are IOUs in the company's name - not the kid's - that pay very high rates of interest to compensate for the high risk involved (remember the company was valued at only $500 million before, and that's as an operating enterprise - if it gets forced into bankruptcy, then damn, when you chop the company up it might be worth only 3 or 4 hundred mil... and then the junk bond investors would be taking a bath.)
So, with a $35 mil payment of his own, and $665 mil in other people's money, the kid buys all the shares of Chains Inc., and takes the company private. Now he's a dictator with supreme control over the enterprise. Don't like how he's running the company? Get another fucking job. There isn't one out there? Then eat grass!
But damn, these junk bond IOU payments are fucking expensive, what with their 10-15% interest and all! The revenue stream ain't gonna pay for that. Well, that's where the kid's expensive business school education comes in. He breaks the union contract, lets the fuckers go on strike, and hires scabs. All the while he's shopping for buyers for his American factories, and looking to source all production in Vietnam. Once he sells the factories, he's got plenty of cash to pay the junk bonds with their high rates of interest, and maybe pay some of them back early. He doesn't need to actually buy the Vietnamese factories, he just pays them (very little) to make the chains. The formal costs of production are very low because most of them are borne (in the form of externalities) by the workers in Vietnam who get paid only a fraction of the value they add to production, and by those who live in the areas that suffer environmental degradation due to the mining of the metals and minerals that go into chain production, the factory production processes that create wastes and emissions, and the emissions required to ship the chains to rich markets in the U.S. and Europe.
Now all Chains Inc. actually owns is a management structure and intellectual property: brand, trademarks, patents, etc. The marketing is done on Madison Ave, and sales and logistics are handled in a relatively small office. Now the kid owns the entirety of Chains Inc., whose value other investors now estimate at over a billion, since he's cut so much "fat" from the company: non-slave-wage workers, and physical plant that's noncompetitively located in high-wage, no-slavery-allowed USA. With 100% ownership of Chains, Inc., the kid's a billionaire and can afford to be friends with enough politicians all over the country, and pay the media enough money in advertising, that no one wants to ask him too many questions about his collection of little shoes, and the little mounds of dirt scattered around his enormous backyard.
There you have it: private equity!
