Why everyone hates private equity

Transcript

Why does everyone hate private equity and hedge funds? Because the hate is earned. Private equity buys a company with borrowed money, straps the debt onto the company itself, strips it for parts and walks away richer while the workers walk away unemployed. That part is real, but here's what nobody sits with. While you're angry at them, they're not angry at anything. They're just awake. Start with how the trick works because it's almost elegant. Affirm buys a company using mostly other people's money, sometimes 90% debt. Then the loan doesn't sit on their books. It gets loaded onto the company they just bought. If it thrives, they collect. If it collapses under the debt they added, they've already pulled their fees out. Heads they win, tails, you lose your job. It's why toys are us-died. Not from failing to sell toys, but from buckling under roughly $5 billion in buyout debt and 33,000 people paid for it. And it's spread into places that should scare you. When private equity buys nursing homes, one major study found resident deaths rose about 10%. That's the model reaching the end of a life and still finding margin. Now the fee machine. Heads funds run on two in 20. 2% of everything you give them every year, win or lose, plus 20% of any gains. Warren Buffett bet a million dollars that a plain index fund would be to basket of these funds over 10 years. He won easily. Here's the psychology nobody tells you. Economists have a word for it. Loss aversion. Losing hurts about twice as much as winning feels good. So when you get hit, your instinct is to freeze, protect what's left, and find someone to blame. That flinch is human. It's also exactly the reflex these firms are built to feed on. They don't feel it. They see a discounted asset and a frozen owner, and they move. So sit with the real lesson. They aren't smarter than you. They're not even braver. They just treat money as a thing you do relentlessly, while most people treat it as a thing that happens to them. Same recession, same crash, same cheap house on the corner. They buy it and you refresh the news and feel robbed. You can spend the next decade furious at private equity. The fury is justified. It's also free money you're leaving on the table because the cheap thing you're too scared to buy, they will. The job you assume is safe, they're already pricing. Being angry costs nothing and changes nothing. Get off the sidelines or they'll keep owning them.

Transcribed automatically from the video, so small errors are possible.