¶ Intro / Opening
Welcome to Stuff You Should Know, a production of iHeartRadio.
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 the podcast.
Oh wow, fancy.
Yeah. I wanted to dress it up a little bit because it's our job, Chuck, to yank what could be a bone dry, boring economics lesson from the maw of well boredom. Shake it up a little bit by the caller, look it in the eye, and say you will not be boring today, and then do all that. All right, Okay, we can do it, Chuck. We're professionals.
I'm glad you feel good about it.
I do, and I'm going to make you feel good about it too, because while we're talking about today is no mere typical economics. 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. The reason it can be hard to wrap your head around is because it's so insanely unfair
¶ Understanding Private Equity Basics
the structure of it, that it just doesn't make sense. So you just kind of have to accept it on its face that this is actually how it is.
Yeah, I would agree, it's nuts.
So private equity, I guess we should probably start out with a little bit of a definition, Charles. It's an alternative investment vehicle. And essentially what it is is it's a fund, a private fund. You have to basically be in the club to even invest in this, at least traditionally.
That kind of open it up a little more, and private equity goes around and essentially either buys huge controlling interests in companies or just buys the company's outright, trims them down, makes them lean, mean and efficient, and if ideally turns them around for a healthy profit, walks away does it again. Everybody who invested gets even richer than they already were. And that's the basics, the very most basic definition of private equity.
Yeah, it's something that has become much more popular in the past, you know, twenty ish years, but really kind of started in the seventies, as we'll see. And it's an alternative investment, so it's not like stocks or bonds or anything. It's generally a little riskier. There's less oversight, there's less transparency, and they want to keep it that way.
¶ Inside Private Equity Operations
Yeah, Yeah, they've actually gone to great links to make sure that it's much less transparent. 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 or walk along, open up a brokerage account, start buying stocks
and bonds. I 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. The government says you're on your own. As a matter of fact, 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 invest in private equity, and usually they're what institutional investors, right, like huge massive funds or college endowments or something.
Yeah, and the people who really come out on top are the people that manage these 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 two percent of the total assets of that company plus twenty percent of the profits above whatever
threshold that you agree on, I guess. And then there's all sorts of other ways that they can make money, as we'll see, like you know, selling the land that the business sits on, maybe to yourself and then renting it back to that same company at a higher rate. So yeah, we'll dig into all that. But they're the people that are really getting rich are the people that are investing in these but really managing these.
Right, So if you ever hear a news story about some guy who ran some great venerated company into the ground and they're like, yeah, I mean even I lost my investment, do not feel bad for them because they made probably hundreds of millions or billions of dollars for themselves from those fees, 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 of managing this company,
doesn't matter. They get to keep that money no matter what the turnout is. No matter how many people lose their jobs. That is why almost everyone in the world hates private equity people.
Yeah, and they generally do this to private companies. Sometimes it'll be a controlling interest in a much larger publicly traded company, but you know, generally we're talking about private companies here, and you know, we're going to go through industries and different examples of specific companies in a bit, 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.
So it's it's really whoever came I mean, I guess we'll get to who basically came up with this stuff, But it's a sort of evil financial genius on a level that is kind of hard to comprehend that it was ever allowed to happen.
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 in a mortgage so that you could buy and own it, 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 and then you just decided 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 that I can come up with.
Yeah, I mean, that's a thing, and it's a big
¶ The Ideological Roots of PE
thing right now. Private equity firms, the companies they own in the United States employee more than thirteen million people and they account for about two trillion of which is
about seven percent of the GDP. And like I said, it all started out in the seventies 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 share holders.
The people don't matter, the product don't matter, doesn't matter, rather English grammar doesn't matter, 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, So that's what we're going to all try and do now.
Yeah, one of the worst ideas in the history of the world, and it just took off. So, yeah, Friedman, that was step one. Step two was laid well. Step two through ten, I would say, is was laid out by a guy named Michael Jensen, who was an economist with Harvard Business School in the seventies and eighties, and he basically said, traditional companies that have you know, you've got a CEO, and you have employees, and the CEO has paid a certain salary a year and everything's great.
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 share they might be spending a bunch of money, and they don't care. They don't care about the shareholders, the investors, who, again, as Melton Friedman said, the entire purpose of the corporation is to enrich the shareholders. So how can you bring a CEO in line? And you 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. 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. The 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, so that it can keep afloat and pay off of those debts. 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.
