Private Equity: Your Ears Will Bleed

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Speaker 3 Welcome to Stuff You Should Know, a production of iHeartRadio.

Speaker 3 Hey, and welcome to the podcast. I'm Josh, and there's Chuck, and Jerry's here, too.
And this is Stuff You Should Know

Speaker 3 the podcast.

Speaker 2 Oh, wow. Fancy.

Speaker 3 Yeah, I wanted to dress it up a little bit because

Speaker 3 it's our job, Chuck, to yank

Speaker 3 what could be a bone-dry, boring economics lesson from the maw of,

Speaker 3 well, boredom. Shake it up a little bit by the collar.
Look it in the eye and say, you will not be boring today.

Speaker 3 And then do all that.

Speaker 3 All right. Okay, we can do it, Chuck.
We're professionals.

Speaker 2 I'm glad you feel good about it.

Speaker 3 I do. And I'm going to make you feel good about about it too.

Speaker 3 Because what we're talking about today is no mere typical economics.

Speaker 3 And we're famous for having trouble wrapping our heads around economics. This one can be that way too.
We're talking about private equity today. We'll explain all about it.

Speaker 3 The reason it can be hard to wrap your head around is because it's so insanely unfair, the structure of it, that it just doesn't make sense.

Speaker 3 So you just kind of have to accept it on its face that this is actually how it is.

Speaker 2 Yeah, I would agree.

Speaker 3 It's nuts. So, private equity, I guess we should probably start out with a little bit of a definition, Charles.

Speaker 3 It's an alternative investment vehicle. And essentially, what it is, is it's a fund, a private fund.

Speaker 3 You have to basically be in the club to even invest in this, at least traditionally, they kind of open it up a little more.

Speaker 3 And private equity goes around and essentially either buys huge controlling interests in companies or just buys the companies outright, trims them down, makes them lean, mean, and efficient, and

Speaker 3 ideally turns them around for a healthy profit, walks away, does it again. Everybody who invested gets even richer than they already were.

Speaker 3 And that's the basics, the very most basic definition of private equity.

Speaker 2 Yeah,

Speaker 2 it's something that's become much more popular in the past 20-ish years, but really kind of started in the 70s, as we'll see. And it's an alternative investment.

Speaker 2 So it's not like stocks or bonds or anything. It's generally a little riskier.

Speaker 2 There's less oversight. There's less transparency.

Speaker 2 And they want to keep it that way.

Speaker 3 Yeah. Yeah.
They've actually gone to great lengths to make sure that it's much less transparent.

Speaker 3 One reason why the government, who is in charge of regulating stuff to make it transparent, like stocks and bonds and disclosures and all that, is that you or I or anybody could walk along, open up a brokerage account and start buying stocks and bonds.

Speaker 3 You don't have to be savvy at all. To invest in private equity, because of the risk, because it's just so different from traditional stocks and bonds and normal investments,

Speaker 3 the government says you're on your own. As a matter of fact,

Speaker 3 you have to register as an accredited investor, which says that you either know what you're doing so much that we don't have to worry about you losing your shirt, like you're going to just deal with it if that happens, or you have so much money it's not really going to matter if you lose your investment those are the people who can um can invest in private equity and usually they're what institutional investors right like huge massive like funds or college endowments or something yeah uh and the people who really come out on top are the people that manage these

Speaker 2 if you're a managing partner there's a formula known as two and twenty where the company that you're managing, that you have taken over, they pay you 2% 2% of the total assets of that company plus 20% of the profits above whatever threshold that you agree on, I guess.

Speaker 2 And then there's all sorts of other ways that they can make money, as we'll see, like

Speaker 2 selling the land that the business sits on

Speaker 2 maybe to yourself and then renting it back to that same company at a higher rate.

Speaker 2 So, yeah, we'll dig into all that. But

Speaker 2 the people that are really getting rich are the people that are

Speaker 2 investing in these, but really managing these.

Speaker 3 Right. So, if you ever hear a news story about some guy who ran some great

Speaker 3 venerated company into the ground and they're like, Yeah, I mean, even I lost my investment.

Speaker 3 Do not feel bad for them because they made probably hundreds of millions or billions of dollars for themselves from those fees.

Speaker 3 And those fees can't be taken back like because that company's in bankruptcy, because you can show that they did a terrible job job of managing this company. Doesn't matter.

Speaker 3 They get to keep that money no matter what the turnout is, no matter how many people lose their jobs.

Speaker 3 That is why almost everyone in the world hates private equity people.

Speaker 2 Yeah, and they generally do this to private companies. Sometimes it'll be a controlling interest in a much larger publicly traded company.

Speaker 2 But, you know, generally we're talking about private companies here.

Speaker 2 And, you know, we're going to go through industries and different examples of specific companies in a bit.

Speaker 2 But it's usually almost always what's called a leverage buyout in which the money to buy this company comes from a huge loan that that company is also then responsible for.

Speaker 3 So it's

Speaker 3 it's really

Speaker 2 whoever came, I mean, I guess we'll get to who basically came up with this stuff, but

Speaker 2 it's a sort of evil financial genius on a level that is kind of hard hard to comprehend that it was ever allowed to happen.

Speaker 3 Yeah, it's the best analogy I've been able to come up with is it's like if you went and bought a house, the house had to go take out a loan and a mortgage so that you could buy and own it.

