Thread

1. NegativeK · 1789944184 · focus · HN ↗

   Can someone steelman private equity, please? I'm honestly looking for the upsides (for non-investors) of when PE moves into an industry like medicine and begins buying up businesses that traditionally aren't already large chains.

   I already hear the downsides frequently from someone whose work is directly affected.

   1. dghlsakjg · 1789952787 · focus · HN ↗

      Private equity just means controlling a company outside of the public stock markets, it is incredibly broad, and covers everything from blackrock buying every vets office in an area, to a plumber buying out another plumber when they want to retire.

      The steelman argument is that private equity is just property rights. If I build a business I get to decide what to do with it.

      What most people are arguing against is a specific kind of PE where an institutional investor will either use aggressive financial engineering to force a profit, even if it kills the business, or when those same investors aggregate market share to the point where it is detrimental to consumers. Sprinkle in a little bit of heartless MBA bullshit, and that is what people specifically don’t like.

      1. caminante · 1789954556 · focus · HN ↗

         It is a broad term. VC is a subset of PE.

         In medicine, it's a solution for someone who wants liquidity (buy kids new home, help local dog shelter, add a new mistress) and doesn't want to retire, yet.

         The problem is that the terms are custom and YMMV as an existing patient of said practice.

      2. holmesworcester · 1789955217 · focus · HN ↗

         A stronger steelman is that it results in resources getting allocated in smarter/healthier ways across society.

         If there's some business that's getting by but the land it's on is more valuable (e.g. for housing) than the business, some investors buy the business, sell the land, make the business account for the land value, wind the business down if it can't, and there are apartments there a few years later.

         1. dghlsakjg · 1789955801 · focus · HN ↗

            Is that not just a subset of this:

            > The steelman argument is that private equity is just property rights. If I build a business I get to decide what to do with it.

      3. viccis · 1789959296 · focus · HN ↗

         >If I build a business I get to decide what to do with it.

         I don't think that follows necessarily, especially not categorically.

      4. BrenBarn · 1789964425 · focus · HN ↗

         > The steelman argument is that private equity is just property rights. If I build a business I get to decide what to do with it.

         You're gonna need to steelman that again, because in and of itself that is also not something I see as desirable.

         1. dghlsakjg · 1790005564 · focus · HN ↗

            To be clear: You don't think it is desirable to be able to do what you want with your own property?

            If you can't allow property rights then there is no way to steelman people exercising property rights.

            1. BrenBarn · 1790018534 · focus · HN ↗

               I think that "everyone should be able to do what they want with their own property", per se, is not a good principle for society. Sometimes people should not be allowed to do what they want with their property. In particular, I think the more property a person has, the less freedom they should have to do what they want with it. (This can also take the form of "the amount of property a person can own should be limited".)

               1. dghlsakjg · 1790024699 · focus · HN ↗

                  I was speaking in generalities, if that wasn't extremely obvious.

                  Obviously, yes, people are - and should be - constrained in what they can do with their property. Even the most capitalist systems on earth place restrictions on property. I didn't think it was necessary to caveat that control of private property is not absolute or without consequences. I'm not aware of any capitalist systems that do not put greater protections on people that control large amounts of property (see monopoly, environmental, antitrust, public securities law, etc. Most of those are basically irrelevant to people who don't own large amounts of property).

                  The point is that for property to mean anything at all, an owner must be allowed to direct the use of that property. What's the point of owning a house if I can't make any decisions about what to do with it. I don't really own a house if I can't decide that I want to live in it, or to sell it.

                  1. BrenBarn · 1790053826 · focus · HN ↗

                     Yes, but what if you own 100 houses? I'm pretty sure there is some number N of houses (or total value of houses) where I would be fine telling the person, "You don't get to decide what to do with these houses anymore, they're going to be given to people who need houses." Not as a matter of antitrust or monopoly but just directly as a matter of an individual controlling too much wealth.

                     Aside from that, once you admit that there can be restrictions on property rights, it's unclear how property rights in and of themselves is a steelman of private equity. Why not just say that "you can't sell to private equity" is one of the restrictions? Or, perhaps more subtly, why not say that a private equity company of a certain size is not allowed to buy any additional company, independent of what rights that company's owner has to sell?

                     1. solidsnack9000 · 1790100566 · focus · HN ↗

                        There is a lot of stuff you're saying here that sounds simple but isn't.

                        ...once you admit that there can be restrictions on property rights, it's unclear how property rights in and of themselves is a steelman of private equity. Why not just say that "you can't sell to private equity" is one of the restrictions?

                        What do you think that would look like in practice? Private equity is investment in non-public companies -- the purchase of shares in non-public companies or the purchase of the companies outright. In many cases, the private equity firms themselves are public; but in many cases, they are private, as well.

                        There isn't a way to make a rule that "you can't sell to private equity" but there can be a rule like "you can't sell a private company at all" or "public investment funds can not purchase shares in private companies" -- if you try a few of the variations that are possible, you'll see that they're all bad rules, I think.

                        You really have to think about hard about what you mean by "a private equity company". It's not as easy as it looks. If a manufacturing firm starts to buy up suppliers (many of which are small, private entities), is it a private equity company? It's buying up non-public companies.

                        1. BrenBarn · 1790141431 · focus · HN ↗

                           My point with these arguments is just to say that private property rights are not a steelman for private equity. I'm not saying that these are simple answers to the claim that we need private equity, I'm just saying that the concept of private property is also not a simple answer to the claim that we don't need private equity.

                           That said, I agree with you to some extent. I think it's not actually so hard to define what I think is bad about private equity, but it's true that that badness is not confined to private equity. In particular I think the distinction between public and private companies is almost entirely meaningless; what we should care about is what companies do, whether they are publicly traded or not. From that perspective private equity is not really different from publicly traded "holding companies" that do basically the same thing.

                           The crux of it, for me, is companies that are just doing "the business of business", and are not organized around human beings doing things that they genuinely care about and want to do a good job at. You can never run a good company by trying to run "a company", rather than trying to run a steakhouse, or a pet groomer, or a bank, or a car wash, or some particular company that does a particular thing. The problem of both private equity and public "holding companies" is that they value money to the point that they no longer sufficiently value the actual substance of the good or service that the business provides.

                           1. solidsnack9000 · 1790644804 · focus · HN ↗

                              Thanks for taking the time to reply.

                              The distinction between public and private companies is deeply meaningful for someone like you, who wants to see reforms in corporate governance.

                              You just want the problem to be solved, by someone else, without having to think too hard about it -- that is the way a lot of people feel. This is abdicating any real say in what actually happens, though.

                              This is one reason that companies doing "the business of business" are here -- because of people doing business the other way while not really knowing what they are doing. They pile up some combination of assets, good will, procedures and human capital but can't get the combination to balance profit and loss -- so someone else comes along and buys them and uses a more functional approach to actually get the business to work.

                              There are so many people who sincerely want the right thing to happen but then look at the mechanics of getting it to happen and say, this is meaningless, tedious, &c. They don't really get to be a part of the solution (though they will find their capital and efforts drawn into the problem unawares, often enough).

                              Learn about these things and know the difference between public and private companies.

      5. mizzao · 1789996057 · focus · HN ↗

         Berkshire Hathaway is in some sense also PE (though done by a public company that you can invest in) and Warren Buffett's culture is to find great companies run by great managers and let them cook. That long-term view is the exception and not the rule though.

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