Yeah, and you know we're going to talk about the different ways this happens. Obviously, 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. So you know, mass layoffs is one way to make that happen. That's one way to trim the fat. Even if it, you know, makes the company not function as well, it doesn't matter. You know,
sometimes there is fat that can be trim. So we're not saying like no one should ever be laid off or anything like that, like we're realistic people, but we're talking about, you know, leverage buyouts and kind of how they work. So another thing they can do is break them apart. And if you've ever seen the movie Wall Street with the great Michael Douglass, I just watched that again for the billion time recently. Really, Yeah, very very
good example. 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 arlichenes father's airline just for the sole purpose of breaking it apart and you know, driving it into the ground to get rich.
Right.
But you know, selling off assets is another way to
¶ Common PE Strategies and Impacts
do it, like I mentioned, like selling off the land that the business sits on. Sometimes that equity firm owns the real estate company as well. Yeah, that buys the land that the company sits on and then leases it back to that company, sometimes against their best interest at like higher rental rates.
Yeah, I'll give you an example. We'll talk a little more about Red Lobster. But they got they got taken over in a leveraged buyout, and the company did exactly that. They sold off all of their assets, all of their restaurants to sold them off and then they sold them to a company who turned around and leased them to Red Lobster. Right, the Red Lobster was paying an estimated sixteen million dollars a year for just a one percent property tax on its locations, all of them sixteen million dollars.
Now their leases amount to one hundred and fifty eight million dollars. 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, and it's not just like from selling properties, Chuck. One of the other ways that investors get their money back, they get return on their investment is they'll take out more loans from the company.
After the company's been bought and has all this extra debt, they'll take out even more loans, and when that money comes in, rather than spending 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. I feel like we really should say something to be fair. 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. It's just when it's bad, it's so bad that it almost it almost makes it seem like there shouldn't be this type of business model.
Yeah, for sure. 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. 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. So you're gonna, if you're a manager of that firm, you're gonna make a lot of very short term decisions that make it appear much healthier
than it really is on paper. 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 gonna do the same thing. Probably.
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. 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, because the people who bought the company don't really care about the company or what it does.
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.
All right, I need to go get some palmade and grease my hairback real quick. I'll be right back.
Okay, definitely should I'm not large childs of each my ski.
I should mention real quick that I I love Wall Street so much that I was watching it again and I was like, I wonder if there's a t that says Anacott Steel. It's just one of the companies that they, you know, one of the fictional companies at Oliver Stone wrote it to the movie, and sure enough there's an Anacot Steel T shirt. I bought it. I love it. I hate the message of the movie and Gordon Geko.
I don't think he's the hero or anything like that, right, But it's just a movie I've always loved and now I got my Annacott Steel shirt. It just kind of as a movie crusher type. So when people see me that know that movie, they'll be like, oh Wall Street.
Right, No, I get it, I get it. I used to have a sweatshirt that was like the print of Danny's sweater, the Apollo Latin sweater. I love that thing. That was one of my more beloved pieces of clothing.
You know, I met the guy who owns that sweater. Oh really, Dan Johnson No Lee Ownkrik I think is his name. He's a big animation guy. I think he did Coco and a bunch of other big, oh cool animated films, and he was such a fan of the Shining that he bought that real sweater at auction.
Good for him. I hope he's never tried it on because that's a tiny sweater.
Well you wouldn't a big guy.
It doesn't matter. That is still a very Danny was not a he was a tiny guy.
Yeah. Should we talk about history?
Yeah? I think we should chuck. So this whole thing is kind of newish, right, I Mean we usually associated with the eighties, and it's pretty accurate, but it goes back a little further. It's just the eighties or when it really took shape and got off the rails the first time.
Yeah, for sure, the first leverage buyouts that came after World War Two. There were some dudes from Bear Stearns, Jerome Cohlberg, Henry Kravis with a K, and George Roberts, so they were KKR. They got together they started, you know, with this idea of leverage buyouts for small companies, like
you know, family owned businesses. This is in the nineteen sixties and in the mid seventies they formed Colberg, Cravis and Roberts the KKR business and their first big success story for them is making a ton of money doing One of these was a machine tooling company or a tool company rather called is that Holdale Whodale? Whodale maybe who dat hou Dai La Industries. This was in nineteen
seventy nine. They bought it for three hundred and eighty million bucks, of which they paid about a million bucks. 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. They said, hey, we're going to pay a double what the previous CEO got and we're going to start raking in these fees as the fund manager.
