Private Equity Looks Out for Itself

Programming note: Money Stuff will be off tomorrow, back on Monday.

If you are a private equity fund, you borrow a lot of money to buy a company, and then you try to operate the company in a way that makes enough money to pay back the debt and make you rich. Sometimes this works and everyone is happy. Sometimes it doesn’t work and at least some people are sad. If you are a smart cutthroat private equity fund you try not to be the one who is sad. Traditionally you will be the holder of the equity in the company (thus: “private equity”), and if there is not enough money to go around you will try to arrange matters so that the equity gets the money and the debt does not. This is hard, because the point of debt is that it is senior to equity, but you are smart and you might find a way. There are dividend recaps and ways to shuffle assets around and loose covenants that allow equity payouts even in default. And in fact the financial press is absolutely full of stories of creditors complaining about private equity firms putting one past them, finding clever ways to get paid themselves while stiffing the creditors.