The McNamara fallacy. One of my favorite fallacies vaguely related to Goodhart’s Law

https://en.wikipedia.org/wiki/McNamara_fallacy

That's only possible if the financial system is valuing things systematically incorrectly.

IFF a company is truly, honest to god, less valuable than the sum of its parts, then it (or the subset that would have more value to someone else) SHOULD be dismantled, and those resources sold and reallocated to more productive use. You probably make these sorts of decisions in the capacity of your own personal finances without even thinking about it.

On the other hand (and what I believe is likely happening is) if cynical financial engineering is allowing you to turn a useful company that's valued poorly by the market into a useless company that's is paradoxically highly valued by the market, in the short term, and that keeps happening over and over again, then the tools used to calculate the market value are wrong.

This is illustrated by how PE commonly trashes trusted brands. A brand doesn't show up in your EBITDA. If you trash a brand quickly enough by cutting costs and quality, some institutional sucker will buy the company because they haven't clocked that the current EBITDA is elevated due to asymmetry in how quickly the costs come off and how quickly the revenue falls off after burning the brand.

They've simply valued the company wrong.

Bringing morality into it opens a whole can of worms that I don't think we have the tools to answer.

My view is companies don't have a conscience, and any expectation that they are going to independently act with moral righteousness is unrealistic. Any perceived conscience is either for marketing (green/pinkwashing), or the sum of the morals of their owners multiplied by their willingness to exert any moral authority over the company.

Besides, if you try to imagine a company having an independent conscience, what even would that conscience be based in? I'm vegetarian and think it's immoral to eat meat, but obviously I'd be insane to expect companies to divest from meat based on my peculiar moral position.

In most cases, people do not exert any moral authority over anything they own. Do you actively select your pension investments based on your morality and vote in the shareholder meetings? If you do, I'm genuinely pleased and happy that someone is. But the reality is most people don't give their investments any thought beyond "line goes up", so companies end up acting as ROI maximisers.

So: the main way we enforce morality on companies is ultimately the government. If you want companies to act morally, you set the rules such that an ROI depends on following our democratically agreed set of regulations. Maybe that even harms economic growth but we still consider it worth it (which is typically how we think in Europe, but look at our economies are doing!). However, the company and its investors are still acting as ROI maximisers.

> As long as customers choose services based on quality.

If the market doesn't reward this then maybe quality isn't important to the customer. Could be price, location, availability, etc. - PE can absolutely create that value even when they roll up 70% of your local HVAC market.

> The HVAC for example - the large firms around you do not run HVAC/plumbing/electrical, they run marketing companies that happen to schedule and bill H+P+E service appointments.

Maybe if you’re talking about the small residential market, that’s not where the money is.

The large HVAC/Electrical/Plumbing contractors in my area all perform their own work, including the one I work for. Large contractors do commercial and industrial work, not service calls for homeowners. Doing service calls homeowners sounds like a nightmare, personally.

Bain Capital just bought Service Logic which is a holding company for HVAC contractors. They own a couple of the local HVAC shops and they all have their own PMs, sales, estimating, and field staff.

This is true but to use your example of an emergency room:

It's not uncommon in more rural areas to find a business that is essentially "more than an urgent care but less than an emergency room". e.g. they aren't doing trauma surgery but they can deal with broken limbs, severe lacerations etc that an urgent care couldn't handle.

My point is that while it's true that there are "step functions" in certain services, this is not always the case.

When it's an essential service for "everyone", and the economics make healthy competition unworkable, the traditional solutions have been municipal ownership and publicly regulated utilities. Those include Fire Departments, Water & Sewer Dept's, Electric & Gas companies, ...

sure. not just that. certainly part of the issue is that the market is not perfect information.

but there are plenty of other reasons as well.

starting a new venture, whether from the foundation of an existing company or doing a new one takes investment and carries risk. maybe the sales relationships the existing company had were the results of decades of investment. maybe the ownership or the employees had a specific skillset or maybe they used tooling that could be bought easily anymore. maybe they had an important and established relationship with suppliers.

maybe PE moved in because the business was viable, but not really growing and there isn't sufficient upside to motivate investors.

or the business only existed because the owner just loved that thing so much and funded it at a near-loss out of family money.

or the business was based on a huge capital investment or ownership of property in a key location that happened 20 years ago and isn't possible to replicate because of changes in the environment.

there are 1000 reasons why these things aren't spherical cows.