Posts Tagged ‘private equity’
“If you don’t allow for self-serving bias in the conduct of others, you are, again, a fool”*…
Private equity firms are in the spotlight for their negative impact on health care, journalism— indeed, essentially every sector they touch in the interest of generating big returns for themsleves and their investors (some of which are sovereign wealth funds; some, very wealthy individuals/families; but largely, insurance companies and public pension firms). Now, as the inimitable Matt Levine points out, even those investors (who were already paying massive fees) are in the private equity firms’ crosshairs…
Two basic features of private equity economics are that if you raise a fund and you spend $1 billion to buy a company, and you do a good job running the company and it becomes worth $5 billion, then:
- You charge a management fee — say, 2% per year — on the $1 billion you paid for the company, not the $5 billion it’s currently worth.
- If you sell the company — to a strategic buyer or another private equity firm or in an initial public offering — you collect $800 million of carry (20% of the value that you added to the company), but you can’t charge the management fees anymore.
It would be good, for you, to mark the company to market. Raise your own new private equity fund, and sell the company from your old fund to the new one at its current market value. Then:
- You can keep charging 2% per year, but now on $5 billion rather than $1 billion.
- You can collect your $800 million of carry now, and then if you add more value you can collect more carry when you sell it.
This is called a “continuation fund.” The Financial Times reports on “a new and controversial type of transaction that is fast becoming the private equity industry’s hottest trend in the US, UK and several other markets — deals in which a buyout group in effect sells a company to itself”:
Such deals have partly been a consequence of the tidal wave of cash that has flooded private markets during the long era of low interest rates. As that era comes to an end and a downturn looms, these deals are set to become more attractive than ever for private equity groups with companies to sell.
The deals — a way for buyout groups to return cash to their original investors within a pre-agreed 10-year time period, without the need to list companies or find outside buyers — have been growing in popularity since the early days of the Covid-19 pandemic, when a market freeze prompted a search for new options…
Equity market investors are becoming increasingly vocal about how private markets value companies. Vincent Mortier, Amundi Asset Management’s chief investment officer, said this month that parts of the buyout business “look like a pyramid scheme” because of “circular” deals in which companies are sold between private owners at high valuations.
Speaking privately, some pension funds are frustrated. “This is wonderful for the [buyout groups]; it’s one of the best things they ever discovered,” says one pension fund’s head of private equity, who asked not to be named.
But “it’s one of the worst things” for their investors, he adds. “The pie is getting bigger” as private equity balloons in size, he says, but “more of the pie is going to the [private equity firm] and less is going to [its investors].”…
More on these Machiavellian machinations: “Buyout Firms Buy From Themselves,” from @matt_levine in @business.
[Image above: source]
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As we ruminate on rapaciousness, we might recall that it was on this date in 1873 that Jesse James and his gang staged the first train robbery (the world’s first robbery of a moving train), a mile and a half west of Adair, Iowa… the site of which is now commemorated as a county park.
“America’s health care system is neither healthy, caring, nor a system”*…
Care is deteriorating even as prices rise. There are a number of reasons; Fred Shulte explores a new and growing category of culprit…
Private equity is rapidly moving to reshape health care in America, coming off a banner year in 2021, when the deep-pocketed firms plowed $206 billion into more than 1,400 health care acquisitions, according to industry tracker PitchBook.
Seeking quick returns, these investors are buying into eye care clinics, dental management chains, physician practices, hospices, pet care providers, and thousands of other companies that render medical care nearly from cradle to grave. Private equity-backed groups have even set up special “obstetric emergency departments” at some hospitals, which can charge expectant mothers hundreds of dollars extra for routine perinatal care.
As private equity extends its reach into health care, evidence is mounting that the penetration has led to higher prices and diminished quality of care, a KHN investigation has found. KHN found that companies owned or managed by private equity firms have agreed to pay fines of more than $500 million since 2014 to settle at least 34 lawsuits filed under the False Claims Act, a federal law that punishes false billing submissions to the federal government with fines. Most of the time, the private equity owners have avoided liability…
The terrifying details: “Sick Profit: Investigating Private Equity’s Stealthy Takeover of Health Care Across Cities and Specialties,” from @FredSchulte at @KHNews.
