¶ PE just bought your fave store - here's why
What is private equity and why is everyone always saying it's ruining everything that you love? Your favorite store closes, your hospital gets worse, and your childhood brands are unrecognizable? Chances are private equity probably bought it. Private equity sounds intimidating, like something only insiders understand. But it doesn't have to be. Welcome to private equity for hot girls. And hot girls is a mindset, obviously. In this episode, we're going to break down private equity.
No jargon and no judgement, just cold hard insights and facts into the most mysterious corner of capitalism and finance. If you love business drama or you love succession, definitely listen to this episode all the way through. I'm Cherie. I'm Jean and. We're the Tiger sisters. We are your Wall Street and Silicon Valley Big Sisters. And we're a top ten business podcast on Spotify where we talk about money, power, and love. In this episode, we're going to break private equity down into 5
juicy parts. The 1st is what PE actually is.
¶ Private equity in 30 seconds - no MBA needed
The second is how PE firms make their money, which is millions and billions. The third is what is a leveraged buyout, also known as an LBO. The 4th is why does PE always get dragged in the media? And the 5th is what it means for you as a founder, customer or an employee of APE purchased firm. By the end, you'll understand why PE is always the villain in the media, and whether or not that's actually fair. Please remember to like, follow, and subscribe.
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¶ The "2 & 20" fee that mints millionaire managers
And we're back. OK, so this is Part 1. What even is private equity? Let's get into the definition. There are three things that define private equity. The 1st is private ownership. For the most part, private equity firms invest in companies that aren't on the public market. They are private companies. Second is control. When private equity companies invest or buy companies, they usually buy a majority stake of the company. The 3rd is a turn around
mindset. The goal is to buy the company, increase the value value and sell it for a profit. Yeah. So think of it like this. Instead of buying a few shares of a company on Robin Hood or on the stock market, PE companies actually come in and they buy either the whole company or majority stake, and then they go ahead and make improvements, they increase efficiencies, and then they turn it around and sell it for a profit.
So PE is different from VC venture capital because venture capital usually goes for the big bets, the earlier companies that are much riskier, whereas private equity companies generally target much larger companies that are bloated or have inefficiencies or real ways you can turn it around and then sell it for profit. Basically, these are larger companies that are more developed but are fixer uppers. Right. So it's kind of like flipping a
house. You come in, you see the potential, you renovate it, you flip it, you sell it. For more, think of brands like Burger King, Neiman Marcus, Dollar General, Dunkin' Donuts, Dell Computers. So many different brands that you interact with on a weekly basis have been a part of private equity. OK, Sheree, so let's move on to Part 2. How do PE firms actually make money? So there are two main ways PE firms make money. The first one is management fees where they get typically 2% just
to manage the PE fund. So let's say PE fund raises a billion dollars, that means they're getting $20 million a year just to manage the fund. The second one is the more important one that's carried interest and it's typically 20%
¶ LBOs: buy with debt, profit with someone else's cash
on all the successful deals and that's where the magic happens. So this sounds kind of complicated, but it's actually very common and you'll hear people talk about it in 2 and 20. They'll just say that phrase 2 and 20 talking about the management fees and also the carried interest. So Jean, where do these private equity firms actually get their money from?
Yeah, good question. So in this example before where I said, you know, this PE fund raised a billion dollars for their fund, they typically get that money from three different sources. The first one is LP's or limited partners, which is basically investors in the fund. These are typically big institutions like endowments, high net worth individuals, other sorts of investment funds. And pensions. And pensions. Exactly. The second source is the PE fund
itself. They always put in a little bit of money themselves just to have skin in the game. Yeah. And a lot of limited partners like to see this because if you're the management team and you're charging those management fees, you also want to have some of your money invested into the firms as well. And the third one is debt, which brings us to the next section, which is leveraged buyouts. When I first learned about private equity, I was most surprised to learn about the
debt portion. It's actually a lot of borrowing that's going on to then invest. So this is where LBO's leveraged buyouts come into play. So what exactly is a leveraged buyout or an LBO? This is where private equity
¶ Toys 'R' Us autopsy: debt vs. nostalgia
firms take on debt. They borrow money to then buy a company. And once the company starts doing well, you know, the private equity firm starts to turn it around. It's making profit. They use that profit to then pay off the debt of the purchase of
the original purchase. So that's where the leveraged buyout comes in. Going back to the house flipping example that Gene gave before, if you think about a house, once you fix up the house and you rent the house out to people, you take in tenants and then you use the monthly rent to pay off the mortgage. So that's a similar example of how an LBO type model would work with everyday housing.
Yeah. Or if you want to put some numbers to it, you know, if you buy this house for $100,000, it's $1,000,000 house, you actually put in $100,000 of your own and you take on $900,000 of debt and then you actually improve the house and you make $100,000. You're actually already making a the return like of 2X on what you actually put in. So that's why Lobos are so powerful. The keyword is leveraged, right?
The idea that you're taking on a lot of debt so that you can do a lot more with a lot less of your own money. But it's not always rainbows and butterflies and sometimes an LBO goes wrong. So she do you want to share an example? An example of that is Toys R Us. They took a $6.6 billion LBO out in 2005, and that was $5.2 billion of debt. And what ended up happening, as the lure goes, is that Toys-R-Us actually wasn't able to be
¶ Four red flags that tag PE as the villain
turned around. It wasn't a successful company and so they ended up having to pay like millions of dollars in just interest. Yeah, so they actually had to spend all their money servicing their debt. So they didn't really have as much money leftover to make the improvements that they needed to fight with, say, like Amazon, which was coming up at the time. And a lot of people were buying toys from Amazon. So RIP. I actually remember that we used to go to Toys-R-Us all the time
when we were kids. Yeah, it was like the place to go member. You always just be like, please let let's go to toys. R Us. It was amazing. It was a Mecca, honestly. It was so gorgeous in there, all the lights and the colors. Yeah. So let that be. A lesson. A lesson. Yeah. And by 2017, they were actually bankrupt. And that's the risk of taking on debt or leverage. It could work out really well and you could make millions and millions of dollars, or it could really burn down the. House.