Speaker 3 And you didn't actually care about the house because you're planning on selling it down the road. So you didn't keep it up.

Speaker 3 And then you just decide to walk away from the house and the house is responsible for paying off. the loan it took out so you could buy it.
That's the best I can come up with. Yeah.

Speaker 2 I mean, that's a thing. And it's a big thing.
Right now, private equity firms, the companies they own in the United States employ more than 13 million people.

Speaker 2 And they account for about 2 trillion of, which is about 7% of the GDP.

Speaker 2 And like I said, it all started out in the 70s with a guy named Milton Friedman from the University of Chicago who was, I mean, it seems very sort of old hat now to hear, but he was kind of one of the first people to step forward and say, the only thing any corporation should ever worry about is their shareholders.

Speaker 2 The people don't matter. The product don't matter.

Speaker 2 It doesn't matter, rather. English grammar doesn't matter.

Speaker 2 And the only thing that matters is the profits that we turn for our shareholders. And once somebody kind of said the quiet part out loud, everybody's like, oh, well, he said it.

Speaker 2 So that's what we're going to all try and do now.

Speaker 3 Yeah. One of the worst ideas in the history of the world.
And it just took off.

Speaker 3 So, yeah, Friedman, that was step one.

Speaker 3 Step two was laid, well, step two through 10, I would say, was laid out by a guy named Michael Jensen, who was an economist with Harvard Business School in the 70s and 80s.

Speaker 3 And he basically said, traditional companies that have, you know, you've got a CEO and you have employees, and the CEO is paid a certain salary a year, and everything's great.

Speaker 3 That doesn't work because the CEO, the person making the decisions and what moves the company makes, they might be in conflict with the shareholders.

Speaker 3 They might be spending a bunch of money and they don't care.

Speaker 3 They don't care about the shareholders, the investors who, again, as Milton Friedman said, the entire purpose of the corporation is to enrich the shareholders. So how can you bring a CEO in line?

Speaker 3 And he said a couple of things. One, you can pay them in stock.
So that whole thing about how CEOs get huge stock packages now, that came from Michael Jensen.

Speaker 3 And the reason why is because now suddenly they're a shareholder. So they care about what the shareholders are getting, right? That's number one.

Speaker 3 Then, number two, if you buy a company using that leverage buyout technique where you make the company take out tons of loans so that you can buy that company, it's saddled with so much debt that it immediately has to figure out how to get lean and mean, emphasis on mean,

Speaker 3 so that it can keep afloat and pay off of those debts.

Speaker 3 So like immediately managers have to trim the fat and it just gets more efficient and outperforms just a traditional company, traditionally run company. That was Michael Jensen's contributions.

Speaker 2 Yeah. And, you know, we're going to talk about the different ways this happens.

Speaker 2 Obviously,

Speaker 2 firing people is a big way to trim the fat, to pay back those huge loans that someone took out on your behalf that you're now responsible for, once again.

Speaker 2 So, you know, mass layoffs is one way to make that happen. That's one way to trim the fat.

Speaker 2 Even if it, you know, makes the company not function as well, it doesn't matter.

Speaker 3 Right.

Speaker 2 You know, sometimes there is fat that can be trimmed. So we're not saying like no one should ever be laid off or anything like that.
Like we're realistic people.

Speaker 2 But we're talking about leverage buyouts and kind of how they work. So another thing they can do is break them apart.

Speaker 2 And if you've ever seen the movie Wall Street with the great Michael Douglas, I just watched that again for the billionth time recently. Oh, really? Yeah, very, very good example.

Speaker 2 It's one of my favorite movies, but very, very good examples of all this stuff in there as far as like buying, in his case, when he bought Charlie Sheen's father's airline just for the sole purpose of breaking it apart and, you know, driving it into the ground to get rich.

Speaker 2 Right.

Speaker 2 But,

Speaker 2 you know, selling off assets is another way to do it. Like I mentioned, like selling off the land that the business sits on.

Speaker 2 Sometimes that equity firm owns.

Speaker 2 the real estate company as well that buys the the land that the company sits on and then leases it back to that company uh sometimes against their best interest at like higher rental rates.

Speaker 3 Yeah, I'll give you an example. We'll talk a little more about Red Lobster, but

Speaker 3 they got taken over in a leveraged buyout, and the company did exactly that.

Speaker 3 They sold off all of their assets, all of their restaurants, just sold them off, and then they sold them to a company who turned around and leased them to Red Lobster, right?

Speaker 3 The Red Lobster was paying an estimated $16 million a year for just a 1% property tax on its locations, all of them, $16 million. Now their leases amount to $158 million,

Speaker 3 right? So these are just terrible, terrible business decisions. And the reason why is because anytime a big influx of cash comes in, it gets divided up among the investors.
They get tons of money.

Speaker 3 And it's not just like from selling properties, Chuck. One of the other ways that investors get their money back and get a return on their investment is they'll take out more loans from the company.

Speaker 3 After the company's been bought and has all this extra debt, they'll take out even more loans.

Speaker 3 And when that money comes in, rather than spending it on the company, they'll divide some or all of it up among the investors. So it's like a vampire process at its worst.

Speaker 3 I feel like we really should say something to be fair.

Speaker 3 There is a lot of well-run, well-thought-out private equity firms that know what they're doing that actually have saved companies from going under. It happens.