Yeah, and so Wodale, which at the time of this purchase was doing really well. It had been around since I think the nineteen teens. It was, 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 the what usually gets companies in this case is they're so settled with that 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 why 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 and if they're lucky, they can come back out of it and try the whole thing again.
Yeah, for sure. About ten 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. If you've seen the movie Barbarians at the Gate with James Garner.
I haven't, have you, No, I've always wanted to.
Hey, it's out there, buddy.
Okay, that's not a Tom Wolf book. I'm thinking of a man in full, aren't I?
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 RGR Nibisco because it's about RJR Nibisco and there is no more RJR Nibisco. There's RJR and there's Nibisco. But that company ceased to exist after that leverage buyout.
Yeah, and I think two thousand people lost their jobs as the company was sold off in pieces and then finally, like you said, the whole thing went down. And at the time, this is nineteen eighty nine, I think you said two thousand people losing their job because some corporate raiders came in and screwed up a good thing that was.
That was enormous news, and that really kind of put a period on the end of what had become 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. People getting laid off and then they go off fifty times richer than they were and do the whole thing again. Right, So, they got a bad name in the eighties, and by the time the nineties rolled around, things got a little more legit, a
little more structured. Some of the players involved got a little more I don't know, it was more legitimate players than just some maverick guy who worked at bear Stearns or you know, goldn 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 was founded in the eighties, Blackstone founded in
¶ Historical Evolution of Private Equity
the eighties. Carlisle Group founded in the eighties. So the eighties were a big deal. The nineties everybody kind of kept a low profile, and then the two thousands of booms started to come back again.
Yeah, big boom, you know everything crash. We've done a couple of episodes kind of around the two thousand and eight crash. But a lot of private 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, And after that, Congress was like, hey, maybe we should have some some more you know, guardrails and reporting requirement it's on this private equity business, because that's a term that kind of just came around in the twenty first century. Even though
it was happening. Private equity as a term came around, I think in the early two thousands, 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. Right, But there's been a real boom
since that time. The number of companies publicly traded has dropped about half since nineteen ninety six where it was at its peak, and a couple of years ago, in twenty twenty three, there were five times as many private equity backfirms as publicly held companies.
Yeah, because it's you don't have to worry about the government meddling with your stuff. It's crazy. So some of the some of these deals make headlines, and usually when it makes headlines is because it's gotten so bad that the average person wants their blood to boil reading about it. So the news says, here, read this. One of the big ones that I remember was Toys r US.
Yeah, 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. 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. In addition to that, I mean, even more importantly than that loss of nostalgia is that thirty thousand people lost their jobs because of a private equity takeover Toys Rus that eventually ran it into the ground.
Yeah. I mean it makes some of those earlier ones where you know, on Thy twelve hundred people lose their job seemed quaint.
Yeah, thirty thousand people just sorry, you don't have a job anymore.
Yeah, there's this guy. I mean, we got to talk about Seers because that's another one iconic brand, iconic brick and order store. I would say there's some nostalgia tied up in Sears for sure.
Sure.
And a guy named Edward Lampert is someone who may not be on your radar unless you follow this stuff a little more closely. Kmart files for bankruptcy in two thousand and two, and Ed Lampert comes in he was a goldman sax guy and he I think former by this time. But he buys up a bunch of the debt from Kmart they come out of bankruptcy, and then he has a hedge fund e SL Investments, and they were the largest shareholder, and so thus he becomes the chairman and can then run the show.
