When in the history of business and investment did Private Equity make something better? Their MO is to load the company up with debt and skim off outrageous management fees, while stripping everything down to the frame and selling off any parts you can.
How long do we think it will be before Subway ends up in bankruptcy?
7 years is my guess.
It only took a PE group 3 years to bankrupt Art Van furniture. The Van Elslander family bought back the rights to the “Art Van” name in the bankruptcy proceeding. Then, another PE group bought several of the former Art Van stores, and reopened them as “Love’s Furniture”. Ran up a pile of debts, then dumped the company into bankruptcy, in a year.
Maybe PE is necessary to help move the cycle of capital around. They take a mediocre company, kill it, and thus enable new competitors to enter the space with less capital than usually necessary if the competition were still keen and less debt laden.
Interesting outlook, PE as the Waste Management of Capitalism, as the carrion feeders of Capitalism, as the recycling bin of Capitalism.
In the case I am familiar with, Art Van Furniture, the company was very good. The founder was in his 80s and wanted to retire. The heirs didn’t want the company, they wanted money. So the company was sold, to the PE group that killed it. Then some of the stores were bought by a PE group that formed a new company, ran up a pile of debts, then dumped the new company in bankruptcy.
Naive question: after being burned a few thousand times, why would a bank lend money to a company owned by a private equity firm? Especially a PE firm that specializes in bankrupting companies.
Because bank executives make money on the loan origination fee, and are off to their next job before the debt is due.
That’s why one solution to bad banking is the force them to keep the loans they originate.
They get paid FIRST. And get a significant profit as well.
In the end, I think honest people are absorbing the hit with higher fees or lower interest paid on accounts. Just like honest people cover the losses from self-pay check outs and inventory theft.
Not a very warm, fuzzy feeling.
When private equity firms buy a company, they cannot issue stock to pay for it. They must have cash. Much of it borrowed. You suspect lenders are well aware of the extra risk and past history of the firm. And adjust terms to cover that risk.
It is not uncommon for buyer to sell assets to reduce debt. Or to borrow against the assets of the purchased company to allocate the debt against that company. Good will in the purchase price has to be paid for–often by the company acquired.
We also hear of purchasers who borrow all they can on the company and pay themselves big dividends. But i would guess that is not first choice. They would rather clean up the books, increase profits and take the company public. Or sell to another buyer. Lots of changes for the company and can be chaos for employees. But can work well for all involved.
The company that bought Subway also owns:
Dunkin’, Baskin-Robbins, Sonic, Arby’s, Buffalo Wild Wings and Jimmy John’s. Separately, housed under Focus Brands, the firm owns Auntie Anne’s, Carvel, Cinnabon, Jamba, McAlister’s, Moe’s Southwest Grill and Schlotzsky’s. Roark also invested $200 million in the Cheesecake Factory during the early days of the Covid pandemic to help the struggling chain stave off insolvency.
All of which have lasted more than seven years. Perhaps Roark intends to try and return Subway to profitability?
There is nothing inherently sinister about Private Equity. Berkshire Hathaway is basically private equity that went public. Fidelity Investments is private. Meijer grocery is private. Why is there an assumption that if they were to buy another company, their sole goal would be to bankrupt it?
I don’t think it’s the “sole goal.” I just believe it’s one of the easier roads to take rather than becoming an operator and putting the company back on a self sustaining path and then eventually finding another buyer or going through the morass of taking a company public.
It’s so much simpler to announce that past management was stupid, probably because it’s often true, then announce grandiose plans, find dumb money, load up the company with debt and pay (yourself) a big dividend and bonuses, and then tank the whole thing - leaving shareholders, employees, landlords, and the tax collector holding the bag.
No question excesses are possible but we hope unlikely.
“Stupid” is a bit strong. Buyers usually have plans of improve profitability often by combining key functions with those in companies they own to reduce costs. Sales, distribution can often be consolidated. Purchasing larger quantities can give better purchasing terms. Etc.
Thanks. It’s good to know that they are a player in the chain restaurant business. It seems likely that they are not in the business of draining the value out of a company and letting its lenders, pension plans, and suppliers to fight over the crumbs.
Subway has been a bit expensive over the past few years (and before, as well). I like one of their subs–so I buy whenever “the price is right”. Current price is about $10, which is middling-high IMO, but tolerable if I don’t buy often. On the current BOGO deal, I just got four (two eaten, two to go < g >). And will likely get more. Then will see what happens.
If a bank has $500M in deposits, what happens after they loan it all (let’s say 80% of it to keep some reserves) out? Does the economy have to stop growing at that point?
Sounds like a solution to bad banking at the expense of stifling economic growth.
Depends on the bank’s portfolio of loans. If they are not allowed to sell the loans they make, then they will be able to loan various amounts based on repayment schedules. As loans are not all long or short term, loans will be paying in (to the bank) for periods of time–but then getting “paid off” over time. The ongoing payments received is eligible to be loaned again. As loans pay off, those funds can also be loaned again. Loans that are repaid early provides additional money to be loaned again.
They typical response would be to raise the rate of interest the bank offered to attract more deposits.