See also: “Private equity, health care, and profits: It’s time to protect patients,” “Private equity health-care monopolies are on a profitable killing spree,” and “Private equity deals drive up healthcare use, costs among physician practices, JAMA study finds” (this last, source of the image above).
* Walter Cronkite
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As we muse on mercenary medicine, we might send healing birthday greetings to James Collip; he was born on this date in 1892. A biochemist, he partnered with Frederick Banting and Charles Best to discover insulin in 1921. The co-inventors sold the insulin patent to the University of Toronto for a mere $1. They wanted everyone who needed their medication to be able to afford it.
Today, Banting and his colleagues would be spinning in their graves: Their drug, on many of the 30 million Americans with diabetes rely, has become the poster child for pharmaceutical price gouging.
The cost of the four most popular types of insulin has tripled over the past decade, and the out-of-pocket prescription costs patients now face have doubled. By 2016, the average price per month rose to $450 — and costs continue to rise, so much so that as many as one in four people with diabetes are now skimping on or skipping lifesaving doses…
“If Ancestry or its businesses are acquired… we will share your Personal Information with the acquiring or receiving entity”*…
If you’ve never before considered how valuable an asset your DNA might be, you are far behind. Some of the biggest direct-to-consumer DNA sequencing companies are busy monetizing their large-scale genomics databases, with hopes to shape the burgeoning DNA economy and reap its rewards. And if you spit in a cup for one of these companies, your DNA might already be under the corporate control of some of the richest firms on Wall Street.
With their purchase of Ancestry.com late last year, the private equity firm Blackstone now owns the DNA data of 18 million people. And Blackstone is currently ramping up efforts to monetize the data amassed among the companies it owns. But experts say Wall Street firms’ interest in genomics poses new and unforeseen threats, and risks sowing distrust among DNA donors. Without trust, could we miss out on the genome’s real value?
Since the global financial crisis of 2008, private equity firms—which buy up and reshape diverse private companies—have quietly overtaken traditional investment banks like Goldman Sachs as the “dominant players in the financial world,” according to the Financial Times. It’s been a rough tenure so far. While private equity mega-deal hits have made billions for investors, often the companies acquired pay the price, as with high-profile flops including mismanaged music group EMI and bankrupt retailer Toys R Us. The industry has become “the poster child for financial firms that suck value out of the economy,” said U.S. Senator Elizabeth Warren, while introducing an act to Congress aimed at reining in private equity “vampires.”
In December the biggest, most dominant private equity company of them all, the Blackstone Group, Inc., which boasts half a trillion dollars in assets under management, made a dramatic entry into the genomics space when it bought a controlling stake in Ancestry.com as part of the deal that valued the genealogy and gene testing company at $4.7 billion. And with that one stroke of the pen, the firm acquired the largest trove of DNA data assembled by any consumer gene tester. If your own DNA sequence is included in this collection, it exists on servers somewhere along with the genomes of 18 million people from at least 30 countries.
Announcing the deal, David Kestnbaum, a senior managing director at Blackstone said he foresees Ancestry growing by “investing behind further data, functionality, and product development.” At the same time, many privacy-concerned watchers had the same question: How does Blackstone aim to monetize Ancestry’s massive database, which includes users’ most sensitive genomic data and family histories?
Those lingering worries were ignited in the final days of 2020 by revelations buried in U.S. Securities and Exchange Commission (SEC) filings, and unearthed by Bloomberg, that showed Blackstone will begin to “package and sell data” from the companies it acquires as a fresh revenue stream.
For any entrepreneur or investor in the genomics space who knows the industry needs investment to realize its dramatic potential, the question is vexed. Are deals that bring sensitive data under the control of private equity mega-funds a much-needed path to realizing the industry’s goals? Or do they threaten to derail the rapid progress that consumer gene science is making?…
A Wall Street giant’s big bet on Ancestry.com drives home the financial realities– and the privacy challenges– facing the consumer genomic revolution: “Is Your DNA Data Safe in Blackstone’s Hands?“
* from Ancestry.com’s EULA, September 23, 2020 (between Blackstone announcing its plan to buy and the deal completing)
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As we appraise the personal, we might send carefully-deduced birthday greetings to Samuel “Sam” Loyd; he was born on this date in 1841. A chess player, chess composer, puzzle author, and recreational mathematician, he was a member of the Chess Hall of Fame (for both his play and for his exercises, or “problems”). He gained broader posthumous fame when his son published a collection of his mathematical and logic puzzles, Cyclopedia of 5000 Puzzles after his father’s death. As readers can see here and here, his puzzles still delight.
