>Yes I know PE and VC are different. However, they both follow this basic playbook
No, they don't follow the same basic playbook and I think you misunderstand how different they actually are.
VCs do not have their portfolio companies take on debt to pay dividends back to VCs. That's because the typical startup companies that they invest in don't have positive cashflow to service any debt payments to a bank. The banks won't lend to startups because they don't have the cashflow to pay back the debt. The startups at the early stage of VC money don't have cashflow because they don't have meaningful revenue.
PE's invest in mature companies instead of startups. PE's target established companies with real revenue and cashflow. That's where the debt playbook and financial manipulation happens.
VCs and PEs are the "same" in the sense that they both structured as funds with "limited partners".
But it should be mentioned that lot more (VC-funded) startups are being purchased by PE firms, compared to 10-20 years ago.
Which makes one wonder - how "organic" are these companies? In the sense that they can stand on their own feet, without being funded by debt throughout their whole lives.
Because the traditional PE model of debt-fuelled dividends is not feasible anymore. Back in the day it was really feasible to issue debt on the cheap, since you'd find takers, but with equity outpacing debt in returns, that model became infeasible.
After '08, my old firm (mega PE) went on a spree away from the PE play book, simply because they had the dry powder but not enough opportunities. Commercial and residential real estate, biotech, tech, etc.
> > Back in the day it was really feasible to issue debt on the cheap, since you'd find takers, but with equity outpacing debt in returns, that model became infeasible.
But it should be the opposite no?
PE firms acquires company, installs a new CEO and instructs them to knock on each and every bank lender for business loans taking advantage of the low interest rate environment.
Or even mortgages if the company needs to expand its physical footprint.
PE retains the equity and bank finances the business growth as per the intention of the Fed monetary policy 2008-2021...and maybe 2024-????
After 08, the industry was flush with cash and acquisition valuations were lower, so they didn't really need to obtain cash from loans for the acquisitions (which is the LBO model, where you put less upfront cash from your AUM).
The low interest rate environment could have been utilized by PEs like you mentioned, but there were other industries where the same play book could be used for much higher returns - like real estate, tech acquisitions, etc. Why bother with a leveraged buyout of a family owned business for 10% returns when a debt-fuelled real estate purchase will give you 25-30%?
No, they don't follow the same basic playbook and I think you misunderstand how different they actually are.
VCs do not have their portfolio companies take on debt to pay dividends back to VCs. That's because the typical startup companies that they invest in don't have positive cashflow to service any debt payments to a bank. The banks won't lend to startups because they don't have the cashflow to pay back the debt. The startups at the early stage of VC money don't have cashflow because they don't have meaningful revenue.
PE's invest in mature companies instead of startups. PE's target established companies with real revenue and cashflow. That's where the debt playbook and financial manipulation happens.
VCs and PEs are the "same" in the sense that they both structured as funds with "limited partners".