"Backcountry" Sold in a Near-Bankruptcy Exit...

[Latestart]

I'll hesitantly add to the PE part of the thread. This is not in any way a defense of PE, but rather laying out that anyone that gives you money, wants it back with interest. The business part of the US economy does well generally because you can get money to take risky decisions and we don't put people in jail for failing. 70% of venture investments fail. If we want new businesses to try, we are also accepting that most/all of them will fail, especially when tech (AMAZON) and/or consolidation (WalMart) is crushing parts of retail distribution.

I am reminded mostly of Dylan's song, "gotta serve somebody", the lyrics are perfect. https://www.bobdylan.com/songs/gotta-serve-somebody/

To start a business you have a few options for money:

1) Your own deep pockets (already rich),
2) Money from 'friends, family and fools' (rich friends),
3) Venture investors looking for a 10x ++ return, and
4) Bank loans against business or personal assets

For there to be room in the economy for people who aren't born rich to start businesses, the money has to come from someone who wants it back with interest. Reality is banks don't do early stage unless you bet your house. Venture only does hyper-growth. So either you have money or you have friends. If you take your money or your friends money, everybody wants out in a reasonable period of time - 3-10 years.

Every kind of 'investor' will tank a company that: (1) can't pay back or (2) isn't meeting the goals set up in the investment.

The reason PE firms have a ton of money is because they 'on average' give returns about the same or better than the stock market. Like banks, there are 'all kinds' of PE firms. The worst are breaking companies into pieces and making bad strategy decisions and get bad results. They will disappear in a 5-10 year period because they can't raise more money for new funds to invest. The ones that remain give investors about 2-3x money back; can't do that if you destroy all your investments.

The 'other side' of the story is all the people who spent 10-20 years building something and are in their 60's with 90% of their net worth in a business their kids can't/don't want to run and that is too small to go public. They 'exit' to some sale and retire. Without PE and industry buyers, they don't have a way out to turn success into cash for themselves and THEIR investors <see above>. You could also look at ESOPs, but most don't bother.

No comment on BackCountry because I have no specific knowledge, BUT basically all of retail is getting crushed by AMAZON. JCPenny, SEARS, malls nationwide, local owner-operated stores, all of them. I am not sure the PE ownership is the cause, the PE guys bought into a failing industry and most likely lost most of their money as well. Again, no defense of PE, they get paid a lot and have their share of failures and very public bad decisions.

The story is more complicated and there are a bunch of founders (and their earliest investors) who are glad to sell. And there are some good stories of companies that grew. And there are failures whose failure might be accelerated by PE.

[fa63]

I worked for Backcountry / Competitive Cyclist (CC) briefly during the pandemic, because I was curious as to what it would be like. They were allowing remote work at the time (I live in Atlanta).

Even back then, the people were nice but the culture wasn't great. I was amongst the top performers on the CC side of things, and even though I was doing great, they kept asking me to push things like stupid third-party insurance policies... I left after I told them to stop bothering me with those and they wouldn't

It was interesting to see that they stopped offering the insurance policies not too long after I left. I wasn't surprised though; as someone who studied statistics and probability at the graduate level, I made the case to the managers that there was no way the third-party company would survive with the prices we were charging and we should stop offering it before it leaves a bad taste in the customer's mouth. They didn't really care about what I had to say on the matter

[XXtwindad]

I’ve always had fantastic experiences with Backcountry.

[RudAwkning]

Originally Posted by C40_guy

PE just did a particularly nasty job on a group of hospitals in Boston. Two hospitals may have just permanently closed, leaving care wastelands for lower income communities.

While the CEO buys mega yachts.

**** him.

**** PE.

I did some interviewing for positions with PE owned tech firms. I can't figure out why anybody works at them. Modest salary, no equity, sometimes no bonus, limited funds for growing the business. No future.

**** PE.

I worked at a company that was acquired by a PE Firm. Was told "We can't afford salary increases on 'acquisition' years." Uhhhh...you're a Private Equity firm. You're in the M&A business. EVERY YEAR is an acquisition year.

[EB]

Generally the reasons that private equity exists as an investment category in the United States, and is so pervasive vs other kinds of investment, are:

1) leverage

Acquisitions can be made with borrowed money, structured as loans, bonds, and so forth, and those debts can be set up such that the assets and cashflows of the acquisition target itself are the collateral for the debt. This means that relatively small amounts of investor equity can be used to acquire relatively large companies. Without leverage, the PE model doesn't really work as the returns on ordinary equity investment aren't sufficient.

2) interest on debt is deductible on corporate tax - dividend payments are not

Typically equity owners would be compensated in dividend payments, but because interest payments are entirely tax deductible for the acquired company, acquired companies can safely pay much higher (often double) the interest that they could in dividends. This serves to increase the amount of leverage available, and incentivizes debt vs. equity investment structures.

3) tax treatment of carried interest in partnerships

Partners in private equity funds, hedge funds, venture capital firms, and so on are allowed under US tax law to invest the funds of their limited partners - not their money - and collect upside distributions from those investments as if were long-term capital gains on their own income for tax purposes. This is known as the "carried interest loophole" and there is an entire arm of the US lobbying industry devoted to protecting it in Congress. This creates yet another strong incentive for this kind of investment, since it effectively provides a salary that is taxed as if it were a personal investment risk that the partner made.

