Calm down. I wasn't trying to change your "firsthand" knowledge of the subject, or trying to disagree with you. You're missing my point.
nobody will want their money back because it's nobody's money. all the money comes from pension funds, endowments, etc. the people in charge of allocating money at these places are bureaucrats and politicians, not investors - although they all pretend to be astute investors. You will find that although they allocate millions and billions to private equity firms and hedge funds, none of them have actually worked for a private equity firm or hedge fund - although they will all claim to be experts at doing due diligence. nobody cares about this money. people always ask why an unknown person can't raise money from them. i will give you the definitive answer: it's about the bureaucrat covering his ass. he doesn't need to take a chance on you. if you blow up, he looks bad for taking a chance on an unknown. if you do well, so what? he still only gets his regular salary. now, if a big name fund blows up, then it wasn't his fault because it's a big name fund and everybody else allocated money to it.
I am calm, that's why I am not starting a heated debate with someone who does not truly understand how it works. And you are the one who is truly missing the point I have been hinting at the whole thread. LBOs are not new, they date back to 1960s if not before. So go find me one case where the LBOed company BKed and the actual fund had to make any payments to the creditors. I don't know just how many more clues I have to drop as to why this is just another elaborate scheme.
Ok, It makes sense that they'd put debt on the company's books collateralized by the company's assets, but who's lending the money? Banks? Bond investors? Hedge funds? The big investment houses? Foreign investors? Another question. If they are borrowing the money, is it typically on fixed rate, or is it variable based on LIBOR, or Prime, or something else? I'm not saying its wrong or anything, I'm just looking to figure out who's stock the profit or loss will help or hurt. I think the majority might probably do well is the economy stays good, but if the economy goes sour and they can't make the payments, whoever holds the paper will be taking a loss, right?
'Once the bank tightens their standard, and starts calling for payments based on the higher standard....Scary.' Many a times private equity firms like to own a firm in distress and then go around piling debt from banks/funds etc. and use the loan money to buy related businesses that are making profits higher than the loan interest. By buying related businesses and merging them into the original company they try to create 'synergies' of functions/processes and thus cut slack from any and everywhere possible in order the enhance the value of the new organization. Many a times a plant is closed but business is not lost, because all the business travels to other plants not picked for the shut down. LBO, in the end of the day is always a risky strategy and Leverage infusion into a firm already in distress/losses can have banks/creditors watching the operations on daily basis and calling loans at first signs of diviation from the LBO's gameplan. Still Private Equity firms have returned better than public funds in nearly all types of investment/economic environments in the last 50-30-20 years.
Read what David Swenson has to say about that assertion, based on his thorough analysis of that precise subject. It doesn't hold water. The management fees are incredibly excessive, and drive down real returns below major market index returns in almost EVERY cases. He refers to private equity as one of the biggest ways investors are fleeced, period. http://www.npr.org/templates/story/story.php?storyId=6203264 Also, refer to this: HAPPY RETURNS Steven E. Kaplan of the University of Chicago, perhaps the leading academic expert on private equity, and Antoinette Schoar of M.I.T., conclude that, after accounting for fees, the average private equity firms essentially turns in the same performance of the S&P 500. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=473341
Yes, if you're a general partner of the fund (founder, etc.), then you'd enjoy that expensive management fees on the top of whatever portion of return is. But if you're a limited partner to the fund (investors to the fund, etc.), then your share would be a piece of return minus the management fees, etc...so I can see your point. I've seen a case in which a company went bankrupt, but the fund made a killing, partially because the fund took advantage of the company's bankruptcy-heading situation. It was almost immoral..... I guess just like in anything else, there are winners and losers among private equity firms.
I've seen banks and all kinds of financial institutions as lenders (didn't look into what each financial institution's specialty is). I've seen that the fund itself acted as a lender....
I agree that the gravy train has to end. Private equity firms are trendy right now, just like hedge funds were a few years ago. However, just like hedge funds, you will eventually have too many firms chasing too few deals, and the bottom will fall out of the private equity market. Given the current growth rate, it looks like we are approaching that point of equilibrium.