To PE Or Not To PE

I couldn’t resist this google search result for “leverged buyout love”

Alternatively titled Part 2 of Why Being a Banker Sucks Ass.

Zuuko (early 20’s): Omg… I’m on the deal. Not just on it. I’m running the model. The picked me. YES! Finally, all those hours of knob-polishing and crevice-licking have paid off. An LBO with one of the country’s premier PE shops. This is the moment all analysts and associates pray for.

Fast forward Zuuko by 4 months, averaging 4 hours of sleep: WAAAAHHHHHH! Goddamn Aussies beat us to the punch. All that work for nothing. There’s no shiny tombstone on my desk. All those all-nighters were for nothing. I regret passing on all those numerous chances to get laid for this stupid deal. I need a drink at the rippers’ now.

***

Guys working at Private Equity shops are usually former bankers (in particular from M&A), who have switched over to a more lucrative and exciting career. A side effect of the career switch is usually inflation of an already massively over-sized ego, and an accompanying increase in dickishness. Even the juniors (i.e. the counterparts of banking analysts and associates) at PE shops have an over-developed sense of self-regard. Ordinarily in my former banking days, I experienced extreme schadenfreudegasm when one of these pompous pipsqueaks was cut down to size. However in the case above, my slightly more-experienced counterpart (hence, he outranked me, even aside from the fact that he was our client) jeopardized my deal. Let’s christen this fellow Dick Pound for the purposes of this story.

Dick’s PE shop was launching a leveraged buyout of an entertainment company. The point of an LBO is relatively simple: over a period of 7-10 years, a PE firm would go in and maximize profits at a target company, while saddling the target with debt. When done well, target companies become more efficient, productive employees are allowed to work, the dead-weight employees are fired, the business strategy is executed and, ultimately, a more profitable firm emerges. When done wrong, the PE firm does not understand the business they bought, the wrong employees are fired, the strategy is badly mismanaged and the resulting nose-dive in profits usually means that all the debt that was loaded onto the target at purchase is defaulted upon. This is when target companies go bankrupt and, twenty years later when the PE shop’s senior partner is running for president of these united states, they are the subject of very well-made attack ads.

When the target company is bought, a PE firm’s real work begins. In contrast, bankers are usually only around when the target is purchased, providing advice to the PE firm. Bankers mainly provide advice on the price and help raise the debt for the LBO. That and satisfy any number of client requests, however minor or pointless. And of course, bankers are around 7-10 years later to take a successful private company public again, or provide advice on restructuring a bankrupt unsuccessful company. Bankers do this for a cut or fee. Hence, bankers’ incentive is to get the deal done. If a competing bid wins instead of Dick’s PE shop, Zuuko’s bank gets nothing. While bankers are only there for a short period on any deal, that short period is usually an intense 3-6 month period full of all-nighters, spreadsheets, powerpoint, everyone outranking you in the bank hierarchy taking a daily dump on your head without the courtesy of wiping afterwards, and last minute client requests which feel like late-night booty calls without the courtesy of lube, protection or a box of chocolates. Bankers live for these moments. And so did I.

You can imagine the desire to win is intense during such an ordeal. You can imagine when you don’t win, that the disappointment is extremely heavy. Usually, the failure of closing a deal is always dependent on a myriad of factors outside of one’s control, from price to debt terms to internal political dynamics to god knows what else. But, sometimes its relatively easy to put a face and a name on deal failure. In this case, it was Dick.

***

Much as I’d like to continue the saga of Project Vortex, your humble narrator’s eyes are killing him.

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