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How Private Equity "Adds Value" In A Fiat-Financed World

Tyler Durden's Photo
by Tyler Durden
Tuesday, May 21, 2024 - 01:45 PM

Authored by Mark Jeftovic via BombThrower.com,

This past weekend I was at the Canadian Bitcoin Conference in Montreal, where I moderated a panel on Bitcoin As A Treasury Asset For Corporations. At the time I disclosed that 100% of easyDNS‘ retained earnings are in Bitcoin – and that the mark-to-market value of that Bitcoin is currently 300% of the retained earnings balance from our latest year-end financials (hold that thought: the main takeaway being – I have this business, going on over 25 years now, and there’s a stack of sats, cash, or any liquid asset, that the business has built up and continues to grow in retained earnings).

Also in Montreal, there resides a private equity firm that has been bugging me to sell them the business for a long time. Years.

Since the relationship has been cordial, I decided to take an in-person meeting while I was there and the main guy came out to Le Mount Stephen, where I was staying, and we had lunch. What became clear as we talked was that he had no interest in how easyDNS is actually positioned or differentiated, let alone what our growth trajectory or levers were.

All he really wanted to know was top line and EBITDA. “We don’t grow our companies organically”, he told me, “we just acquire them. As many as we can”.

The plan, it turns out, is to hoover up as many small businesses in the ISP, MSP, SaaS space as possible, and in a few years they’re going to mash them all together and take it public. That’s the plan.

It wasn’t even really a roll-up, from the sounds of it. There was no platform business into which the rest would be shoe-horned. It was just going to be a mud-ball.

He asked point-blank if I would be interested in being acquired – and I told him, like I always tell him – if the multiple is high enough and terms don’t suck, sure. Otherwise, no.

That’s when he explained his problem to me:

“When interest rates were zero, we could pay 5X or 7X EBITDA for businesses like yours. But now, with interest rates higher, we can only offer 3X or 4X EBITDA.”

In my business, believe it or not, private companies typically get acquired for a multiple of revenues or else a P/E north of double-digits. I was also having a hard time understanding why his cost of capital had somehow become my problem.

After explaining how the valuations worked, I pointed out that of the publicly traded businesses in our space, one was trading at a P/E of 13 – and the other two were losing money.

“Oh, but public companies are a completely different animal”, he lectured.

So in other words, I asked him, just to confirm I understood this correctly:

You want me to sell you my profitable and growing business for less than a fraction of cash and at a shitty low multiple?

“Exactly right” – he didn’t actually say that – but he confirmed it, but with the qualifier:

“We let you keep the cash”

I pointed out to him that if I just keep the business the cash is mine anyway.

It really was unfathomable why anybody would take this kind of a deal, but I did clue-in to what the entire value prop of the private equity fund was:

  • Borrow money and use it to acquire private businesses at 3X – 4X EBITDA

  • Flip the agglomerated holdco public at 10X to 15X EBITDA

That’s it.

No overarching blue ocean strategy, no thought toward compounding, no “organic growth” – no differentiation.

It was just an arb play, using borrowed, made-up money to sweep a bunch of privately held small businesses into a public entity and capture the spread.

This was not an isolated incident.

While easyDNS has had acquisition overtures from  the very beginning – the tempo definitely increased during COVID and has remained elevated. And we’re a pretty small company – tiny, compared to where you would think private equity typically plays.

While I was usually demurring before we got to talking about multiples, the overtures have been cutting to the chase earlier in the communications process, and it’s coming in around 3X to 5X EBITDA – to buy a business with SDE around healthy double-digit percentage of top line and with more cash on the balance sheet than the total acquisition price.

It’s insane but given that we’re in the shadow of a craze where even SPACs were being valued in the billions before they even had a business focus – it’s unsurprising.

To be clear – I’m not planning on selling the biz. My flight back from Montreal was delayed so I was whiling away the time shitposting about private equity on twitter and some clients were expressing concern that I was looking to exit. I am not.

As a Bitcoiner, I have extreme low-time preference – I wrote about this in the inaugural Bombthrower post, and recently revisited it in a twitter thread:

“No Exit Investing” – Totally Alien Concept to PE, VC and Fiat Finance…

As the fiat monetary system’s debasement has accelerated, I viscerally understood that the business is the asset – not the currency these swindlers are trying to get you to trade it for. I wrote about this years ago, even before M2 blew out about 30T over the pandemic, and I talked about the business as a “no exit” investment:

It is hard to build a successful company. By this I mean a company that is self-sustaining, maybe an off year here and there but for the most part healthy and profitable.

It’s also hard to build a brand. So at the prospect of selling off a successful company and an established brand for a pile of money, the big question I can never answer is Then What?

Thanks to worldwide government interventionism and central bank incompetence, all asset classes are malignantly distorted beyond recognition. What the hell is one supposed to do with the proverbial briefcase full-o-cash? You’ll hand 25% to 40% of it over to the government (even more, come June 25th here in Canada), and what’s left then carries a near negative yield because that same government has a “targeted inflation” policy.

Start all over again? With your negative yielding cash and a non-compete barring you from the one business you know best and your customer base and brand gone? The only asset I can possibly think of that produces the kind return on equity that easyDNS has for me, is easyDNS itself, so why sell it?

The private equity playbook is having a hard time being run at these higher interest rates, so holdco builders and funds are out scouring the terrain for healthy, profitable, small, privately held businesses to buy at lower valuations so that they can mash them together and flip them onto lumpenvestors at higher multiples.

It’s easy to understand why, once you realize that because fiat money is disintegrating, in order to keep expanding a financial system built on debt, you have to financialize all the things.

*  *  *

When the pandemic hit I had no idea how my small business was going to navigate it. So I laid out a Business Survival Blueprint in a huge mindmap and it helped me break things out into areas of focus and decision trees. Sign up to the mailing list and I’ll send you the PDF – you’ll also get The CBDC Survival Guide when it drops later this year. Follow me on Twitter, or Nostr.

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