Right, and he says, Kmart, I think we should buy Sears, 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. Regardless, Kmart bought Sears and they formed the Sears Holding Company, which was this huge, massive retailer. Kmart was not doing very good. Sears was doing amazing tens and tens of billionions of dollars in sales every year, and for the
first couple of years things were going pretty well. But Edward Lampert, being a corporate rating private equity guy, again, he's this is his firm, so he is directly taking hundreds of millions of dollars that two percent of the assets every year, plus that twenty percent 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. 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 buy back. Right. And if you have a bunch of stock out there, a bunch of shares out there on the market, just by like the laws of supplying demand, they're 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, share price
can increase. Right, So if you're holding shares in the company, your share price goes up and you make the company buy the stocksback. It's not like you're out there doing it yourself. Right. The better thing to do traditionally, for if you want your business to keep running, is to use that money to keep your business running. But instead they took six billion dollars and bought stockback to raise the share price, 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 maintaining your buildings, stuff like that, and so the company just almost immediately started to just falter.
Yeah, so things start faltering. This is around two thousand and seven or so, and ESL, which again was at Lampert's company, They and some other firms then loan money
¶ Case Study: Toys R Us and Sears
to themselves almost two point six billion dollars and so they're now also collecting interests and fees on that. So about four hundred million in interests in fees to the big loan that they gave themselves, 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. ESL is buying shares in most of those smaller divisions as well once they break
it apart. And then in twenty fifteen, Ed Lampert founded a real estate company called Sarritage Growth Properties. They bought two hundred and sixty six seers and Kmart buildings and then rented them back to themselves.
It's like robbing Peter to pay Peter.
Yeah, it's just sounds like such an obvious policing.
It is 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. So obviously, after a fairly short time seven years, this company, Seers Holding, filed for bankruptcy. And again, bankruptcy doesn't mean like, oh that's it amount of money. 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. 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. And the first thing you do to slash costs of fear corporators fire people. They closed stores, chuck. They had thirty
five hundred Seers and Kmart stores when those two companies merged. Okay, by seven years later they were down to seven hundred, and today there's eight eight eighty eight, eight hundred zero eight.
Yeah, there's eight of those left. It was, you know, again, tens of thousands of jobs and eleven billion dollars in unpaid debt to creditors. And Ed Lampert ends up making about one point for personally personing about one point four billion dollars from managing that fund.
Two things I saw. The Wall Street Journal estimated that under Lampert's watch of this, I think seven years, two hundred thousand people lost their jobs from Sears and k martin. Yeah, that's got to be a record, man. And then also he was quoted as saying like, yeah, I'm really bummed about this whole thing. It was a real loss. 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.
So you mentioned Red Lobster, and this was very much in the news. It feels like it was more recent. Well, I guess some of this stuff was a little more recent. But in twenty fourteen, Golden Gate Cap Capital San Francisco
company bought Red Lobster two point one billion dollars. They said it was quote an exceptionally strong brand with an unparalleled market position, and in order to pay for that deal, they sold, As you mentioned, they sold the real estate of five hundred restaurants for about one point five billion bucks, 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, and again that one point five billion. I'm a significant portion of it just went right to investors. I'm not sure how much, but that was that's the playbook, right. I also have to say I worked at Red Lobster as a server for a little bit.
Oh, you and I have dined at Red Lobster before one time. It's probably the only time I've been there in the past forty years. And you never, I don't think, disclosed to meet that.
Did I not.
No, All you talked about was how much you love those what are they? Little cheesy biscuits, the cheddar bay bisis.
That is why I worked at Red Lobster so it could be closer to them. It was only for a couple of weeks, so I was like, I gotta stop eating these.
I didn't know you ever waited tables at all.
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. 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, Like the kind of waiter where you're like, you just you ruined our dining experience, are so bad. That was the kind of waiter I was. So I learned after probably six or seven places to just stop trying to be a server.
Yeah, you and Emily. Emily was waited tables for a very very short time for similar reasons.
Yeah, it's just it's Yeah, you have to be in the right kind of mindset to pull it off. It's not as easy as it looks. I found.
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 uh, stadium worker. I want to like that before I want to like sell beer at a base at Brays game.
Let's hear what you got cold? Bea I ha cold, that's pretty good. You gotta 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, cararalcorn hair.
Is that it the price you got to finish it up with?
Here? Yeah, that's how you get people's attention. So oh yeah, back to Red Lobster.
Yeah, I can smell the cheesy biscuits.
