WTF is… Private Equity?
What’s up rich people! It's me Haley, aka Mrs. Dow Jones, and today we’re talking about private equity which is basically Queer Eye for companies. Confused? Let me explain.
So private equity firms buy underperforming companies, go in and do a makeover à la Bobby, Karamo, Antoni, Tan, and Jonathan. Then, they sell them (new and improved) for profit. Can you even?
Unlike on Queer Eye though, the money they use to pay for the whole thing does NOT come from Netflix. Instead, it comes from a few different places. Like, obviously, the private equity firm contributes some of the money, but the rest (and I mean the overwhelming majority) of how they pay for a company is with debt—(money that isn’t theirs). That process is called a “leveraged buyout.”
Side note: Private Equity firms are obsessed with leveraged buyouts. Using debt to pay for those deals has been happening for years and can be sort of confusing. Here’s how I understand it:
Say I wanna buy a Birkin for $10k and I only have $2k, I could borrow $8k from a bank to pay for it, and use the Birkin as collateral (aka I have to give the value of the Birkin to the bank if I don’t pay back what I owe them). So I get the Birkin, it’s amazing and I take it to Art Basel and get it painted by Jeff Koons. The Birkin just went up in value and sold for $20k. I just made 10X my original investment of $2k.
On the flip side, say Jeff Koons spilled his matcha on my bag and it’s now only worth only $5k because it has a weird stain. I would still be on the hook for the $8k I borrowed, which means I would have to somehow pay the $3k difference. So yeah, that’s a big risk to leveraged buyouts but there’s usually also big reward.
Private equity firms need investors who are comfortable with longer holding periods because, unlike on Queer Eye, it takes longer than 3 hours to complete this flip. No cashing out early! After all, half the fun for the firm is charging their 2% management fee on money that investors give them.
After their due diligence, private equity firms take a company that has potential and restructure it so that they can either sell it for profit, or help it become publicly traded (which means it’s liquid, which means now there’s cash!). That's when you know the makeover was a success.
If you want to learn even more about private equity, watch this video:
Anyways, got to go get avocado toast with Antoni, but subscribe and remember—stay rich bitch!