Cue the soundtrack:
And from Eric Salzman via Matt Taibbi's Racket News substack, March 26:
THE SCHEME: Beating the “marks” with their own money
THE COMPANY: Main Street USA
THE NEWS: Private equity firms and Wall Street banks loaded American businesses up with debt from leveraged buyouts over the last decade and now they are loading them with more debt to cash out their winnings with an outlandish strategy, the “dividend recap.”
In the classic 1973 movie The Sting, con men extraordinaire played by Paul Newman and Robert Redford hatch a plan to take down a fearsome mob boss played by Robert Shaw in a high-stakes poker game. The cons first pickpocket Shaw, stealing his billfold and then, using Shaw’s own money, outcheat him at cards to take him to the cleaners.
The stakes are a lot higher with Private Equity (PE). While Redford and Newman ripped off a mob boss, PE firms take over companies that provide important services — healthcare facilities and nursing homes, for example — and manufacturers that employ thousands.
PE firms typically hold companies between four and seven years before exiting. Small to mid-size companies are often sold to another PE firm, while large companies are usually taken public with an initial public offering (IPO).
But high interest rates and uncertainty over President Trump’s tariffs policy have made IPOs an unattractive option. For one, high interest rates are bad for a debt-laden company, and there’s concern that tariffs will disrupt global supply chains.
Not to worry if you’re a PE investor. There’s still what’s called the “dividend recap.” Take the case of Clarios International — America’s largest producer of electric vehicle batteries with 16,000 employees. It’s an example that would surely earn the respect of Newman and Redford’s characters.
A PE firm — Brookfield Asset Management — and Canadian pension fund manager Caisse de dépôt et Placement du Quebec bought Clarios in 2019 for $13 billion. About $4 billion of that was funded by PE investors. The new owners had success reducing debt — it dropped by $2.1 billion between 2020 and 2024, according to Fitch Ratings.
But Clarios added debt when it came time to sell in 2025. The company took on about $4.5 billion in loans from a syndicate of lenders led by J.P. Morgan to pay a special dividend to its PE investors....
....MUCH MORE
A couple related posts (among dozens):
Private Equity: "having your industry compared to a Ponzi scheme is less than ideal"
.... My question going forward is: "Should times get really tough will we see a return to the asset stripping/bankruptcy bust-out model?"
Wait. Did I say that out loud? I meant "will we see a semi-permanent step-change to lower valuations that trap capital?"
Yeah that's it, that's what I meant.
Berkshire Hathaway as Idealized Private Equity
We quoted Buffett on P.E. in last month's "How Vulture Capitalists Ate Toys 'R' Us", updated below....
****
The quote was:
And then there's 2011's "The Porn Shop Operators Strike Again: Harry & David files for bankruptcy";
``You can sell it to Berkshire, and we'll put it in the Metropolitan Museum; it'll have a wing all by itself; it'll be there forever,'' he says at the February meeting.
``Or you can sell it to some porn shop operator, and he'll take the painting and he'll make the boobs a little bigger and he'll stick it up in the window, and some other guy will come along in a raincoat, and he'll buy it.''
On why a business may prefer selling to Berkshire Hathaway rather than a private equity firm.
I know Warren is talking down the bidding pressure that PE firms might put on the price he has to pay for privately held businesses but looking at his comments on PE over the years it's more than that:
He actually loathes private equity and its practitioners....
Sometimes it's hard to tell the difference between a bankruptcy bust-out/bleed-out fraud and private equity.
Also between private equity with its internal rate of return, IRR, and piracy with its eerily similar Arrgh, but that's a whole 'nother post.
