How Private Equity Destroyed Commercial Radio - YouTube

private-equity this mysterious term which basically means a leveraged buyout

and what they do is they buy companies the same way that you or I might buy a house

however there's a big difference. When we buy a house we put down perhaps 25-30%

down and borrow the rest. They do the same thing but the critical difference

is the company being acquired borrows the 70 percent, not the buyer, and then the

company itself is responsible for repayment. And that's where the problems

start. For the company being acquired, now they have a ton of debt. The

private equity game is to juice earnings first, take advantage of it but it's gonna

hurt the business and then that company often is going to collapse. But the guy

making the most money, the private equity firm, the Kohlberg Kravis Roberts, the

Blackstone, the Carlyle, they taken zero risk. Private equity gets their

money mostly from state pensions. they're really not using their own money. They raise

buyout funds and use that to put the 20 to 30% down and leveraged

buyouts. Then the banks and the largest banks, JP Morgan Goldman, Citi, are lending

the money against the company using the company as collateral essentially to

finance the deal. So private equity firms are taking very

little risk. When John Q Public, when you or I, are buying a stock sure we're

taking a risk stock goes down we get hurt stock goes up we do well. For a

private equity firm typically they make fees off of their investors, plus it's

not their money. They can't lose because of the fees they collect and they can do

very well if they can buy and sell their companies for a profit because they get

a free 20% commission. And when you're making billion dollar deals, 10 billion

dollar deal, 20 billion dollar deals, that's a lot of money! If Clear Channel (I Heart)

should go bankrupt which is a distinct possibility, though probably in a few

years as we're talking they've just refinanced their debt to a point that

they kind of kick the can down the road. If and possibly when they go bankrupt

for the private equity owners, I'm not saying they're certainly not hoping for

but they will basically break even or make a little

bit of money off of fees when you combine everything. However for the

investors, the state pensions, like New York State and others they will

certainly lose out it'll be losing investment for them, for the banks who

have made the loans again it's been syndicated out but they're losers. I mean

they don't collect on their loans so there will be a lot of losers. But not

the guys doing the actual buying. The huge tax loophole that makes private

equity possible and profitable, I should say really what makes it profitable is

that when a private equity firm buys a company by having the company borrow

most of the money to finance the deal mostly they're doing it with other

people's money is that that money that a company borrows.. the interest they pay

off their loans they can deduct from taxes. So the companies private equity

firms own pay about half the tax rate as other companies because most companies

don't have that kind of debt. The most simple solution is ending interest tax

deductibility on corporate takeovers. It's easy. It's one swift move to the tax

code. It makes perfect sense and it will make the most aggressive buyouts like

the one for Clear Channel unprofitable so they won't happen. That deductibility

was never intended to finance LBO's. Interest tax deductibility is

supposed to be used to grow a business. to build a new plant or invest in research and development. You borrow money for that. It

was never intended so you could finance an LBO but that's how it's used and

it's legal (for now). So I would say, close the interest tax deductibility loophole, just for

corporate takeovers. So that way home mortgage holders can still claim interest tax

deductibility. Why should a company that's taking on

debt be able to take the interest off that debt off of their taxes when the

money was borrowed so a private equity firm could buy the business? It's

not logical. It doesn't make sense that people should be able to borrow money to

finance acquisitions and then use the debt off that money to

declare a big tax loop hole and take advantage of a big tax loophole. I mean the whole

idea I guess, to me, you know when you hit most people with okay this is how a

leveraged buyout works. Private equity firm buys a company but has the company

borrow the money to finance its own sale. I think there's a lot of "why that can't

be right!". And I know that was my reaction when I first started covering the

industry and after a few months put it together. But it's legal. It's correct. It

doesn't make sense. And then, okay logically... company borrows the money, the

private equity firm says "we're going to improve that company by putting it in

deep debt by anchoring it with loans" that doesn't make sense either. And you

know when you look at the evidence, it doesn't make sense. And then the company

is going to be able to pay much less in taxes because we're encouraging it to

borrow the money to finance its own sale and put itself in deep debt. That also

makes no sense. The whole idea of leveraged buyouts makes little sense

once you really look behind it.