You will note that two out of three of these reasons are US government policy shaped by narrow lobbying interests.

Whether or not PE is good for US companies or not is hard to say - there are as many awful examples out there as good ones. Based on what I have seen, from a macro point of view, it is largely financial engineering that generally provides great returns for the PE firms, decent returns for their investors, and very little that is generally new or useful to the public.

[fa63]

There is a great series on Freakonomics on Venture Capital; highly recommended those who don't know much about VC to give it a listen.

The summary is: sometimes they are good, but more often than not, they are bad.

[fatsanta92]

Originally Posted by fa63

There is a great series on Freakonomics on Venture Capital; highly recommended those who don't know much about VC to give it a listen.

The summary is: sometimes they are good, but more often than not, they are bad.

Venture and PE are two different animals though.

However, a poor leadership team for both can impact a company negatively.

[unterhausen]

It sounds to me like these people were trying to do the right thing for the company, but they just had bad ideas.

[fa63]

My fault; the Freakonomics series I was thinking of is on Private Equity (though they also did a podcast on VC). I got them mixed up. Here is part 1 of the podcast (there are two episodes):

https://freakonomics.com/podcast/sho...e-of-your-dog/

Originally Posted by fatsanta92

Venture and PE are two different animals though.

However, a poor leadership team for both can impact a company negatively.

[EB]

Originally Posted by fatsanta92

Venture and PE are two different animals though.

However, a poor leadership team for both can impact a company negatively.

That's right - these are two totally different investment models with different goals and strategies, though their overall return to their LPs do not differ that much. And they both rely on good leadership teams in their portfolio firms to be successful.

Generally, VC is for unproven startups that require intensive equity capital investments to be successful. Most VC investments within a portfolio will fail - a few will succeed, where the definition of success is "needs more capital to get to the next stage." Successful VCs have enough liquidity to double down on successful investments to avoid dilution. The myth of VC is that it's all about the VC manager picking the right deals - the truth is that it's all about monopolizing the share of the available deals and doubling down on the successful ones. VCs play the field - e.g., when Peter Thiel made his famous Facebook investment, he was also investing in most of the other social media "plays" at the time.

The curse of VC is that VC only "works" if the strategy of the company the VC invests in is to "go big" and dominate a market, justifying all of the previous intensive equity investment. So VC doesn't work for companies that just want to be moderately successful.

PE on the other hand works through the leveraged strategy I described above, and targets companies that are already successful and have cashflows and equity that can be used to collateralize debt. The purpose of the PE investment is to "optimize" the returns such that the investment returns larger cashflows than it did previously, which returns to the equity investment (multiplied by the leverage in the deal).

The only things they have in common are the carried interest loophole and the dependence on good management.

[djg21]

Originally Posted by XXtwindad

I’ve always had fantastic experiences with Backcountry.

Likewise. I have purchased backcountry/telemark ski equipment from BC over the years. You can’t find many brick and mortar shops that stock decent inventories of equipment, and you have to purchase most stuff on line.

[Latestart]

Agree with all of the below. PE is 'tax-advantaged' like real estate investing is 'tax advantaged' if you can call yourself a 'real estate professional'. There's no doubt that we are tax-rewarding and picking winners from a tax-policy perspective. But as they say in other contexts, don't hate the player, hate the game. If we change the incentives, PE/VC/Hedge funds will act differently.

Originally Posted by EB

That's right - these are two totally different investment models with different goals and strategies, though their overall return to their LPs do not differ that much. And they both rely on good leadership teams in their portfolio firms to be successful.

Generally, VC is for unproven startups that require intensive equity capital investments to be successful. Most VC investments within a portfolio will fail - a few will succeed, where the definition of success is "needs more capital to get to the next stage." Successful VCs have enough liquidity to double down on successful investments to avoid dilution. The myth of VC is that it's all about the VC manager picking the right deals - the truth is that it's all about monopolizing the share of the available deals and doubling down on the successful ones. VCs play the field - e.g., when Peter Thiel made his famous Facebook investment, he was also investing in most of the other social media "plays" at the time.

The curse of VC is that VC only "works" if the strategy of the company the VC invests in is to "go big" and dominate a market, justifying all of the previous intensive equity investment. So VC doesn't work for companies that just want to be moderately successful.

PE on the other hand works through the leveraged strategy I described above, and targets companies that are already successful and have cashflows and equity that can be used to collateralize debt. The purpose of the PE investment is to "optimize" the returns such that the investment returns larger cashflows than it did previously, which returns to the equity investment (multiplied by the leverage in the deal).

The only things they have in common are the carried interest loophole and the dependence on good management.

[echappist]

Originally Posted by Latestart

Agree with all of the below. PE is 'tax-advantaged' like real estate investing is 'tax advantaged' if you can call yourself a 'real estate professional'. There's no doubt that we are tax-rewarding and picking winners from a tax-policy perspective. But as they say in other contexts, don't hate the player, hate the game. If we change the incentives, PE/VC/Hedge funds will act differently.

Difficult to untangle the two, because as noted above, the rules of the game are written by the players.

[echappist]

Upthread, I mentioned the CC-branded merino wool socks.

They are still available and are on discount. I'm thinking of buying a few pairs to stock up.

Possibly the best merino socks I've ever bought.

[merckxman]

Didn't they acquire the Merlin brand name?