Speaker 3 It's just when it's bad, it's so bad that

Speaker 3 it almost makes it seem like there shouldn't be

Speaker 3 this type of business model. Yeah, for sure.

Speaker 2 Sometimes it's a real quick thing. Like in the case of Wall Street, like there was no long-term plan for Gordon Gecko and Blue Star Air.
It was like a house flip.

Speaker 2 You buy this company, sort of a smaller company, and you want to make it look good for maybe another private equity firm to come along and buy.

Speaker 2 So you're going to, if you're a manager of that firm, you're going to make a lot of very short-term decisions that make it appear much healthier than it really is on paper.

Speaker 2 So they can just kind of turn it and flip it and get a big payoff. And then it's someone else's problem where they're going to do the same thing probably.

Speaker 3 Yeah. And like you said, one of the big things that happens is including layoffs, including just sucking the company dry of its money, is the customer suffers as well.

Speaker 3 Usually the product or the service takes a really big hit because you're trying to figure out how to put that same thing out and charge as much as you can for it by putting as little as you can into it.

Speaker 3 Because the people who bought the company don't really care about the company or what it does.

Speaker 3 Good time for a break. I think so.
And then we'll come back and talk some more about the history of this whole thing, huh?

Speaker 2 All right, I need to go get some pomade and grease my hair back real quick.

Speaker 3 I'll be right back. Okay.

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Speaker 2 I should mention real quick that

Speaker 2 I love Wall Street so much that I was watching it again and I was like, I wonder if there's a t-shirt that says Anicott Steel.

Speaker 2 It's just one of the companies that they, you know, one of the fictional companies that Oliver Stone wrote into the movie.

Speaker 2 And sure enough, there's an Anicot Steel t-shirt. I bought it.
I love it.

Speaker 2 I hate the message of the movie and Gordon Gecko. I don't think he's the hero or anything like that.

Speaker 2 But it's just a movie I've always loved. And now I got my Anicott Steel shirt.
Just kind of as a movie crusher type. So when people see me that know that movie, they'll be like, oh, Wall Street.

Speaker 2 Right.

Speaker 3 No, I get it. I get it.
I used to have a sweatshirt that was like the print of Danny's sweater, the Apollo 11 sweater. I loved that thing.
That was one of my more beloved pieces of clothing.

Speaker 2 You know, I met the guy who owns that that sweater.

Speaker 3 Oh, really? Tim Johnson?

Speaker 2 No, Lee Uncrick, I think is his name. He's a big

Speaker 2 animation guy. I think he did Coco and a bunch of other big

Speaker 2 animated films, and he was such a fan of The Shining that he bought that real sweater at auction.

Speaker 3 Good for him. I hope he's never tried it on because that's a tiny sweater.

Speaker 2 Well, you wouldn't a big guy.

Speaker 3 It doesn't matter. That is still a very...
Danny was not a... He was a tiny guy.
Yeah.

Speaker 2 Should we talk about about history?

Speaker 3 Yeah, I think we should, Chuck.

Speaker 3 So this whole thing is kind of newish, right? I mean, we usually associate it with the 80s, and it's pretty accurate, but it goes back a little further.

Speaker 3 It's just the 80s are when it really took shape and got off the rails the first time.

Speaker 2 Yeah, for sure. The first leverage buyouts, though, came after World War II.

Speaker 2 There were some dudes from Bear Sterns.

Speaker 2 Jerome Kohlberg, Henry Krabis with a K, and George Roberts. So they were KKR.

Speaker 2 They got together. They started,

Speaker 2 you know, with this idea of leverage buyouts for small companies like

Speaker 2 family-owned businesses. This is in the 1960s.
And in the mid-70s, they formed Kohlberg, Kravis, and Roberts, the KKR business.

Speaker 2 And their first big success story for them as far as making a ton of money doing one of these was a machine tooling company, or a tool company rather, called is that Holdale?

Speaker 3 Hoo Dale? Hoodale, maybe? Hoo Dat?

Speaker 2 H-O-U-D-A-I-L-L-E Industries. This is in 1979.
They bought it for 380 million bucks, of which they paid about a million bucks.

Speaker 2 Once again, as we've already learned, the company was saddled with debt immediately, covering the remainder of that money. And they got a new CEO.

Speaker 2 They said, hey, we're going to pay you double what the previous CEO got. And we're going to start raking in these fees as the, as the fund manager.

Speaker 3 Yeah. And so Hoodale, which at the time of this purchase was doing really well.
It had been around since I think the 19 teens.

Speaker 3 It was fat with cash. The employees were happy.
And these guys just ran it into the ground and sucked as much money as they could out of it. And

Speaker 3 what usually gets companies in this case is they're so settled with debt that a recession comes along or things shift, like we go from brick and mortar stores to online, and they don't have the cash to keep up because they're spending too much of it, either giving it back to investors.

Speaker 3 Well, you can't even say back, just giving it away to investors or keeping up with their interest payments on these loans that they eventually just sink and end up in bankruptcy and their debt gets restructured.

Speaker 3 And if they're lucky, they can come back out of it and try the whole thing again.

Speaker 3 Yeah.

Speaker 2 For sure.

Speaker 2 About 10 years after that, one of the big, big ones, early ones, took place, such that they wrote a book about it and made a movie about it.

