Given how many people explained the same thing, that lack of understanding may be more attributable to you than to everyone else.
In any case, I and several others were able to find many, so it's okay that you weren't. Sometimes a person who has made up their mind and doesn't want to change it, ignores anything that might, and further effort committed to them is just a lost cause.
Could you please stop posting flamewar comments? You've done it repeatedly and we've already had to ask you about this. Crossing into personal attack is particularly unwelcome.
I would need to first see proof that the "observation" that banks would go bankrupt is true in the first place.
I don't see any evidence it is, so the "observation" seems made up, and thus there is nothing to explain. It's possible you misunderstand how the process works.
The observation wasn't that the banks would go bankrupt. The observation was that if the practice was reliably so destructive to the value of the purchased businesses that the loans couldn't be repaid (including interest), the banks would stop choosing to make loans for that purpose. I think that observation is probably true. I also think that there are possible ways to accommodate that observation while preserving the main thrust (or perhaps even the entirety) of the criticisms, but I don't know which of those match reality (if any) or to what degree.
Thanks, yes, that's a good summary. I think if the original claim was that the PE business model is pathological and parasitic because it is (economic) value-destroying then the claim must be false. Other financial stakeholders wouldn't participate, because they would make an economic loss.
If the claim is that it is pathological and parasitic because it leaves employees and customers worse off that's another argument, and I could see myself agreeing, but it's a value judgement, not a financial or economic one. In principle there's nothing that PE can't do that owner-operators can't also do. The objection is to the outcome, not the means they use to get the outcome.
There's potentially room for value to be destroyed while still enough is extracted to pay off the debts.
> In principle there's nothing that PE can't do that owner-operators can't also do.
As others have got at, in bankruptcy owners (of any sort) get paid last; debt gets paid first. Borrowing to pay the owners makes "wind down the company" more attractive by letting the relevant decision-makers cut in line. Outside of PE you see a similar dynamic with funding stock buybacks with debt.
Right, but in both cases you have to pay out of retained earnings. You can't "pay out using borrowed money"! You can borrow to get more cash on hand, and then pay out, but that's not the same thing: dividends are never allowed to take the equity in the company below zero. Dividends are always paid out of profits that have already been realised, and either kept as cash/investments or put into capital.
(Having said that I'm not a corporate accountant so I'm open to correction, but no one has posted any technical details about this matter that make me think I'm mistaken, yet.)
> Borrowing to pay the owners makes "wind down the company" more attractive by letting the relevant decision-makers cut in line.
This bit I don't understand. It reads like a criticism, but what's wrong with winding down a company that's not deploying its capital as efficiently as it could be? (Wrong economically/financially, that is; I've already explained that I'm in sympathy with the effect on customers and workers.)
> The observation was that if the practice was reliably so destructive to the value of the purchased businesses that the loans couldn't be repaid...
That is the observation which is false. Nobody claimed that would happen to the extent that the bank loans couldn't be repaid, with interest and fees. I'm not sure where you got that idea. The value destruction comes from the fact that the company is destroyed in the process, and even though the banks got more than they would have if they kept the company alive, the total value is less.
tl;dr: banks are willing to tolerate the company value going down as long as they make money, which they do, because they, like the private equity firms, are effectively transferring value from the company accounts into their accounts.
> company value going down as long as they make money, which they do, because they, like the private equity firms, are effectively transferring value from the company accounts into their accounts.
But the PE firm owns the company. Why shouldn't it transfer money from the company accounts to its own accounts? That's called "paying a dividend".
Maybe it should, maybe it shouldn't, I don't see how that has any bearing on the factuality of the description.
If we're on the same page there, then we can build off that shared understanding, and perhaps discuss issues like whether that's a net loss or net gain to society as a whole, or to specific individual stakeholders, and what so-and-so should or shouldn't do. That's if were on the same page on the above matter, first.
Do you feel we are? Recall this digression started because a couple people were confused how banks were involved in the matter, and thought the banks were losing money somehow. They definitely aren't. I just want to make sure we're all on the same page there, first, is all.
The bit you quoted is not the observation (as I understood it); the observation is the whole conditional "if A then B". "A is false" is one of the ways the observation can be true.
> making the "if A then B" discussion a distraction at best and disingenuous at worst.
My concern was that it sounded to Tom like people were disputing "if A then B", rather than disputing B by negating A, and that people were therefore talking past each other.
> I take it you understand and agree with that part,
I wasn't weighing in on that part in the first place. I don't dispute or endorse what you've said, but (if you care) do readily acknowledge that it is of the correct structure to address "the observation" if they in fact match reality. I said at the start that I don't know whether that's the case.
> and your quibbles are purely semantic.
I was weighing in on the semantics because it seemed to me like a semantic mismatch was leading to misunderstanding and increasing hostility, and I hoped I could help clarify.
Do you mean you would need to see proof that the observation is correct before you can link evidence that it's incorrect? If so that seems somewhat difficult to achieve.
"Bankrupt" by definition means unable to pay one's debts, doesn't it? Perhaps there's another definition I am unaware of, so that may have been an invalid assumption on my part. But if that wasn't gumby's original point, then what was? Which precise aspect of PE is pathological and parasitic? Assuming the company can pay off all its debts, what exactly has gone wrong (wrong economically/financially; I've already explained I'm sympathetic to other stakeholders like customers and workers).
No, that's not what bankrupt means. Bankruptcy almost never happens when there is literally zero value left. In the archetype we're discussing, there is enough value in the company to pay the banks and PE firms lavishly and exorbitantly, but not enough to do that and keep the company healthy (or indeed, alive, in countless cases). So the PE firms choose just the first one.
> Assuming the company can pay off all their debts
This, too, seems to be unfounded assumption that turns out to not be correct, as explained above.
OK, so there is enough value in the company to pay the banks and PE firms lavishly and exorbitantly, but not enough to pay all their debts. So which debts can they not pay?
