This is genuinely funny.
We need to begin by laying out how private equity works.
Private equity is an asset class in finance that takes advantage of their scale (ie cheaper costs of capital) and structure (ie engineering transaction terms to screw everyone but the PE).
Every now and then you’ll find crossover funds that have more entrepreneurial spirit, but in general the business of PE is just that: a business.
This means you don’t take risks and you don’t lose money.
And you don’t need to create any true, intrinsic value to deliver returns for your shareholders, either: just use your cheaper costs of capital and overreaching covenants to effectively steal from the operators you supposedly “partner” with.
History is littered with major PE flops thanks to high debt and piss poor oversight.
But just because the operating company went under don’t think the PE funds didn’t make out like bandits.
We wouldn’t be so negative if PE could operate a business, but on the whole they’re worse than incompetent – they’re actually quite destructive.
They farm out analysis to the large consulting companies (who themselves are not operators), then heap everything on the management team while the PE earns substantially more, takes almost zero downside exposure, and has optionality in outcomes.
But there’s one creature the finance bros in PE didn’t see coming: the payments bro.
And here’s why it matters.
PE often creates returns by rolling up subscale businesses, adding a glutinous serving of debt, and consolidating all the back office functions to “professionalize” the operation.
Think services like dry cleaners, massage parlors, and tire centers.
These all start as SMBs, or small chains, and when they grow large enough PE becomes interested.
And you know what these SMBs are doing now more than ever?
Surcharging cards.
And if they ain’t surcharging, they’re dual pricing.
Look at the CAGR on SMB surcharging.
Now, payments is a total cheat code.
Everyone has to deal with moving funds as part of commerce, but PE funds simply haven’t figured it out.
Huge opportunity for someone to get it right.
But in the meantime?
PE will get pummeled by the payments bros.
Because nearly every merchant that PE will roll up will come with a surcharge or dual price cost component.
Think about it: larger US merchants, which PE seeks to cobble together, are rarely adding additional card costs.
So PE will be forced to eat the cost increase on acquisition OR pass the fee along to their customers in a higher top line fee.
The latter of which they’re fine doing, by the way, as most PEs mandate that their portco’s take price 2x annually (and naturally nobody ever measures the effects of the price increases because that’s more work than buying a golf membership).
But if PE just learned how payments works they could use this to their advantage if positioned properly.
Instead of making portco’s take price increases – where if a customer doesn’t like the price increase they bounce – swap one of the price increases with a dual price.
Now if the customer doesn’t like your price increase all they need to do is not force the merchant to fund their credit card points and they experience NO price increase.
It’s the fairest pricing model because instead of a blanket price increase that forces all a merchant’s customers to underwrite the subset of customers that are buying on credit, those who can afford to pay receive the lower price.
But, you know, PE is still more concerned with comparing their degrees than they are running a good business.
Two will enter.
Only one will leave.
The winner?
Try the one with the real-world experience who uses contracts as toilet paper.
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