Speaker 2 If you've seen the movie Barbarians at the Gate with James Garner, I haven't.

Speaker 3 Have you?

Speaker 2 No.

Speaker 3 I've always wanted to. Hey, it's out there, buddy.
Okay,

Speaker 3 that's not a Tom Wolf book. I'm thinking of a man in full, aren't I?

Speaker 2 Yeah, I think so. I can't remember who wrote the book, but the book was called Barbarians at the Gate, colon, the fall of RJR Nabisco, because it's about RJR Nabisco, and there is no more RJR Nabisco.

Speaker 2 No. There's RJR and there's Nabisco, but that company ceased to exist after that leverage buyout.

Speaker 3 Yeah, and I think 2,000 people lost their jobs as the company was sold off in pieces. And then finally, like you said, the whole thing went down.

Speaker 3 And at the time, this is 1989, I think you said, 2,000 people losing their job because some corporate raiders came in and screwed up a good thing. That was that was enormous news.

Speaker 3 And that really kind of put a period on the end of what had become

Speaker 3 almost like the Wild West. Like these people were, in some cases, like outlaw folk heroes who were just coming into corporates and taking everything.

Speaker 3 People getting laid off and then they go off 50 times richer than they were and do the whole thing again, right? So they got a bad name in the 80s. And by the time the 90s rolled around,

Speaker 3 things got a little more legit, a little more structured. Some of the players involved got a little more,

Speaker 3 I don't know, it was more legitimate players than just some Maverick guy who worked at Bear Stearns or, you know, Goldman Sachs for a little while and then additionally some other firms whose names we know because this stuff is just so nuts that it makes the news bain capital um was founded in the 80s blackstone founded in the 80s carlisle group founded in the 80s so the 80s were a big deal the 90s everybody kind of kept a low profile and then the 2000s a boom started to come back again yeah a big boom um

Speaker 2 you know every everything crashed we've done a couple of episodes kind of around the 2008 uh crash.

Speaker 2 But a lot of private equity firms did okay. It's not like they were completely unscathed or anything like that.
But they were better off than a lot of financial institutions after the crash.

Speaker 2 And after that, Congress was like, hey, maybe we should have some more guardrails and reporting requirements on this private equity business.

Speaker 2 Because that's a term that kind of just came around in the 21st century, even though it was happening. Private equity as a term came around, I think, in the early 2000s.

Speaker 2 And even though they put some more reporting requirements around it, still way less transparent and way fewer requirements than, you know, the publicly traded companies and the stock market and banks and stuff like that.

Speaker 2 Right. But there's been a real boom since that time.
The number of companies publicly traded has dropped about half since 1996, where it was at its peak.

Speaker 2 And a couple of years ago in 2023, there were five times as many private equity-backed firms as publicly held companies.

Speaker 3 Yeah, because it's just you don't have to worry about the government meddling with your stuff. It's crazy.

Speaker 3 So, some of the

Speaker 3 some of these like deals make headlines, and usually, when it makes headlines, it's because it's gotten so bad that the average person wants their blood to boil reading about it.

Speaker 3 So, the news says, Here, read this.

Speaker 3 One of the big ones that I remember was Toys R Us.

Speaker 3 Yeah.

Speaker 3 One of this, and this is another thing. It will also make news if like a beloved nostalgic brand just gets torn apart by corporators.
And Toys R Us definitely fit that bill.

Speaker 3 You know, most people our age have memories of going to Toys R Us and it being like, how does this place exist? This is the most amazing place on the planet.

Speaker 3 In addition to that, even more importantly than that loss of nostalgia, is that 30,000 people lost their jobs because of a private equity takeover of Toys R Us that eventually ran it into the ground.

Speaker 3 Yeah.

Speaker 2 I mean, it makes some of those earlier ones where, you know, 1,000, 1,200 people lose their jobs seem quaint.

Speaker 3 Yeah. 30,000 people just, sorry, you don't have a job anymore.

Speaker 2 Yeah, there's this guy. I mean, we got to talk about Sears because that's another one.

Speaker 2 Iconic brand, iconic brick and mortar store.

Speaker 2 I would say there's some nostalgia tied up in Sears for sure.

Speaker 2 And a guy named Edward Lampert is someone who may not be on your radar unless you follow this stuff a little little more closely.

Speaker 2 Kmart files for bankruptcy in 2002. And Ed Lampert comes in.
He was a Goldman Sachs guy. And he, I think, former by this time.
Right. But he buys up a bunch of the debt from Kmart.

Speaker 2 They come out of bankruptcy. And then he has a hedge fund, ESL Investments.
And they were the largest shareholder. And so thus, he becomes the chairman and can then run the show.

Speaker 3 Right. And he says, Kmart, I think we should buy Sears.

Speaker 3 And he had a pretty big stake in Sears, too. So much so that he was later accused of devaluing Sears so that he could buy it through Kmart for cheaper.

Speaker 3 Regardless, Kmart bought Sears and they formed the Sears Holding Company, which was this huge, massive retailer.

Speaker 3 Kmart was not doing very good. Sears was doing amazing, tens and tens of billions of dollars in sales every year.
And for the first couple of years, things were going pretty well.

Speaker 3 But Edward Lampert, being a corporate rating private equity guy, again, this is his his firm. So he is directly taking hundreds of millions of dollars, that 2% of the assets every year, plus that 20%

Speaker 3 when he gets above performance goals. So by juicing this company and like boosting the stock price and the value of all this stuff, he's getting huge percentages of that every year, right?

