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From today's Wall Street Journal:

Private-equity firms are adding debt to the companies they own in order to fund payouts to themselves, a controversial practice now reaching a record pace.

    Leonard Green & Partners LP, Bain Capital LLC and Carlyle Group LP CG -1.98% are among the firms using the tactic, which rose in popularity before the financial crisis.

    In these deals, known as "dividend recapitalizations," private-equity-owned companies raise cash by issuing debt. The proceeds are distributed in the form of dividends to buyout groups.

I wonder why, after all the bad publicity surrounding debt loading, asset stripping and off-shoring, private-equity firms are actually "accelerating" the process of adding debt to the companies they buy in order to fund mammoth payouts to themselves, a controversial practice now reaching a "record pace".  

Short speculation after the shredded pumpkin below.

It has been highlighted all summer by the Obama campaign as they hammered home the results of Romney's favorite use of leveraged capital on employees of such companies while at Bain.   But why NOW is the trend  towards using such tactics accelerating?   Is it pure and simple greed?  Perhaps it is the only easy way big money has left to beget big money?  Or, does Big Money fear the "borrow and strip" days may be, somehow, coming to an end?  Certainly they know its not going to be quite as lucrative:

Another driver of the trend, some say, is private-equity investors' desire to reap dividends before the potential increase in taxes on the proceeds next year.
To me, the above is another way of saying, "I want to get as much as I can, as quick as I can, before they change the rules on me".  Perhaps with everyone talking about closing loopholes will come the realization that this method of "creating wealth" is bad economic policy and is merely another way the Ultra Wealthy has of plundering Main Street for their own advantage and  perhaps our tax policy should be changed to discourage it?  Think that really has a real chance of happening?

I don't.  But its good that the current political conversation has them at least looking over their shoulders.

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Comment Preferences

  •  Tip Jar (6+ / 0-)

    "The man who has his millions will want everything he can lay his hands on and then raise his voice against the poor devil who wants ten cents more a day" - S.Gompers

    by Copp on Fri Oct 19, 2012 at 10:34:47 AM PDT

  •  makes perfect sense if the taxes increase (2+ / 0-)
    Recommended by:
    phonegery, Russgirl

    Make and take your money now otherwise you are looking at a much bigger chunk for the government - simple economics.

  •  "They're worth it" (1+ / 0-)
    Recommended by:

    Except that they haven't created the net worth to be worth it.

    A conservative is a man with two perfectly good legs who, however, has never learned how to walk forward. Franklin D. Roosevelt

    by notrouble on Fri Oct 19, 2012 at 10:44:36 AM PDT

  •  If they are issuing debt, (1+ / 0-)
    Recommended by:

    who is buying it?  I'm assuming that somehow, someone else is left holding a bag of worthless promises to pay debt,  Will this end up with the Pension Benefit Guarantee Corporation having to fund any of their retirements benefits?  

    Time is a long river.

    by phonegery on Fri Oct 19, 2012 at 10:56:49 AM PDT

    •  indeed! who would loan them money (0+ / 0-)

      at this point even I know the strategy and likelihood of payback vs bankruptcy.

      How can any person responsible for the loaning of investor funds not be on to this long ago unless they are in on it!

      It implies wider corrupt everyday practices.

      Oh wait, the gubbint is backstopping this?

      I get it...

      This machine kills Fascists.

      by KenBee on Fri Oct 19, 2012 at 11:52:52 AM PDT

      [ Parent ]

      •  Borrowing is easy (2+ / 0-)
        Recommended by:
        KenBee, phonegery

        Some of these companies have a cash hoard.  Earnings going forward might not support a high stock price, making them ripe for takeover.  A good example is BJ's Warehouse, from the article.

        In another deal, Leonard Green and CVC Capital Partners repaid themselves the full cash investment they made in a $2.8 billion buyout of BJ's Wholesale Club Inc. a year ago. BJ's sold debt last month to help pay a $643 million dividend to the owners. The firms and the company declined to comment.
        So, no debt, lets you borrow.  Vultures come in with $2.8 B, buy you, pay the leverage off (with money THEY have themselves probably borrowed), then make you, the victim company "issue debt" in the form of stock or bonds to the public and pay themselves $643 million.
        That's what BJ's gets by being prudent sitting around with a bunch of cash and a low stock price.

        "The man who has his millions will want everything he can lay his hands on and then raise his voice against the poor devil who wants ten cents more a day" - S.Gompers

        by Copp on Fri Oct 19, 2012 at 12:13:38 PM PDT

        [ Parent ]

        •  Thanks for your comment. (0+ / 0-)

          Lately a lot of this stuff goes over my head, but your comment reminded me of things I used to have clear in my mind.  

          What I remember was the over funded pension fund that would set a company up for a takeover.    

          Time is a long river.

          by phonegery on Sat Oct 20, 2012 at 10:41:08 AM PDT

          [ Parent ]

  •  The Creators Are, Ironically, (1+ / 0-)
    Recommended by:

    The Fed, who've pumped all that money out there for the banks to lend for such great deals as this.   Makes you wonder if they put as much effort into truly creating something, where we'd all be.....

    "The man who has his millions will want everything he can lay his hands on and then raise his voice against the poor devil who wants ten cents more a day" - S.Gompers

    by Copp on Fri Oct 19, 2012 at 10:58:44 AM PDT

  •  The best predictor of future behavior (2+ / 0-)
    Recommended by:
    Russgirl, KenBee

    is past behavior.  So what's the surprise that predatory capitalists continue to be predatory capitalists?

    Fake Left, Drive Right . . . not my idea of a Democrat . . .

    by Deward Hastings on Fri Oct 19, 2012 at 11:02:23 AM PDT

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