Warren unveils detailed plan to stop PE ‘looting’ U.S. companies | Hacker News Reader

Warren unveils detailed plan to stop PE ‘looting’ U.S. companies

washingtonpost.com

39 pointshoward9419 comments

I didn't know what "PE looting" meant when I saw this title, so here's what I would say it is based on the article:

When a private equity (PE) firm buys a company (usually taking on large debts to do so) and strips any valuable assets from it. The firm then neglects the purchased company and lets it sink, sometimes with the debt that was used to buy it in the first place.

If I misinterpreted please feel free to give feedback. I'm always curious to learn more about these types of financial distortion devices that are in play. I also figured a lot of people probably didn't know what this term meant either.

From the specific items in the article:

>For example, private equity firms often sell off a company’s real estate — and then lease it back from the new owners. While this may seem an odd maneuver, the practice allows the private equity firm to distribute a quick real estate profit to their investors. The Warren proposal would block such a maneuver for the first two years after a company is purchased.

>Another piece of the legislation would essentially block companies from taking “monitoring fees” or “transaction fees” out of the companies they buy. These fees simply force companies to turn over money to the private equity firms.

>Finally, what may be the most critical piece of the proposal would rein in one of private equity’s characteristic methods of investment: They use a lot of debt to buy companies. That debt often becomes a burden to the company and has played a key role in many bankruptcies. The proposal would make the use of debt far less attractive for private equity firms because it would hold the private equity firms — and not just the company — responsible for its repayment.

Good. If they draw out money and then the company soon is in financial trouble that basically proves the drawing out the money was unsound. Yet they do that sort of thing again and again.

I don’t think Warren is a dummy - so this is just populist pandering

These seem very sensible proposals to me. e.g., Toys R Us was a perfectly viable business, if not for the ridiculous debt-load. Thousands of low-paid workers lost their jobs, so that some PE partner could make a few million bucks.

No! Toys R Us was not at all a “perfectly viable business”, rather a deeply troubled retailer with long history of decline, mismanagement, terrible earnings, and a disaster of a balance sheet! [1] And “if not for the ridiculous debt-load” is like saying Flint Michigan had delicious water except for the poison. Debt load destroys companies unless they are growing revenues and can service and retire the debt.

Thousands of workers lost jobs because the company leadership and market pressures crushed the company; oh, and that debt.

Enter PE and a much needed restructuring. Now Toys R Us is reformed into more of an experience vice pure retailer. [2]

While not as large as it once was there are jobs there now whereas absent the reforms PE brought there would very likely be only some real estate for sale and a footnote in business history. And no jobs.

So yeah, blame PE.

[1] https://www.retaildive.com/news/inside-the-20-year-decline-o...

[2] https://www.cnbc.com/2019/02/11/toys-r-us-executives-plot-re...

The complaint is about the leveraged buyout in 2005, not the restructuring happening right now.

The former Toys R Us liquidated its stores, and a different company called Tru Kids acquired the Toys R Us brand name. There are a few people in common between the two companies, but intuitively it doesn't seem that the original Toys R Us survived. At the end of the day, people owed money didn't get paid, and a historically uninvolved PE firm did get ppaid.

The article [1], rather, seems to present the 2005 buyout as the terminal blow to a weak company; it was only after 2005 that maintenance of the physical stores was neglected.

Also, it's not clear how the specific reforms proposed by Warren prevent restructuring and changes in management.

Corporate pension defaults, i.e., Sears, are another problem; retirees were promised an income beyond their working years, and then vulture capitalists come in and sell-off their formers employers in pieces.

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