M2 - U2 - Class 21 - Private Equity

Question 1

private equity and the news/government

Answer 1

Been impacting jobs and making the gap bigger between rich and poor
Taylor Swift: Old songs bought by private equity and is now unable to sing these songs in the way she wants to
Warren: Curve power of private equities, wanted to stop wall street

Question 2

what is private equity (PE)?

Answer 2

Private equity funds: Managed investment funds that pool money from various investors (high net-worth accredited individual investors or pension funds) and invest in private companies or public companies with plans to take them private
> Not really open to public investors
> Convert public companies into private companies
> Funded by borrowed money - creditors/lendors
– Shows up on book of acquired company
> PE asset value > public market cap

After buyouts, PE firms usually implement radical restructuring
Eventual goal is the sale of the company either privately or through an initial public offering

Question 3

what is private equity

Answer 3

Private equity fund - pot of money that can invest in multiple companies

Question 4

where does the money come from for private equities

Answer 4

General Partners
Manage funds/capital
Decisions for capital/money and manage company

Limited Partners (majority 98% of money)
Principle of private equity funds
Provide capital

Question 5

what is a portfolio company

Answer 5

Has integrated the principal and the agents
Pay back debt

Question 6

what is an LBO

Answer 6

Leveraged buyout

Question 7

private equity main players

Answer 7

General partners (GPs)
Run PE funds

Limited partners (LPs)
Provide most of capital

Portfolio firms
Company targeted by PEs and converted into private (payless and dunkin are examples)

Question 8

private equity key features

Answer 8

PE acquires undervalued companies using substantial debt (LBO)
The portfolio company becomes private
The debt is loaded on the portfolio company
GP actively (and often aggressively) manages the portfolio company
GP collects fees from LPs and the portfolio company

Question 9

private equity video notes

Answer 9

Retail stores bankrupting because of private equity firms from leverage buyouts in hopes to save them but failed
> Original shareholders may be happy but companies can be hurt by this because the debt is theirs not the private equity’s

Borrowed money to save company is on company’s books not PE’s
> Crushing debt

Question 10

1. Before private equities came to Payless, what were the strengths and weaknesses of Payless?

Answer 10

Strengths:
> Customer service
> Low-prices
> Accessible and quick

Weaknesses:
> Not technologically advanced at all - terrible online
> Poor management and wasted money on campaigns
> Messed up supply chain in 2015
> Messed up shoe orders

Question 11

2. Who were the GPs for Payless?

Answer 11

• Eddie Lampert and Shopko
• Not in alignment with shareholders
• Got rid of management - inserting principal (PE) as manager - resolved agency problem - principal became agent
  > Now they can do things faster
  > Restructuring and downsizing
• All fees went to GP not company

Question 12

3. What was the PE firms’ tactic?

Answer 12

In the two-year period ending in January 2015, Payless generated $322 million in “Ebitda,” a common metric for operating profits; paid $352 million in one-time dividends to shareholders; and made $83 million in interest payments. For every dollar that came in the door of the company in that span, it paid out $1.09 to its owners and 26 cents to its lenders

Massive debt
> The resulting losses strained the company’s ability to repay its debts and led to credit downgrades

Beyond their lack of retail experience, former employees said the Alden team cloistered itself in the executive suite and seemed to disdain the expertise of the staff in Topeka.

Didn’t close stores fast enough, fire employees fast enough and didn’t generate enough profits

Question 13

4. What was the outcome for payless?
5. Could Payless have avoided failure?

Answer 13

bankruptcy and yes

Question 14

Does PE outperform the public stock market?

Answer 14

yes

but makes about the same as small cap stocks

Question 15

1. How is private equity’s corporate governance different from traditional corporate governance systems?

Answer 15

People who manage are kicked out when PE is there–they’re fired. They’re under the control of the PE. The GP is using LP’s money. Among investors.

Question 16

2. Does private equity model solve the agency problem?

Answer 16

Yes they aim to do this but in some cases they didn’t (Payless) if its not in the best interest of the company

Question 17

3. What are the sources of agency problem in the private equity model?

Answer 17

Problems still present here - goal congruence and information asymmetry

Question 18

4. What were the main causes of Payless’s downfall?

Answer 18

Shown above– e-commerce, too much risk

Question 19

5. Does private equity create more productive and dynamic companies by reallocating jobs and capital, as Steven Davis argues in the NYT article?

Answer 19

May be on exam
Sure - eliminating unproductive companies

Question 20

6. How do stakeholders fare when private equity targets a company like Payless?

Answer 20

MGT - They often got fired
Suppliers - Lost

Question 21

7. Should the government regulate private equity industry?

Answer 21

Few regulations because its outside stock market because it is private
Public ones are regulated by the government