Speaker 3 The problem is these bad management decisions. This is when it goes bad and this is when you end up reading about it.
One of the big things they did was a stock buyback, right?

Speaker 3 And if you have a bunch of stock out there, a bunch of shares out there on the market,

Speaker 3 just by like the laws of supply and demand,

Speaker 3 they're worth less than if they're scarcer. So you go as the company and buy those shares back.
And because there's fewer shares on the market, your share price can increase, right?

Speaker 3 So if you're holding shares in the company, your share price goes up. And you make the company buy the stocks back.
It's not like you're out there doing it yourself, right?

Speaker 3 The better thing to do traditionally, if you want your business to keep running, is to use that money to keep your business running.

Speaker 3 But instead, they took $6 billion and bought stock back to raise the share price.

Speaker 3 And they only spent, I think this is over a couple of years, they only spent half of that on capital expenditures, like keeping up your properties,

Speaker 3 maintaining your buildings, stuff like that.

Speaker 3 And so the company just almost immediately started to just falter.

Speaker 2 Yeah, so things start faltering. This is around 2007 or so.
And ESL, which again was Ed Lampert's company, they and some other firms then loan money to themselves, almost $2.6 billion.

Speaker 2 And so they're now also collecting interest and fees on that. So about $400 million in interest and fees.
to the big loan that they gave themselves.

Speaker 2 And Sears continues to sort of tank or the Sears Holding Company continues to tank. That's when they break it up.
They spun off, they start spinning off different divisions.

Speaker 2 ESL is buying shares in most of those smaller divisions as well once they break it apart.

Speaker 2 And then in 2015, Ed Lampert founded a real estate company called Seritage Growth Properties. They bought 266 Sears and Kmart buildings and then rented them back to themselves.
Right.

Speaker 3 It's like robbing Peter to pay Peter. Yeah, it's

Speaker 2 just sounds like such

Speaker 2 obvious fleecing.

Speaker 3 It is.

Speaker 3 And grift. And it's totally legal.
That's the thing. They're not breaking any laws.
All of this is completely legal. It's just despicably unfair.

Speaker 3 So obviously, after a fairly short time, seven years, this company, Sears Holding, filed for bankruptcy. And again, bankruptcy doesn't mean like, oh, that's it.
I'm out of money.

Speaker 3 It means like, hey, I can't pay my debts back. So I'm going to negotiate with all these people and hopefully reduce it by two-thirds.
And then I can manage that.

Speaker 3 So I'm going to come back out of bankruptcy and try to continue on. That's what that's, that was the result for Sears Holding.
But part of this restructuring was that they started slashing costs.

Speaker 3 And the first thing you do to slash costs if you're a corporator is fire people. They closed stores, Chuck.
They had 3,500 Sears and Kmart stores when those two companies merged. Okay.

Speaker 3 By seven years later,

Speaker 3 they were down to 700.

Speaker 3 And today there's eight.

Speaker 3 Eight.

Speaker 3 80? Eight. 800? Zero, eight.

Speaker 2 Yeah, there's eight of those left.

Speaker 2 It was, you know, again, tens of thousands of jobs. and $11 billion in unpaid debt to creditors.
And Ed Lampert ends up making making about $1.4 billion,

Speaker 2 about $1.4 billion

Speaker 2 from managing that fund.

Speaker 3 Two things. I saw the Wall Street Journal estimated that under Lampert's watch of this, I think, seven years,

Speaker 3 200,000 people lost their jobs from Sears and Kmart.

Speaker 3 Yeah.

Speaker 3 That's got to be a record, man.

Speaker 3 And then also he was quoted as saying, like, yeah, I'm really bummed about this whole thing. It was a real loss.

Speaker 3 It was a real opportunity cost for me, meaning he could have done this with a different company and maybe made out even better than he did.

Speaker 2 So you mentioned Red Lobster, and this was very much in the news. It feels like it was more recent.

Speaker 2 Well, I guess some of this stuff was a little more recent, but in 2014, Golden Gate Capital, a San Francisco company, bought Red Lobster $2.1 billion.

Speaker 2 They said it was, quote, an exceptionally strong brand with an unparalleled market position.

Speaker 2 And in order to pay for that deal, they sold, as you mentioned, they sold the real estate of 500 restaurants for about 1.5 billion bucks.

Speaker 2 And a company called American Realty Capital Partners bought that land and then, once again, leased it back at a higher rate, like above market rates. Yeah.

Speaker 3 And again, that $1.5 billion,

Speaker 3 a significant portion of it just went right to investors. I'm not sure how much, but that's the playbook, right?

Speaker 3 I also have to say I worked at Red Lobster as a server for a little bit.

Speaker 3 Whoa.

Speaker 2 You and I have dined at Red Lobster before one time.

Speaker 2 It's probably the only time I've been there in the past 40 years.

Speaker 2 And you never, I don't think, disclosed to me that.

Speaker 3 Did I not?

Speaker 2 No, all you talked about was how much you love those, what are they, little cheesy biscuits?

Speaker 3 The Cheddar Bay biscuits. That is why I worked at Red Lobster so it could be closer to them.
It was only for a couple of weeks. I was like, I got to stop eating these.

