It reminds me of the old argument that says, if a business owner wants to take on a private equity investment, he/she is obviously a savvy entrepreneur with a solid strategic mindset, hence why we want to do business with him/her. However, if they don’t want us on board, obviously they’re deluded and immature and hence, we wouldn’t want to do business with them anyway.

The same goes here, banks (or credit teams) that provide lots of debt for us to gear our businesses obviously have an appreciation for capitalism and the value we private equiteers add to society. However, those that demand us to put in more equity, or don’t let us pay special dividends, or are too harsh when we breach, obviously don’t have our country’s (or the world’s) interests at heart. They’re obviously trying to destroy the global economy.

I hear this stuff every day.

Of course that’s murder for the IRR, and of course it has implications for the same game happening across a wider portfolio – but it’s what a responsible long-term investor would do, whether in the case of a listed entity or private family enterprise.

PE evidently still wants banks to be taking equity risks for historic low debt returns. But the balance of power has shifted and the bank knows it can take the company down and still recover most/all of its debt… the same cannot be said for the PE boys that have to keep the play alive for as long as possible for the equity to come back…

@Jordan: yes, I know it’s unfair to blame them (hence, my last sentence about the likelihood of private equiteers providing leeway to founders when it comes to earn-outs and ratchets.) However… I don’t think they’re aware of the fallout they are creating by not thinking through their responses to covenant breaches. It makes no sense to employ investigators whom mostly profit from bankruptcies. They are conflicted and motivated to give bad reports since they’ll likely win the work to manage the bankruptcy if the business fails. It’s just like doctors receiving commissions for selling certain drugs; it’s a conflict we want to avoid from the beginning.

You know, private equiteers are generally very tough when it comes to negotiating earn-outs and ratchets, which are somewhat similar to these covenants and their repercussions. So, maybe we don’t deserve any generosity. But there’s a bigger issue here. A global economic issue much bigger than the banks themselves.

As an aside, there is a world outside the States. A world where banks haven’t failed, where they’re profitable, very profitable in fact. I’m not talking China either, I’m talking about developed countries. As I said earlier… we need to be honest with ourselves. The financial system in the States may be diverse and competitive, but it’s an absolute mess. We’re all to blame, not so much for greed (like people like to blame the States for), but for ambition and initiative. You can’t have the ups without the downs. Other countries took it a little easier and they’re doing much better for it. In this case, they may have benefited from conservatism, but it’s not always the case. Such is life.

Secondly, with over 100 small bank failures this year, many of the banks are scrambling to try and survive themselves. Granted, much of this is due to poor management – bad risks taken – but much of it is also because they made “safe investments” with their assets in preferred stock of government sponsored institutions Fannie Mae and Freddie Mac that were wiped out when the government intervened to “save” them. Now the health care plan is place more taxes, fines and penalties on small businesses for their health care plan. Seems to me the government is waging war against the profits of small businesses.

So, if you call back on the last post, building communities can help you even with this – if you’re a well-liked local baker, it might be easier for you to raise money from your local community than from your bank.