Private Equity Puts Debt Everywhere

The Financial Times has a fun graphic feature titled “How private equity tangled banks in a web of debt,” the essential point of which is that everything in finance is more fun with a bit of leverage:

I once wrote that “a (the?) main move in finance” is this: You take a thing with some risk, you divide it into a risky first-loss piece (the equity) and a safer second-loss piece (the debt), you sell the risky piece to people who want high returns and the safe piece to people who want safety. “Also you can compose this move: You can divide a bunch of things into junior and senior claims, bundle a set of junior or senior claims together, and then slice that bundle into new junior and senior claims.” This FT feature is a series of pictures illustrating that point. Take a set of cash flows anywhere in the vicinity of private equity — the earnings of a company, the returns to private equity limited partners, the commitments of those LPs, the fees paid to the general partners, the the payments on a loan — and you can slice it into safer and riskier pieces, fund the safe piece with debt and juice the returns on the riskier piece.