Somebody really good at the economy needs to explain to me how a PE firm buys a company using the company it’s buying as collateral for that financing, and then somehow, that acquired company is the entity that debt is attached to.
Imagine if us poors could buy a Hummer EV financed against itself and then the truck had to self-drive for uber to pay its own payment, under penalty of being put in a crusher. Oh and you get paid by the thing for the privilege of being bought.
But that’s exactly what happens when someone buys a Hummer with an auto loan?
You put 10% down (say $10,000) and the bank lends you $90,000 based on the lien they have on the hummer.
No different than a leveraged buyout - PE firm buys a company with cash down and takes on debt for the rest of the purchase using the assets of the company as collateral.
It makes a lot more sense if you think of it in steps - negotiate buyout agreement with owners, close purchase with cash and take ownership, then as CEO have the company take on debt and use the loan proceeds to close the deal.
Just like if you went to a dealership and negotiated a deal where you purchased the hummer for $10k, they transfer ownership to you, then you go to the bank and get a loan using vehicle as collateral then pay the dealership the loan proceeds to close the deal.
Where I think you’re confused is the “how do they take a loan on an asset they don’t own?”. The answer is they don’t. It’s multiple steps and they own the company they use as collateral.
Yes, it is the same way you buy a home mortgage or get an auto loan.
You find a bank that thinks there it can make money from interest payments or collecting the asset.
it really is that simple. If self driving trucks were a good bet, banks would be happy to loan entrepreneurs money to buy them.
It’s entirely different. When I buy a car, as I’ve done a few times now, that debt is mine. I’m responsible for it. When I bought my corvette, despite the fact that I can’t drive it about four months out of every year, I’m still responsible for those payments. And if those payments were to stop:
- the asset would be repossessed
- the bank would wreck my credit
And most importantly IMO, to really spotlight it: I am paying that loan. I took out a loan for however much, with a payment schedule to pay it back. That is completely different and much more reasonable than “I borrowed money to buy a thing and now that debt is on that thing.”
And that’s before you even get into their various “fees.”