Speaker 2 I didn't know you ever waited tables at all.

Speaker 3 So the reason why I don't talk about that that much is because that I'm one of the worst servers of all time.

Speaker 3 Something happens to me between walking from, you know, the kitchen to your table and my personality just drops out of me somehow and I forget stuff and I'm just terrible.

Speaker 3 Like the kind of waiter where you're like, you just, you ruined our dining experience. You're so bad.
That was the kind of waiter I was.

Speaker 3 So I learned after probably six or seven places to just stop trying to be a server.

Speaker 2 Yeah, you and Emily, Emily was

Speaker 2 weighted tables for a very, very short time for a similar reason. Yeah.

Speaker 3 It's just, it's,

Speaker 3 yeah, you have to be in the right kind of mindset to pull it off. It's, it's not as easy as it looks, I found.

Speaker 2 Yeah, I was pretty good at it. I believe that.
You know, also glad those days are behind me. Yeah, I think my retirement job is going to be a stadium

Speaker 2 worker. I want to

Speaker 2 like sell beer at a base at Brace Games.

Speaker 3 Let's hear what you got.

Speaker 3 Cold beer, huh?

Speaker 3 Cold beer, here that's pretty good you gotta um you gotta grow one of those walrus mustaches two for one and they're like you can't do that you can't make deals the one i always remember is popcorn peanuts carmicorn here

Speaker 3 is that at the bottom you always got to finish it up with here yeah that's how you get people's attention

Speaker 3 so oh yeah back to red lobster

Speaker 2 Yeah, I can smell the cheesy biscuits.

Speaker 3 They're so good, man. And their ranch dressing is world-class as well.
That's just unlike any other ranch. It's really good.
Oh, all right. I'm glad that Red Lobster is still around as far as I know.

Speaker 3 Despite all these different companies trying their best to run it into the ground, COVID definitely didn't help.

Speaker 3 2020 hit, COVID hit, and Red Lobster, which is already, this is what I was talking about, when a company is saddled with a bunch of debt and new costs that's hard to keep up through rough times or changes, right?

Speaker 3 Same thing with Red Lobster.

Speaker 3 And I guess one of its seafood suppliers, Thai Union Group, stepped in and was like, hey, we'll buy Red Lobster. We have a really good idea.
So this is their seafood supplier.

Speaker 3 They became the exclusive shrimp supplier to Red Lobster, the company that owned it, that now owned Red Lobster. And the CEO is like, you guys get this.

Speaker 3 You know, the endless shrimp promotion for 20 bucks? We're going to make it a permanent menu item and we're going to sell them so much shrimp because we're their exclusive supplier of shrimp. Bam.

Speaker 3 And he said, bam, that's a quote.

Speaker 3 And they lost like $11 million in just three months of trying that because they grossly underestimated how much shrimp people would eat if there was no bottom to it.

Speaker 2 Yeah. I mean, if you're talking to,

Speaker 2 you know, medium-sized shrimp, I can eat, you know, if I'm really trying

Speaker 3 30

Speaker 3 meal.

Speaker 3 Wow. That's a lot of shrimp, dude.
Not the huge ones. No, I know what you mean.
I got it.

Speaker 2 If it's endless and it's all for a very set rate,

Speaker 2 and I'm, you know, maybe trying to impress my date.

Speaker 3 Right.

Speaker 3 Surely not fried, though. Right? You're just talking like peel and eat.

Speaker 2 Oh, that's more like 40.

Speaker 3 Oh, my God. You could eat 30 fried shrimp.
No,

Speaker 2 I probably could not eat 40 peel and eat. I don't know if I could eat 40.
I mean, if I'm not eating cheesy biscuits and french fries and coleslaw and

Speaker 2 then I could probably eat 30 fried shrimp for sure. Okay.

Speaker 3 I'm going to be your date for that one.

Speaker 3 Well, I hope to impress you.

Speaker 3 Oh, what else? Oh, I've got one.

Speaker 3 One of the things that a lot of these companies do is they take over and buy a business that they just don't understand the business of, and that's how they run it into the ground.

Speaker 3 That'll happen a lot. We'll talk about that here or there.
But there are some niche private equity firms that focus on specific kinds of businesses. They know what they're doing.

Speaker 3 And one of them is Roarke Capital. They're big on the fast food industry.

Speaker 3 And when you have a

Speaker 3 very powerful, wealthy firm like that that's zeroed in on the ups and downs of their particular industry, you have the kind of people who will lobby successfully to get the $15 federal minimum wage taken out of the stimulus package, which is exactly what Rourke Capital managed to do several years back.

Speaker 2 That's right. And if you're wondering, is that named after, you know, Mr.
Rourke from Fantasy Island?

Speaker 2 No, it's named, like seriously, named for Howard Rourke,

Speaker 2 Ayn Rand hero, and do with that what you will.

Speaker 3 Yeah, from the fountainhead.

Speaker 2 That's right.

Speaker 2 All right. I guess we could talk a little bit about newspapers and physical print media because

Speaker 2 I mean,

Speaker 2 they have been in trouble anyway. So, not all of the losses of the print media industry are due to private equity firms.
But

Speaker 2 private equity ownership of newspapers rose from 5% in 2001 to 23% in 2019.

