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Comment by 9nGQluzmnq3M | Hacker News Reader

Sure, private equity can mean a lot of things, but for Bain, the caricature is appropriate:

• 1988: Bain put $10 million down to buy Stage Stores, and in the mid-’90s took it public, collecting $184 million from stock offerings. Stage filed for bankruptcy in 2000.

• 1992: Bain bought American Pad & Paper, investing $5 million, and collected $107 million from dividends. The business filed for bankruptcy in 2000.

• 1993: Bain invested $25 million when buying GS Industries, and received $58 million from dividends. GS filed for bankruptcy in 2001.

• 1994: Bain put $27 million down to buy medical equipment maker Dade Behring. Dade borrowed $230 million to buy some of its shares. Dade went bankrupt in 2002.

• 1997: Bain invested $41 million when buying Details, and collected at least $70 million from stock offerings. The company filed for bankruptcy in 2003.

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> for Bain, the caricature is appropriate

Not mounting a general defense of leveraged buyouts. Just against the point that private equity, or Bain for that matter, tends to guide companies into bankruptcy.

It looks like Bain did about 68 deals in the 1990s [1]. About five of them went bankrupt, a 7% frequency. Even if we double that to 10, it's about a 15% frequency. That's high! But it doesn't suggest a norm.

By and large, private equity-backed companies don't end up in bankruptcy. That doesn't mean everything is perfect. But the facts don't sustain this line of attack.

[1] https://en.wikipedia.org/wiki/Bain_Capital

Since we're down to argueing degrees...

Of course it's not deterministic. If 100% (or even 15%) went bankrupt, no one would finance them. It's impossible to get to this point.

Every deal is a snowflake, but the reductive caricature of Bain and "private equity leveraged buyouts" is: "(1)buy a company. (2) get your money back quickly by borrowing on behalf of the company (3) profit on your free option.

This caricature is not that far from the truth, as caricatures go, and it's a pretty good guideline to speculations about what they plan to do with Virgin Blue. My guess is that a covid-related bailout or stimulus will provide the capital.

Again, situations differ, but generally these deals don't capitalize a company... lenders do. What they bring to the table is risk tolerance and a mercenary attitude... much of it related to the free option they are exercising.

How can you argue that this strategy is a “good guideline” of what they are planning to do with this asset when it’s only been the result of 15% of previous assets?

1-out-of-6 might be high. But true, most businesses that are having to sell out are probably on their way out, so maybe 1-out-of-6 is low. Would have to compare relative numbers of roi to overall business

There's also the thought that they should be making their profits from the 85% that succeed, as opposed to not taking a loss on 15% which fail. But question then becomes who's actually losing out on these 15%? ie who's actually paying for the risk, since it seems like a "heads I win, tails you lose" arrangement if losses on 15% aren't being repaid by profits from 85%

I do not think "most businesses that are having to sell out are probably on their way out" is even remotely born out by fact.

Many businesses - Dell, Marketo, Informatica, have been bought by PE when they wanted to restructure or change their operating models. But, those companies are not dead or gone.

There is nuance here, and the data suggests that bankruptcy is not the end state of every PE buyout.

Doesn’t have anything to do with “having to sell out.” Often management gets rollover equity and participates in the upside of the deal.

I'm not arguing that bankruptcy is part of the strategy.

The strategy is about "how to buy a company for free, without downside liabilities." This, results in bankruptcy sometimes... significantly less than 15% of the time, I imagine.

What I am predicting is that Bain will leverage this asset to borrow, and use this money to pay themselves back whatever they put in. At this point they have no money in the deal... a free option.

This is just what a leveraged buyout is, and Bain does leveraged buyouts... one way or another.

Honest question here, because you seem to know the topic.. Given the risks and what everyone seems to know about how these firms operate..

Who is lending them this money? I understand when they take a company public, the literal public is giving them money, but otherwise, who typically just gives them money on such good terms that they can recoup their investment and then some..

Isn't someone just getting the PE's risk shifted onto them when they do that?

Banks, and in the last decade private lenders.

The simple answer is "because they're generally good for it." No one would invest if these companies immediately went bankrupt.

First.. lenders generally get a premium if it's a risky deal. Low risk rates are exceptionally low. There's always some demand for higher yield bonds. Supply and demand are generally unresponsive to eachother. In the current market,

Second, think "bondholders" moreso than lenders. The people who structure the deal are the initial financiers, including the PE firm. They just borrow/invest enough to ensure solvency in the first few years. Long term, bonds trade. They trade at market rates.

Also note that all these bankruptcies happened during the dotcom bust, regardless of when Bain got involved. At that point, demand for risky bonds is terrible. Business is hard, and a highly leveraged company is at risk. Highly leveraged companies tend to stay highly leveraged, so even if Bain did this to them 15 year prior... it's hard to survive bad times.

People who understand business from a purely SV/tech perspective forget that software is not normal. Outside of software, large companies usually owe money. They don't have billions of dollars lying around like FB or Google.

Exactly. These looks are made all the timer because lenders make money on them. LBOs happen all the time because most parties make money.

I would throw in a bunch of caveats...

I'm OK with "because lenders make money on them" as a generality. ...As long as we are honest about what an LBO is. It is an arbitrage, of sorts.

The deals are, by definition and in practice, structured to give the acquiring PE a free option. Their risk lasts only as long as they have skin in the game, usually a short period. Since they structure the deal, they structure it in a way that eliminates (as much as they can) short term risks.

The old fashioned way of doing this is took a few years. (a) Raise enough debt and run extreme short-term management strategies. (b) make interest payments religiously. (c) Use this history of payments to raise enough money to pay yourself out fully. (d) sell the now indebted company, run it, or whatever. Any dollar you make is profit on a zero dollar investment.

It's a risk arbitrage, more specifically. In a liquid market, this arbitrage wouldn't exist, but if it did it would look like this: (1)Buy shares in Tesla. Put it in a LLC (2) Borrow money under LLC, interest only (3) Pay this money to yourself. (4) Sell shares as necessary to pay interest (5) pay yourself when you deserve a treat (6) If you run out of shares and no one is willing to lend you more money... the game is now finished.

The risk is between acquisition and getting the money out. That’s where they pay for the “free” option.

I don’t get it. Bain likely invested in hundreds of companies in that time frame. What conclusions can you draw from these instances? (Moreover, it looks like these companies went bankrupt in the early 2000s recession, like thousands of others.)

Another anecdote:

• 2005: Bain buys Dunkin' Donuts for $2.4B. In the ensuing 15 years, the number of stores has doubled from 6,500 to 13,000. https://www.nytimes.com/2005/12/13/business/parent-of-dunkin...

When you buy distressed companies, you are going to have a lot of failures - you can't save them all. You are also going to have enough successes to justify those failures, otherwise you won't have any LPs for your next fund.

You can add Edgars, one of South Africa's oldest, most profitable, and largest retailers to that list. They filed for bankruptcy recently in the aftermath of a botched Bain Capital 3.5bn USD buyout in 2007.

https://businesstech.co.za/news/business/407279/edgars-credi...

Considering the state of things in SA, I would hardly call that Bain's fault. Well, of course it's their fault, but there's a massive amount of systemic risk that is common to all companies in SA.

I'm confused how a compagny who goes bankrupt ~8 years later is supposed to be the end of the world

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