The first 80% of this piece is nothing either new or that interesting … however, at about that point, it finally starts revealing HOW private equity is able to make such huge profits … The key — paying themselves enormous fees as soon as ANY money starts to come in … how they can so quickly get in / get out / make immense profits … “Most investors seeking profit have to wait for the right moment to sell a company or take it public. But private equity uses a different playbook. First, Apollo and Metropoulos [two private equity giants] arranged for Hostess to borrow money from the banking giant Credit Suisse. The two firms then pocketed about $900 million of that money for themselves and their investors. Hostess, meanwhile, is stuck repaying the debt. This type of deal is known as a dividend recapitalization, and it is a staple of private equity’s money-making strategy. These deals provide private equity firms an opportunity to profit before they even sell a company, an added bonus to the firms and their investors, including public pensioners. Since 2012, private equity firms have arranged hundreds of such deals, totaling over $148 billion in debt, according to Thomson Reuters. Hostess’s dividend deal was the third largest of 2015. This financial engineering is crucial to private equity’s success — and to building the personal fortunes of the industry’s executives. With each dividend recapitalization, more money pours into Apollo, which then flows to the firm’s executives … A few months after the dividend deal, Apollo and Metropoulos entered into negotiations to sell the company. Instead of being sold outright, Hostess would be acquired by a shell company, created by another private equity firm, the Gores Group. Apollo and Metropoulos retained a combined 42 percent stake in the company, which is now publicly traded. After investing only $186 million in cash when they bought the company in 2013 — they took out debt to help finance the rest of the $410 million deal — Apollo and Metropoulos’s investment is now worth 13 times that initial cash investment.”
Behind the financial maneuvering at Hostess, an investigation by The New York Times found a blueprint for how private equity executives have amassed some of the greatest fortunes of the modern era.
Source: How the Twinkie Made the Superrich Even Richer – The New York Times