Light a match

“When you can’t borrow another buck from the bank or buy another case of booze, you bust the joint out. You light a match.”– Henry Hill – Goodfellas

I have always wondered what the difference is between the mob “Bust Out” made famous in the movie “Goodfellas” and a Private Equity Leveraged Buy-out. In a mob bust out, your friendly organized crime gang becomes your business partner. If your business generates good cashflow and has decent access to credit, your new partners skim the cashflow and run up your credit with the purpose of putting lots of cash in their pockets until there is nothing left to pocket. Then, like Henry Hill said, you light a match.

In a leveraged buyout, a private equity firm gets financing from usually a syndicate of banks, to purchase a target company while directing cashflow toward paying themselves and their investors in the form of fees and special dividends. In fact, with regard to special dividends, the private equity firm can actually borrow in the syndicated loan market (in the name of the acquired company) for the sole purpose of paying themselves a special dividend. I’ve never understood how something like that could happen legally but it happens all the time and regulators seem to be cool with it so who knows. Leveraged loans have been the rage for years now as we have been in some form of zero-rate, quantitative easing monetary policy since 2008. Trillions of investor dollars desperate for yield have been funneled into private equity investments.

 

continue reading »