Speaker 2 And,

Speaker 2 you know, there have been supposedly analyses done that show that ownership of print media by a private equity firm can improve circulation. But

Speaker 2 it also will lead to reduction in editorial staff, like massive cuts in staff,

Speaker 2 which means cuts in things like local government. And they've shown that results in a decline in participation in local elections.

Speaker 3 Oh yeah, like

Speaker 3 the loss of local government news reporting has had an enormous effect on the United States. It's just crazy like the cascading effect it had.

Speaker 3 We're going to do a whole episode on that right after this, okay?

Speaker 3 Great. We'll make it up as we go along.
Great. Vice is another one.
They were sitting pretty. I think they were worth almost $6 billion in 2017, got bought out.
And by

Speaker 3 2023, they were worth $350 million because it just got run into the ground.

Speaker 3 That's a good example of a company that didn't know what they were doing buying a business that they didn't know anything about that and then they just made terrible decisions.

Speaker 2 For sure. I think we should take a second break.

Speaker 3 Okay.

Speaker 2 And we'll be back right after this.

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Speaker 3 Okay, Chuck, we're back, and here's where we really get into the problems.

Speaker 3 I I mean, aside from people getting laid off, people being neglected in the hospitals they go to because they're owned by private equity firms.

Speaker 3 That's become a big problem in the 21st century and in the United States, too.

Speaker 2 Yeah, there's in 2024 alone, by one count at least, there were 166 leverage buyouts in healthcare just in that one year.

Speaker 2 And seven of the eight biggest healthcare bankruptcies that year were from companies owned by private equity firms or hospitals and healthcare organizations.

Speaker 3 Right.

Speaker 3 The private equity firm dental practices rose dramatically from the teens to the 2020s.

Speaker 3 And that results in things like companies push. I read an article about the Dental Express in Ohio telling a mom that her three-year-old needed seven root canals.

Speaker 2 Yeah, for sure. And the same goes with hospitals.
Hospitals, if they're owned by a private equity firm, they result in higher charges, more safety issues.

Speaker 2 There was one study that said there was a 25% rise in hospital-acquired complications, like something you got while you were there. Right.

Speaker 3 And I think 38% more blood infections from IV ports. That's just from not having enough staff or inexperienced staff.
It's just not good. And it gets even worse.

Speaker 3 They're also into hospices, nursing homes, and it just follows the same pattern that you would expect. A study found that private equity ownership increases mortality rates by 11%

Speaker 3 just because PE's cutting corners to save costs. So that's a huge, huge issue.
I think that that one needs regulation where it's like, you can't, sorry, you guys can't own healthcare stuff.

Speaker 3 That's just off limits for you.

Speaker 2 Yeah.

Speaker 2 I mean, anyone who's been through the trauma of a loved one and having to go to a nursing home in the past, I mean, I don't know when it was good, but we had to go through that with Emily's grandmother.

Speaker 2 And just the state of that industry is is horrific.

Speaker 3 Yeah.

Speaker 2 It's the opposite of what it should be in almost every way.

Speaker 3 Yeah. And housing too is another big deal.

Speaker 3 I think Blackstone, which we mentioned was founded back in the 80s, they're known as the United States's largest landlord. They own 300,000 units of rental housing in the U.S.
as of 2023.

Speaker 3 And as you would expect, when private equity comes along, rents go up.

Speaker 3 The maintenance people are slower to respond because they've been laid off and just things kind of go downhill rather than get better. Like they're supposed to.

Speaker 3 That's the reason private equity is supposed to exist. It's supposed to take

Speaker 3 kind of slow lumbering companies that are in a position to do better than they are and make them do better. It's not supposed to make everything go downhill, but that's how it happens a lot.

Speaker 2 Yeah, I mean, sometimes it does happen for the better. Like one great example is Hilton, the hotel chain.
There was a leverage buyout from Blackstone in 2007 of Hilton. And the Great Recession

Speaker 2 hit, I guess it was like the next year in 2008. And obviously, it's going to really affect the tourism industry.

Speaker 2 But they brought in a CEO from Blackstone, a guy named Christopher Neseta, who actually made things better. He said, hey, let's invest in emerging markets.

Speaker 2 Let's invest in the future and like digital strategies like apps where you can check in and get your hotel key through an app and things like that.

Speaker 2 Just, you know, instead of just shuttering things like actually investing, reinvesting in the company. Right.

Speaker 2 And it turned out to be really, you know, all these things were really popular moves. And Blackstone sold Hilton back to the public market after it had been yanked out of the public market.

Speaker 2 They sold it back in 2013

Speaker 2 and sold out of their stake in 2018. made a ton of profit, $14 billion over 11 years.
But the company itself, Hilton, was doing great and continues to do great.

Speaker 3 Yeah, they doubled the number of rooms today that they had in 2007 when they took over, when Blackstone took over. So, yeah, that's a big success story.
It wasn't like a pump and dump.

Speaker 3 Hilton's still doing well, like you were saying. Burger King's another one, too.
They got bought by a Brazilian firm called 3G Capital, and they

Speaker 3 just

Speaker 3 made some really good moves in a lot of ways. Again, this is from an investor standpoint, not necessarily from the standpoint of the people at corporate who were laid off or anything like that.

Speaker 3 But as far as firms go, 3G made something like $28 billion over 14 years, and it had only invested 1 billion. So that's a pretty good return on investment.

Speaker 3 Private equity coming in.

