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Private equity ran amok in the 2010s
The decade exposed an industry that cared about lining its own pockets, often at the expense of the companies it bought.By Joe Nocera
...Financially speaking, the 2010s have been characterized by corporate mergers, aggressive activist investors, out-of-control CEO pay and “maximizing shareholder value.” But more than anything, it has been a decade awash in private equity deals. I therefore dub it the private equity decade...What was different in the 2010s was less the size of the deals as their proliferation. In 2009, private equity firms completed 1,927 deals worth $142 billion, according to the financial data firm Pitchbook. By 2018, there were 5,180 private equity deals worth $727 billion.
Why so many deals? One reason is more firms are holding more capital than they know what to do with; Bain & Co. recently estimated that private equity firms have a staggering $2 trillion in “dry powder” that they need to deploy. But another reason is that there just aren’t as many big deals available as there used to be, so firms have had to move down the food chain to find companies willing to be bought out. Many, if not most, of the deals in the past few years have been for less than $500 million. I half expect the bodega down the street to be bought out.
What has also become clear this decade is the high-minded rationale the private equity industry once used to justify its deals has largely evaporated. You don’t hear much anymore about how taking a company private will remove short-term incentives, impose necessary restructuring, yadda, yadda, yadda. The main thing private equity has done this decade is to pile debt onto companies — imposing repayment costs while pulling out fees and dividends that have no bearing on what the private equity firm has actually done...One private equity skeptic, Daniel Rasmussen, conducted a study to see the effect private equity firms had on the companies they bought. Using a database of 390 deals with more than $700 billion in enterprise value, he found that:
In 54 percent of the transactions we examined, revenue growth slowed. In 45 percent, margins contracted. And in 55 percent, capex spending as a percentage of sales declined. Most private equity firms are cutting long-term investments, not increasing them, resulting in slower growth, not faster growth.
... It seems to me that there are two likely consequences for the devolution of private equity in this decade. The first is that when the business cycle finally turns, the consequences for the thousands of companies carrying private equity debt are likely to be severe. As increasing amounts of capital have chased deals this decade, purchase prices have increased drastically. Rasmussen reports that in 2013, private equity deals were done at an average of 8.9 times adjusted earnings. Today, that number has risen to 11 times adjusted earnings. That means the debt loads are becoming heavier...
https://www.chicagobusiness.com/opinion/private-equity-ran-amok-2010s
Why so many deals? One reason is more firms are holding more capital than they know what to do with; Bain & Co. recently estimated that private equity firms have a staggering $2 trillion in “dry powder” that they need to deploy. But another reason is that there just aren’t as many big deals available as there used to be, so firms have had to move down the food chain to find companies willing to be bought out. Many, if not most, of the deals in the past few years have been for less than $500 million. I half expect the bodega down the street to be bought out.
What has also become clear this decade is the high-minded rationale the private equity industry once used to justify its deals has largely evaporated. You don’t hear much anymore about how taking a company private will remove short-term incentives, impose necessary restructuring, yadda, yadda, yadda. The main thing private equity has done this decade is to pile debt onto companies — imposing repayment costs while pulling out fees and dividends that have no bearing on what the private equity firm has actually done...One private equity skeptic, Daniel Rasmussen, conducted a study to see the effect private equity firms had on the companies they bought. Using a database of 390 deals with more than $700 billion in enterprise value, he found that:
In 54 percent of the transactions we examined, revenue growth slowed. In 45 percent, margins contracted. And in 55 percent, capex spending as a percentage of sales declined. Most private equity firms are cutting long-term investments, not increasing them, resulting in slower growth, not faster growth.
... It seems to me that there are two likely consequences for the devolution of private equity in this decade. The first is that when the business cycle finally turns, the consequences for the thousands of companies carrying private equity debt are likely to be severe. As increasing amounts of capital have chased deals this decade, purchase prices have increased drastically. Rasmussen reports that in 2013, private equity deals were done at an average of 8.9 times adjusted earnings. Today, that number has risen to 11 times adjusted earnings. That means the debt loads are becoming heavier...
https://www.chicagobusiness.com/opinion/private-equity-ran-amok-2010s
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