They're so good man, and they're ranch dressing is world class as well. It's just unlike any other ranch. It's really good. Oh all right, I'm glad that Red Lobster are still around as far as I know, despite all these different companies trying their best to run it into the ground. COVID dip definitely didn't help. Yeah, twenty twenty hit, Covid hit and Red Lobster, which was already This is what I was talking about. When a company is saddled with a bunch of debt and new lost, that's hard
to keep up through through rough times or changes. Right, same thing with Red Lobster. And I guess one of its seafood suppliers, Tie 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. They became the exclusive shrimp supplier to Red Lobster the company that owned it
¶ Red Lobster's Endless Shrimp Debacle
that now owned Red Lobster, and the CEO is like, you guys get this. You know, the endless shrimp promotion for twenty 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. And he said, bam, that's a quote. And they lost like eleven million dollars in just three months of trying that because they grossly underestimated how much shrimp people would eat if there was no bottom to it.
Yeah. I mean, if you're talking to you know, medium sized shrimp, I can eat, you know, if I'm really trying thirty wow meal.
Wow. That's a lot of shrimp, dude, not the huge ones.
No, I got it's if it's endless and it's solved for a very set rate. Uh. And I'm, you know, maybe trying to impress my date.
Right, surely not fried though, right, you're just talking like peel and.
E oh, that's more like forty.
Oh my god, you could eat thirty fried.
I probably I probably could not eat forty eight peel and eat. I don't know if I could eat forty I mean, if I'm not eating cheesy biscuits and French fries and cole salaw and so you're being serious, then I could probably eat thirty fried shrimp for sure.
Okay, I'm going to be your date for that one.
Not well, I hope to impress you.
Oh what else? Oh, I've got one. 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. 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, and one of them is Rourke Capital.
They're big on fast food industry. And when you have a 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 fifteen dollars federal minimum wage taken out of the stimulus package, which is exactly what Rourke Capital managed to do several years back.
That's right. And if you're wondering, is that named after you know, mister Rourke from Fantasy Island. No, it's named like seriously named for Howard Rourke ein rand Hero. And do with that what you.
Will yeah, from the fountain.
That's right, all right. I guess we could talk a little bit about newspapers and physical print media because I mean, they have been in trouble anyway. So not all of the losses of the print media industry are due to private equity equity firms, but private equity ownership of newspapers rose from five percent in twentyd and one to twenty
three percent in twenty nineteen. And you know, there have been supposedly analyses done that show that ownership of print media by a private equity firm can improve circulation, but it also will lead to reduction and editorial staff, like massive cuts and staff, which means cuts in things like local government. And they've shown that results in a decline and participation in local elections.
Oh yeah, like 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. We're going to do a whole episode on that right after this. Okay, Great, we'll make it up as we go along. Great is
another one. They were sitting pretty I think they were worth almost six billion dollars in twenty seventeen, got bought out and by twenty twenty three they were worth three hundred and fifty million dollars because it just got run into the ground. 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.
For sure, I think we should take a second break, okay, and we'll be back right after this.
Definitely should.
Childs of each.
Ysk kid Okay, Chuck, we're back. And here's where we really get into the problems. 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. That's become a big problem in the twenty first century in the United States too.
Yeah, there's in twenty twenty four a loan by one count at least there were one hundred and sixty six leverage buyouts in healthcare just in that one year, and seven of the eight biggest healthcare bankruptcies that year were from companies owned by private equity firms or hospitals in healthcare organizations right.
The private equity firm dental practices rose drew dramatically from the teens to the twenty twenties, and that results in things like companies push I read an article about the Dental Express in Ohio telling a mom that her three
¶ Private Equity in Niche Industries
year old needed seven in root canals.
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. There's one study that said there was a twenty five percent rise in hospital acquired complications like something you got while you were there.
Right, And I think thirty eight percent 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. 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 eleven percent just because pe'es 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 that's just off limits for you.
Yeah, 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, and just the state of that industry is horrific. It's the opposite of what it should be in almost every way.
Yeah, and housing too is another big deal. I think Blackstone, which we mentioned, was founded back in the eighties. They're known as the United States's largest landlord. They owned three hundred thousand units of rental housing in the US as of twenty twenty three. And as you would expect, when private equity comes along, rents go up. 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. That's the reason private equity is supposed to exist. It's supposed to take 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 down hill. But that's how it happens a lot.
