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Business, Economics, and Taxes: Eat Cereal for Dinner

Handyman said:
I just watched an interview with a former Lehman financial guy talking about private equity...that bubble when it bursts is going to be ugly. PE has almost $4 trillion in adjustable loans (if the info they have is correct) and are buying big and small companies (including hospitals and vets) at 10/12x evaluations. They employ roughly 8 million people as well...

If that is true and the bottom falls out (added with what we already have that isn't going well) this could make 2008 look like a minor correction.
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Seeing if I can translate for the layman (i.e. myself):

Private Equity firms have borrowed $4T from the entities that have the real money (i.e. investment banks), at adjustable rates. PE firms are then buying companies at for 10-12x revenue, so if the companies are 10% profitable, that's equivalent to a P/E ratio of ~100:1 (in other words, they are way overpaying for the companies). When the businesses they are buying fail due to tarriffs or other macroeconomic factors out of the PE's control, the PEs won't be able to pay back the loans and will go bankrupt, taking the companies they bought down with them. The investment banks will have $4T of assets wiped off the books due to a common root cause event that instantly wiped out what otherwise seemed like a diversified portfolio.

Close?
 
The PEs might not go bankrupt but they will shut down all of the businesses they bought or sell it for pennies. Hospitals, vets, small businesses...gone overnight.

And just a shift in the interests rates in general could be enough trigger it depending on the loan.
 
LynahFan said:
Seeing if I can translate for the layman (i.e. myself):

Private Equity firms have borrowed $4T from the entities that have the real money (i.e. investment banks), at adjustable rates. PE firms are then buying companies at for 10-12x revenue, so if the companies are 10% profitable, that's equivalent to a P/E ratio of ~100:1 (in other words, they are way overpaying for the companies). When the businesses they are buying fail due to tarriffs or other macroeconomic factors out of the PE's control, the PEs won't be able to pay back the loans and will go bankrupt, taking the companies they bought down with them. The investment banks will have $4T of assets wiped off the books due to a common root cause event that instantly wiped out what otherwise seemed like a diversified portfolio.

Close?
Click to expand...
Sounds like the 80s. Even on the big screen.
 
LynahFan said:
Seeing if I can translate for the layman (i.e. myself):

Private Equity firms have borrowed $4T from the entities that have the real money (i.e. investment banks), at adjustable rates. PE firms are then buying companies at for 10-12x revenue, so if the companies are 10% profitable, that's equivalent to a P/E ratio of ~100:1 (in other words, they are way overpaying for the companies). When the businesses they are buying fail due to tarriffs or other macroeconomic factors out of the PE's control, the PEs won't be able to pay back the loans and will go bankrupt, taking the companies they bought down with them. The investment banks will have $4T of assets wiped off the books due to a common root cause event that instantly wiped out what otherwise seemed like a diversified portfolio.

Close?
Click to expand...

Eh, only if there were no assets. All of them have _some_ value, tangible or not. What matters is who gets their turn at the trough first.

So like let’s take Tesla. There are things like inventory, AR, land, buildings, IP, brand, all of these have some baseline value. It’s a fraction of their market cap, but there’s still something there even if they go tits up.

What is going to really matter is that valuation and whether someone buys them out of bankruptcy or liquidates.

Liquidation is the ugly scenario because now we’re talking a contagion that spreads as jobs are lost wholesale. Buying out of bankruptcy might be less painful for the country, but god know who buys them and whether that’s good.
 
LynahFan said:
Seeing if I can translate for the layman (i.e. myself):

Private Equity firms have borrowed $4T from the entities that have the real money (i.e. investment banks), at adjustable rates. PE firms are then buying companies at for 10-12x revenue, so if the companies are 10% profitable, that's equivalent to a P/E ratio of ~100:1 (in other words, they are way overpaying for the companies). When the businesses they are buying fail due to tarriffs or other macroeconomic factors out of the PE's control, the PEs won't be able to pay back the loans and will go bankrupt, taking the companies they bought down with them. The investment banks will have $4T of assets wiped off the books due to a common root cause event that instantly wiped out what otherwise seemed like a diversified portfolio.

Close?
Click to expand...
The pe itself doesn’t go bankrupt. After buying the company using the huge debt, they then use that company to take out the same loan to repay to PE. PE then takes the profits from that company until the debt kills the company, and then the purchased company’s defaulted debt can’t hurt the parent PE company due to some fancy chicanery in how it was structured. And then it’s rinse and repeat with their next target.
 
dxmnkd316 said:
Eh, only if there were no assets. All of them have _some_ value, tangible or not. What matters is who gets their turn at the trough first.

So like let’s take Tesla. There are things like inventory, AR, land, buildings, IP, brand, all of these have some baseline value. It’s a fraction of their market cap, but there’s still something there even if they go tits up.

What is going to really matter is that valuation and whether someone buys them out of bankruptcy or liquidates.

Liquidation is the ugly scenario because now we’re talking a contagion that spreads as jobs are lost wholesale. Buying out of bankruptcy might be less painful for the country, but god know who buys them and whether that’s good.
Click to expand...
If you are talking about the businesses owned by the PE they are going to be liquidated. That is what they were bought for in the first place. PE's buy them short term to either get them in the black to sell off for a profit or to sell off the parts like in the film Wall Street. The loans (and price) are all based on that.

And the stupid thing is, the PE's all bid the price up against each other for these smaller businesses which is why the valuations are so out of whack. Now all of these purchases are leveraged to the hilt so PEs have itchy trigger fingers. A shift in the interest rates the wrong way has a huge effect and will cause a selloff...and you don't want to be the last one holding the bag because the longer you wait the more you lose. Once it starts it goes downhill fast. The PEs will eat the loss and just eradicate the companies 4-5 years quicker than before.

And the assets won't really help all that much. If a hospital is sold off sure the equipment has value but it will nowhere near cover the loan. It is like selling your living room furniture to pay off the house mortgage completely.
 
aparch said:
I've seen posts on Bluesky showing how in disarray the softlines are throughout the stores due to understaffing, drawing comparisons to late '90s KMart.
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90s Kmart made second rate thrift stores look organized!

Next Wednesday is one of the big Target Corporate Events...should be a blast to bartend at!
 
The one down by me is about the same as it always has been. It's usually better stocked and cleaner than the Wal-mart closest to me, which is why I go there.
 
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