If it’s the case of a hostile takeover, maybe I get it. But in other cases, doesn’t the previous owner have to sell to and/or voluntarily engage in PE services?
Goes something like this:
- Previous owner gets cash up front
- PE becomes new owner and gets seats on the board
- PE cuts costs to the bone to improve short-term cashflow
- PE borrows based on the companies assets and cashflow
- PE pays itself high mamagement fees and issues special dividends to shareholders (them (PE) being a controlling majority)
- For an extra boost, PE manages to also get the debt they are taking on structured in such a way that they end up paying interest on said debt to themselves (usually to an offshore jurisdiction like Cayman or Bermuda that they ultimately control after layers of shell companies)
- Big increase in long-term debt payments (much higher levels of gearing) also reduces their tax bill (could even bring it low enough to get tax credits)
- PE does this for a few years until the capital structure of the company is a debt-bloated husk of itself (they effectively extracted all the equity it had and loaded it up with debt)
- PE then offloads it to someone else in a much more unstable state vs what they initially found it in (likely at a discount if its severely damaged or they sell the different parts for an additional profit)
- Eventually, the company will either be restructured or fail because the debt-service payments cause it to flounder (eat up too much of its revenue causing it to minimise investment and lose competitiveness).
This is the bad side of capitalism.
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Yeah I get that but the question revolves around #1. The PE path was a deliberate choice by the owner, so blame the owner and not PE.
Almost exactly like the restaurant in “Goodfellas,” except that it is all under the table with the threat of death or living torture.
Owner just wants to cash out (either they need cash in a hurry for something else or they want to leave for better pastures. Makes little difference really).
The ones that sell to PE fully understand what is going to happen once they sign on that dotted line.
Its the employees that suffer the worst outcome usually.
I tend to blame PE because the original intent of PE was not asset stripping a company. It was to take a badly run company, improve it operationally, and then sell it on for a profit.
It was about adding value to the company via improved operations and financing, and eventually cashing out by selling the long-term improvements.
Thats gone now. The model has become destructive (in the long-run) and largely predatory.
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Pretty Woman.
“Wall Street.”
Well, yeah…a little on the nose with that one though, eh? 
I agree that’s gone. But I’m not sure if it ever existed in the first place.
It’s troubling in vulnerable areas like healthcare.
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Agree that it is very troubling, but also, this is the only possible outcome in a hyper-capitalistic environment with a for-profit healthcare system.
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Most of the time the business owner wanting to retire isn’t getting a competitive offer anywhere else, so PE is the only way to go. What PE is doing is obviously working, so they are going to keep doing it. I don’t always like the effect on the business (I just dumped my dental office for becoming too corporate), but my bank account is thanking them.
How specifically?
When PE buys a business, I know I’m going to be spending more for a worse product, and then it will be run out of business.
I’m an investor in S&P 500, Main Street Capital, Hercules Capital Management and a few other companies that benefit from the PE trend.
Thanks. That was my presumption. But since I usually consider “bank account” to be more specifically a reference to cash and daily spending vs investments, I wasn’t totally sure if you were somehow seeing PE making everything more economical somehow.
I am sure I’m passively invested in PE, it’s a cancer that’s metastasized, but I’m not comfortable actively supporting it to the extent possible. Soon, though, that will be impossible.
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I decided a few years ago that PE was the wave of the future and that my investments should be on board.
As far as economic efficiency goes, would it really be better that the owner of the neighborhood deli just shuts down and doesn’t get anything for his business when it’s time to retire?
The growth of PE came out of the 2008 financial crisis when regulators decided that banks needed tighter lending standards so most banks have sharply restricted their lending to small businesses. PE has stepped in to fill that gap.
Are PE firms actually buying up neighborhood delis? On the surface that feels like an emotion-grabbing example that never actually happens in reality. I could be way wrong though. I’m out of my lane on this topic.
My previous dentist had a family practice. When he retired he sold is patient list to a corporate dental operation. They didn’t actually take over his office.
I believe that if the neighborhood deli had a good location that they might actually take over the location, but of course it would probably be rebranded.
I have heard that a lot of plumbers and HVAC guys are selling out to PE, I imagine that usually works the same way as my dentist did. Most businesses operate in leased spaces so there is not much value to the physical locations.
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I don’t see enshittification as a good long-term economic thing. You just end up with the Deli upping prices and delivering worse services. Eventually, PE either offloads it in parts (real estate) or sells it to a chain so they absorb it.
It always boils down to the same thing: short-term asset-stripping.
Additionally,
You may thank your bank account today, but as the cycle of enshittification spreads to services you cannot avoid (healthcare, insurance etc) you will be facing those higher prices and worse service.
So effectively, unless your PE investments* outrun you loss of purchasing power in the long run, you will be worse off.
*based on the research I have read it is unlikely that they will in the long-run.
Of course, when the long-term neighborhood deli goes away because its proprietor has retired or otherwise exited the business, what replaces it if regulatory hurdles interfere with small businesses seeking startup capital?
I think an argument can be made that the enshittification will probably occur regardless, in such an environment. The involvement or non-involvement of PE just influences the shape of the 
.