Wow. That sounds like a downright responsible way to do business.
Hedge funds always love to claim that they fix companies and make them healthier, but most of them have a reputation for looting them, loading them with debt, and then dumping them at a temporary profit. It's good to see that Warren Buffet actually tries to make businesses healthier.
Hedge funds and private equity are slightly different. Private equity is the leveraged buyout business that got rebranded after its callous performance in the 80s. Hedge funds are usually long/short in public equities (stocks, bonds, etc). Those guys haven't been performing well, and they have had a secular decline in their ability to charge high fees to clients. 2/20 doesn't exist for the vast majority of HFs anymore, more like 1/15, etc.
There are a small number of funds that do growth equity (where they buy a small business and grow it), but so much of it just depends on financial engineering in the way you mentioned in your comment.
Yeah, a handful of funds do focus on growth. But it's a small part of the industry, and they typically have longer exit timelines than the "mega-bucks" PE firms.
Berkshire is one of the best run organizations in America.
Most private equity that uses leverage actually destroys businesses. Just look at what happened to toys r us for example. That's extremely common.
The problem is that when private equity buys a company, it usually uses lots of loans to do so. Then the most experienced people in the business are removed or deincentivized (the previous owners). Finally, this now poorly run and heavily in debt company struggles to survive and goes bankrupt in the next recession.
You will see this pattern repeated over and over with private equity.
They self-deal. The loans are used to pay management and other fees from affiliates entities.
When the parasite finishes the digestion of the host and it goes bankrupt, they get to write down the losses against the money made on those fees, and the actual losses are distributed amongst the partners in the syndicate.
Companies that may go bankrupt are paying higher interest than normal, stable SP500 companies. This is attractive to people who want to get higher returns at the expense of additional risk. In other words, the existence of these loans is a necessity due to the way the market operates.
Alternative view (not necessarily my view): Hedge funds are able to buy companies that are already in trouble. They do a lot of up-front financial engineering to free working capital for last-ditch efforts. Frequently, those last-ditch efforts don't work and the companies fail anyway.
Obviously, this isn't universally true, but, not all troubled companies can be saved, or really, need to be saved. The standard pivot model just doesn't work on most businesses, while deferred investment and cash flow problems are always fatal.
Hedge funds always love to claim that they fix companies and make them healthier, but most of them have a reputation for looting them, loading them with debt
The genius of PE is convincing the public that all the bad things they do are actually done by “hedge funds”.
Hedge funds always love to claim that they fix companies and make them healthier, but most of them have a reputation for looting them, loading them with debt, and then dumping them at a temporary profit. It's good to see that Warren Buffet actually tries to make businesses healthier.