Loyd’s most famous puzzle was the 14-15 Puzzle, which he produced in 1878. His original authorship is debated; but in any case, his version created a craze that swept America to such an extent that employers put up notices prohibiting playing the puzzle during office hours.
“Neoliberalization has meant, in short, the financialization of everything”*…
Investing and deal-making occupy an outsized role in popular depictions of “business” like HBO’s Succession and Showtime’s Billions. They also occupy an outsized share of our elite: Over the last five years, the nation’s top business schools have sent nearly thirty percent of their graduating classes into finance.
But the buying and selling of companies, the mergers and divestments, the hedging and leveraging, are not themselves valuable activity. They invent, create, build, and provide nothing. Their claim to value is purely derivative—by improving the allocation of capital and configuration of assets, they are supposed to make everyone operating in the real economy more productive. The practitioners are rewarded richly for their effort.
Does this work, or are the efforts largely wasted? One might default to the assumption that an industry attracting so much talent and generating so much profit must be creating enormous value. But the elaborate financial engineering of the 2000s, which attempted an alchemy-like conversion of high-risk loans into rock-solid assets, and then placed highly leveraged bets against their performance, led to the collapse of some established Wall Street institutions, massive bailouts for others, and a global economic meltdown. Mergers and acquisitions, meanwhile, appear largely to be exercises in wheel-spinning: “M&A is a mug’s game,” explains Roger Martin in the Harvard Business Review, “in which typically 70%–90% of acquisitions are abysmal failures.”…
Hedge funds and venture capital funds appear to badly underperform simple public market indexes, while buyout funds have performed roughly at par over the past decade. Of course, some funds deliver outsized returns in a given timeframe; even a random distribution has a right tail. And there are managers whose strong and consistent track records suggest the creation of real value.
In other words, most fund managers are generating the results that one might expect from an elaborate game of chance—placing bets in the market with odds similar to a coin flip. With enough people playing, some will always find themselves on winning streaks and claim the Midas touch, at least until the coin’s next flip. Except under these rules of “heads I win, tails you lose,” they collect their fees regardless…
In the U.S., finance, insurance and real estate (FIRE) sector now accounts for 20 percent of GDP– compared with only 10 percent in 1947. The thorough and thoughtful analysis– and critique– of the frothier components of that sector excerpted above is noteworthy, beyond its quality, for it’s origin; it is an early product of a new conservative think tank, American Compass.
Read it in full: “Coin-Flip Capitalism: A Primer.”
Pair with “What Kind of Country Do We Want?“, a resonant essay from the amazing Marilynne Robinson.
(image above: source)
* “Neoliberalization has meant, in short, the financialization of everything. There was unquestionably a power shift away from production to the world of finance… Neoliberalization has not been very effective in revitalizing global capital accumulation, but it has succeeded remarkably well in restoring, or in some instances (as in Russia and China) creating, the power of an economic elite. The theoretical utopianism of neoliberal argument has, I conclude, primarily worked as a system of justification and legitimation for whatever needed to be done to achieve this goal.” — David Harvey, A Brief History of Neoliberalism
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As we look beyond price to value, we might recall that it was on this date in 1936 that Alan Turing submitted his paper, “On Computable Numbers” for publication; its full title was “On Computable Numbers, with an Application to the Entscheidungsproblem.” In answer to Hibert’s and Ackermann’s 1928 challenge, Turing demonstrated that some purely mathematical yes-no questions can never be answered by computation; more technically, that some decision problems are “undecidable” in the sense that there is no single algorithm that infallibly gives a correct “yes” or “no” answer to each instance of the problem. In Turing’s own words: “…what I shall prove is quite different from the well-known results of Gödel … I shall now show that there is no general method which tells whether a given formula U is provable in K.”
Turing followed this proof with two others, both of which rely on the first. And all rely on his development of type-writer-like “computing machines” that obey a simple set of rules and his subsequent development of a “universal computing machine”– the “Turing Machine,” a key inspiration (to von Neumann and others) for the development of the digital computer.
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