Speaker 3 Why'd you do that?

Speaker 2 Oh, just because I know you hate me.

Speaker 3 You got me.

Speaker 2 So here's the thing.

Speaker 2 Alternative investments make a lot of money.

Speaker 2 We've seen that there's less oversight.

Speaker 2 So, you know, one of the ways ways that they can make a lot of money is that they're just allowed to do things that you can't do in traditional sort of slow growth investments like stocks and bonds and things like that.

Speaker 2 But you also mentioned earlier that like pension funds, like 401ks, are where a lot of this money comes from.

Speaker 2 And like, do you have a choice whether or not the 401k that you invest in ends up being a part of this thing?

Speaker 3 Yeah, I think you can also invest your 401k now, which for a long time was off limits because that's your

Speaker 3 you, the non-accredited investor who doesn't know what they're doing with private equity. That was off limits, but now you can if you want.

Speaker 3 Although they say that's probably not a good idea unless you know what you're doing again.

Speaker 2 Well, 89% of public pension funds have some of their money in private equity.

Speaker 2 I think 13% average of 13% of their assets is the average, sometimes more than 25%, but that's that's almost 90% of public pension funds. It's a lot.

Speaker 3 Yeah.

Speaker 3 And then I guess one of the other big things, so the reason why, well, another reason why people are like, this is so not right.

Speaker 3 All of that money that those people like Edward Lampert made, he made that $1.4 billion by running a huge venerated company into the ground. He paid at most 20%

Speaker 3 on those profits. Even though it was personal income for him, he didn't pay the personal income tax of like 37%.

Speaker 3 Instead, he paid 20%

Speaker 3 in capital gains tax because the fees that he charged are treated like gains from an investment rather than personal income, even though anyone would call those fees personal income.

Speaker 3 So, not only are the PE firms robbing companies for their own personal enrichment, getting people laid off, they're not even paying their full share of income taxes on it too.

Speaker 3 So, not only are they robbing companies for their own personal enrichment, getting people laid off, they're not even paying their full share of income taxes on it too.

Speaker 2 Yeah, this is the kind of thing where in the movie version where this is first born as an idea and the person is explaining it to like the people at dinner, they keep asking questions that start with, yeah, but what about?

Speaker 2 And then the answer always starts with, oh, no, that's the best part.

Speaker 3 Right.

Speaker 3 Exactly. It just keeps going like that.
Yeah.

Speaker 2 And they're like, no, no, no, but what about this? No, no, that's the best part. Yep.
So there's a lot of best parts.

Speaker 3 And one of the guys finally puts his fork down and stands up, hits the table and goes, bam!

Speaker 2 That's right. But you were talking about the carried interest loophole, right? That's what it's called.

Speaker 3 Yeah, where your personal income is magically treated as returns on an investment and taxed at 20% rather than 37% or whatever. So if you make $100 million,

Speaker 3 you pay $17 million less taxes on that $100 million.

Speaker 3 And at that point, really, who cares anyway, anyway, right? Yeah.

Speaker 3 You would think.

Speaker 3 So that's private equity. I feel like we kind of showed our bias a little bit, but it's really tough not to be when you really dig into this stuff, you know?

Speaker 2 Yeah. I mean, it's not the sole cause of the housing crisis, but it's a major player.
Yeah.

Speaker 3 And all the other crises that we're facing too, economically and socially. And politically.

Speaker 3 And probably religiously, too, if I gave it some real thought.

Speaker 2 Yeah, personally.

Speaker 3 Yep. Since Chuck said personally I was waiting for it.
I got you there because now we just unlocked listener mail.

Speaker 2 Hey guys, this is in response to a tangent that you went on during this Saturday's classic episode when Chuck was talking about arguing with his mother about who gets to pay for dinner.

Speaker 2 It reminded me of my grandmother Sheila. She always likes to pay for her big family dinners and has engaged in tricks in the past.

Speaker 2 For a graduation dinner for my brother, my father knew what she was doing when she took her purse to the bathroom. So that's a good trick.
I've done that before.

Speaker 3 Yeah.

Speaker 2 That wasn't her best trick, though, as even Josh mentioned that very trick.

Speaker 2 The best part,

Speaker 3 did you mention that? Yeah, I mentioned that. I remember that.
I've done that for sure. Yeah, yeah.
That's what you got to do.

Speaker 2 The best was when part of the family was in upstate New York for a triathlon. Sheila wasn't even there.
She lives in Massachusetts.

Speaker 2 The bill came when dinner was over the night before the race. My father and my aunt reached for their card, and the waitress said it had been taken care of.

Speaker 2 All the adults looked in accusation at each other, and there was a long silence. And at the exact same moment, they all threw up their hands crying, Sheila!

Speaker 3 And all the way over in Massachusetts, Sheila went BAM! That's right.

Speaker 2 My aunt had made the mistake of telling Sheila on the phone where we were going to have dinner. And our grandmother called the restaurant and gave her the credit card number.
Beautiful.

Speaker 2 Thanks for all the pods. That is from James.
James, that's wonderful. Sheila Sheila sounds great.
I just hope she tips well.

Speaker 3 Oh, good point, Chuck. Nicely done.

Speaker 3 If you want to be like James, thank you, by the way, James. That was a great email.

Speaker 3 You can send us an email too. Send it off to stuffpodcasts at iHeartRadio.com.

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