April 24, 2008
Hedge Fund/Private Equity investing made simple!
The mystery shall be revealed! Ever wondered how the financial 'master's of the universe' make their money? Have you been puzzled about what exactly it is that they do?
It's flipping a house. No joke, that's what it is. You take a run down asset (an old house in the case of house flipping; Sears in the case of hedge fund investing), make some improvements (a coat of paint, new floors, landscaping; new management, fire 20% of the workforce, sell off assets to pay off debt incurred in the takeover) wait until the market improves, then sell to some sucker who doesn't look too closely at the goods (usually, a first time homebuyer; mutual fund managers whose performance is so shitty they're lucky to have jobs anywhere other than Carl's Jr.). Of course, hedge funds are a little stranger than pure private equity in that they can invest in anything according to their charters. Even lottery tickets. What they usually do is a short the stock on a company that's having problems, driving it down aggressively not through actual bad news but by piling on massive amounts of debt. Then they magically appear to negotiate a 'rescue' of said company that will give the company a little cash in exchange for 90% dilution of the existing shareholders.
Then, once things have improved, they'll end up selling off the stake. That's how you do things if you're a hedgie which makes them arguably scummier than pure private equity. Usually, the PE folks didn't take a hand in actively destroying the company they are trying to acquire.
And, that my friends, is the 30 second explanation of private equity. And last year, that business plan made these douchebags (well, at least 50 of them) more than $29 Billion. Last year alone.
In the end, these guys work off, at least on the private equity side, a tremendous amount of debt rather than equity. Does it work? As it turns out, not nearly as well.
The ironic thing about all this is that these people serve absolutely no public good. Period. Just like house flippers
(as opposed to true investors), these people are pump and dump artists of the first rank. Unlike the house flippers, they get to do it all with money for big retirement funds. PUBLIC retirement funds.
Posted by mcblogger at April 24, 2008 08:46 AM
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