Thread by @BrentBeshore

Politely disagreeing with friends is fun. @BillDA you're wrong and you suck. JK.

In all seriousness, yes, debt is a tool. Not sure most people need the nudge to use more.

Here's why @PermanentEquity hasn't used debt in our last 6 deals (gasp!) and why we think that's correct.

https://twitter.com/BillDA/status/1395519187532107779

Debt is not a source of returns. It’s an amplifier. It’s a way of taking good returns and making them better. Or taking mediocre returns and creating problems.

Let’s state the obvious: With perfect information, you’d always employ max leverage.

The challenge is that the world is messy and unpredictable. We think we’re far more in control than we are. People go off the rails. Pandemics hit. The price of oil goes negative. Digital shared fictions become a $1T asset class. Musical chairs look available until they’re not.

In the complicated real world, debt removes options and creates fragility. When stuff happens, you always have less available resources with debt. Sometimes you need to fix a problem. Other times you need to take advantage of opportunity.

Debt reduces your ability to do either.

Most only consider the downside with debt — things get sideways and your lenders own/run the company.

But, you also sacrifice reinvestment opportunities, which is why private equity is not known for their long-term, thoughtful, and generous capital allocation.

If you have a business with no problems and no opportunities, debt is your best buddy. Buy him another round of drinks and let the good times roll.

For the rest of us, it comes down to judgement around how much I’m willing to give up and get in various situations.

Debt to fund transactions introduces underwriting uncertainty and complexity, invites more cooks in the kitchen, slows down an already difficult process, and places pressure on a business at the exact wrong time.

Can debt make them sweat? Sure. It can also cause heat stroke.

For @permanentequity, keeping transactions simple is valuable, maintaining optionality is crucial, and giving our companies the best shot at making good long term decisions with abundant resources is priceless.

But, we’re also necessarily underperforming in hindsight too.