Yeah, I mean, sometimes it does happen for the better. Like one great example is Hilton, the hotel chain. There was a leveraged buy out from Blackstone in two thousand and seven of Hilton and the great procession you know, Hit. I guess it was like the next year in two thousand and eight, and obviously it's going to really affect the tourism industry. But they brought in a CEO from Blackstone, a guy named Christopher Nesstta, who actually made things better.
He said, hey, let's invest in emerging markets, 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, just you know, instead of just shuddering things like actually investing, reinvesting in the company, right, 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. They sold it back in twenty thirteen and sold out of their stake in twenty eighteen. Made a ton of profit fourteen billion dollars over eleven years. But the company itself, Hilton, was doing great and continues to do great.
Yeah, they doubled the number of rooms today that they had in two thousand and seven when they took over, when Blackstone took over. So yeah, that's a big success story. It wasn't like a pump and dump. Hilton's still doing well, like you were saying. Burger King's another one too. They got bought by a Brazilian firm called three G Capital, and they just they just made some really good moves
in a lot of voice. 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. But as far as firms go, three G made something like twenty eight billion dollars over fourteen years and it only invested one billion, So that's a pretty good return on investment.
Private equity coming in.
Why'd you do that?
Oh?
Just because hate you got me.
So here's the thing. Alternative investments make a lot of money. We've seen that there's less oversight, So you know, one of the ways that they 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. But you also mentioned earlier that like pension funds like four to one k's or where a lot of this money comes from.
And like, do you have a choice whether or not the four one k that you invest in ends up being a part of this thing.
Yeah, I think you can also invest your four to one k, now, which for a long time was off limits because that's your 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, although they say that's probably not a good idea unless you know what you're doing.
Again, well, eighty nine percent of public pension funds have some of their money in private equity. I think thirteen percent average of thirteen percent of their assets is the average, Sometimes more than twenty five percent. But that's that's almost ninety percent of public mention funds. It's a lot.
Yeah, 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. All of that money that those people like Edward Lampert make made that one point four billion dollars by running a huge venerated company into the ground. He paid at most twenty percent on those profits, even though it was personal income for him. He didn't pay the personal income tax of like thirty
¶ PE's Detrimental Impact on Public Services
seven percent. Instead, he paid twenty percent in capital gains tax because the fis that he charged are treated like gains from an investment rather than personal income, even though anyone would call those fees personal income. 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. 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.
Yeah. This is the kind of thing where in the movie version where this is firstborn as an idea, yeah, and the person is explaining it to like the people at dinner, they keep asking questions that start with yeah, but what about and then the answer always starts with oh, no, that's the best part.
Right exactly. It just keeps going like.
That, yeah, 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.
And one of the guys finally puts his fork down and stands up, hits the table and goes Bam.
That's right. But you were talking about the carried interest loophole, right, that's what it's called.
Yeah, Or your personal income is magically treated as returns on an investment in text at twenty percent rather than thirty seven per or whatever. So if you make one hundred million dollars, you pay seventeen million dollars less taxes on that one hundred million dollars, and at that point, really who cares anyway? Right, Yeah, you would think, 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.
Yeah, I mean it's not the sole cause of the housing crisis, but it's a major player.
Yeah, and all the other crises that we're facing too, economically and socially and politically and probably religiously too. If I gave it some.
Real thought, yeah, personally.
Yep, since Chuck said personally, I was waiting for it. It got you there, because now we just unlocked listener mail.
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 gets to pay for dinner. It reminded me of my grandmother, Sheila. She always likes to pay for big family dinners and has engaged in tricks in the past. 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. Yeah, that wasn't her best trick, though, as even Josh mentioned that very trick. The best part did you mention that?
Yeah? I mentioned that. I remember that. I've done that for sure.
Yeah, Yeah, that's what you gotta do. 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.
¶ Private Equity Success Stories
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. 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 all the way over in Massachusetts. Sheila went bam that's right.
My aunt had made the mistake of telling Sheila on the phone that where we were going to have dinner, and our grandmother called the restaurant and gave her the credit card number.
Beautiful.
Thanks for all the pods. That is from James. James. That's wonderful. Sheila sounds great. I just hope she tips well.
Oh good point, Chuck, nicely done. If you want to be like James. Thank you. By the way, James, that was a great email. You can send us an email too. Send it off to Stuff Podcasts at iHeartRadio dot com.
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