How do private equity firms trade other countries debt and make money?
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Strip in down to the essentials and it becomes clear.
Group X buys group Y’s debt from group Z = private equity firm buys USA’s debt from China. It could also be bank buys John Doe’s mortgage debt from another bank, it’s all the same.
Perhaps China believes the USA will default on its debt, or wants liquid assets or whatever. The private equity firm will buy when China believes USA will default bc they can obtain the debt for pennies on the dollar and they believe USA wont default and actually make a payment. Or China really needs the cash and so they sell for more than they wil get from debt service bc they know USA will want to barrow more next year and they believe they will have more cash in a years time thus they sell again for pennies on the dollar.
Anyway you slice it regardless if it is mortgage securities, national debt, etc. it usually boils down to a desire for liquid assets or fear of missed payment and private equity firms leverage their namesake in controlled aggressive fashions to generate large profitability for their clients to justify massive fees accrued.
u/Darth_kahuna pretty much summed it up. But I wanted to add a lil bit, in case you didnt understand some of those fundamentals.
Say you take a loan for $1000 from the bank for 30 years. The bank, after interest, will get $1500 by the end of the 30 years.
But if the bank needs money RIGHT NOW, they can sell that loan to me. I will give them… $1100 for the loan. I know I stand to make $1500 in the long term, because you are a reputable guy who will eventually pay me everything you owe me.
Debt is in the form of bonds. Private equity firms buy/sell the bonds issues by various governments. In addition to collecting interest, the shifts in currency exchange rates and interest rates can affect the value of the bond itself.
Good explanations here. I’d add the really simplistic view that debt is a liability for the borrower (they owe that money plus interest to someone), but to the lender it’s an asset (someone owes them that money). Look at it as a hose, money flowing out of one party (paying the debt) is money flowing into the other party (receiving the debt payments). Selling debt is just changing where the outlet of the hose points.
Let’s say I want to borrow some money. You have money that you want to lend me as an investment.
So we write up a contact. You lend me £100, and I give you a contact that says I’ll pay you £1 of interest every year, until the end of the contact in 20 years, which will be £20 of interest. At the end of the contract, I’ll give you your £100 back.
This contact is thus worth the original £100 that you’ll get back, plus the £20 interest, so £120 total. In finance, this contact is called a *Bond.* Nations and large businesses can borrow money by issuing these bonds that get paid out over a long time.
Now here’s the kicker – Bonds can be traded on the market. The bond is worth £120, and I can sell this bond to someone else, for say, £105. Whoever owns the bond will receive the payments from the nation or company each year when it pays out. They buy the bond for £105 now, and they’ll get £120 in return by holding this bond for the next 20 years, so a £15 profit for holding the bond long term.
A private equity firm will buy bonds on the market. And then they’ll hold them over the long term term and collect the interest on them. A private equity firm will have a huge portfolio of many different bonds, paying out at different times.
Bonds are a great way of investing in the long term. They are less risky than shares, and return a greater amount than keeping your money in the bank and collecting interest. Many professional investment firms prefer to invest in bonds over shares due to their low risk.
Now, there are risks. Inflation reduces the value of money, so inflation is a bond’s greatest enemy. The company or nation that issued the bonds can also run out of money, and may *default* on its debt, which means it fails to pay out when the bond says it must. This can reduce the value of the bond to nothing, so it’s important that investors hold bonds from many different nations or companies to mitigate that risk.
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