Yikes. Dramatic. Mm Hmm. OK, so next is part 4. Why is private equity always the bad guy? And we'll get to it right after this break. Quick pause, Tiger fam. This is Cherie and we just dropped a brand new listener survey. It's different from the audience survey that you hopefully already filled out. It's 10 quick questions and two minutes Max. Your support keeps the episodes free and publishing weekly. Why?
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¶ Hilton glow‑up: how one PE deal made $14 B
building a podcast that feels made for you. Thank you from the bottom of our hearts for being the best part of Tiger Sisters. Now back to the show. And we're back. OK, so Sheree, tell us, why is private equity always the bad guy? I think in media private equity, it gets a really bad reputation. There's a lot of movies and films and TV show that just shows like the slimmier parts of private equity.
I think that's number one, How it's portrayed in media, but also how customers, consumers and employees are treated does not help with the reputation of private equity. The first reason why it gets a bad reputation is because of layoffs. Often times when private equity firms are turning around companies, they have to do mass layoffs as a way to boost efficiency or improve the company and that that impacts day-to-day people and the
employees. I guess they don't have to do it, but that's typically a very strong lever for them to cut costs and therefore increase. Profits, yeah. The second thing is prioritizing short term benefits over long term health. A lot of private equity firms have to be careful not to do this, or else they risk improving the profits kind of artificially.
Yeah. And this is, it actually depends on the PE fund and also kind of what size they are and what their plan is for the company that they purchase. Because a lot of times I guess maybe this is like another
¶ Job watch i.e. three clues your company just got touched by PE
dirty, dirty secret of PE is that there goal is to actually improve the efficiency of the company and then sell it to another PE fund. Like they just kind of want to hit a certain level of like profit and then move on to the next one. Right, because there's different sizes of PE funds and different types of companies that they
buy. And so actually something that I learned when I was taking a private equity class at Stanford last year is that most of the exits, the exits of these PE firms is selling to another PE firm that takes on the company when it has grown to a certain size, which is how they make money. The third reason why private equity gets a bad reputation is because of the asset stripping. Like one lever they can pull in order to cut down cost is to sell things that the company owns.
For example, if the company is a manufacturing company and they have really big machines or expensive machines, one thing that they can do is strip the assets and sell it. But that might not be good for the long term health of the company, although it does raise profit.
¶ Higher prices or shockingly better service for customers
And the fourth reason why private equity gets a really bad reputation is because of industry sensitivity. A lot of healthcare firms or hospitals are actually controlled by PE firms. And when incentives may not be necessarily aligned or there's different stakeholders in the entire equation, PE firms, definitely their goal is to return money to the shareholder. And when that collides with hospitals or healthcare funds or education, it can get really
sticky. Yeah. And I think especially when it comes to industries like hospitals, it's always just a really bad headline. If it says like, you know, there's the like we've talked about headline risk before on Tiger Sisters. There's just a lot of headline risk when it comes to these industries because you don't really want to be pointed to as like the evil company that laid off 30% of hospital.
Workers, right, Right. Because there's a lot of downstream effects too that can ladder up to that. And then the PE firm will inevitably be blamed for that. Right. And it's not always just sensitive industries like hospitals either. It's across all different industries. Like for example, think about Vice Media, which used to be a
global media company. I remember they raised $1.6 billion, including from PE funds like TPG and they weren't able to make it work and they ended up declaring bankruptcy in 2023 and laying off hundreds of employees. And going back to the Toys-R-Us example, over 30,000 people lost their jobs when Toys-R-Us went under. Yeah, and there's so many examples in retail. So thinking about j.crew, thinking about Payless, both of them went bankrupt at some point and ended up shutting hundreds
of stores. But to be fair, not all PE is bad. So look at what Blackstone did
¶ Verdict time: PE - evil empire or misunderstood fixer?
with Hilton for example. They bought it, they improved it, they expanded it globally, and they actually took it public again. Yeah, they ended up making 14 billion on that deal and they didn't have to do mass layoffs. Many times it comes down to incentives and style of the PE firm. It depends on the firm itself, how big it is, what industry it's in and the strategy that they employ to turn around the companies.
A lot of firms are able to do it, and then sometimes they're not able to. OK, Sheree, on to our last part, Part 5, which is how PE effects you as an employee or customer. So what can you expect if your company gets acquired by a PE firm? Yeah. I would say there are three main things. The first one is efficiency moves, AKA typically cost cutting. And tighter budgets. The second one is new leadership. A lot of time these PE firms actually bring in people from
outside the company. A lot of times they're actually operators that exist in the PE firm to come lead the new company. Yeah, because PE firms, if they're turning around a company, they want to bring in people that they trust and know can do the job. And that they know will execute their strategy. True. And then the third one is restructuring AKA layoffs, which is to boost profitability.
And as a customer, if a PE firm has acquired one of your favorite brands, you might see higher prices were service and leaner offerings. Yeah, this reminds me of when my girlfriends and I heard that Zimmerman, you know, the Australian like dress brand for women, designer brand when they announced that they were PE acquired.
We were like, oh shit, like better buy up all that Zimmerman now because next season it's probably going to be worse quality and it's going to be more expensive because the PE fund is going to try to like squeeze their profit margins and improve them. So that was just like a small way where like we were like, uh oh. We know what's coming. Yeah, like time to buy up the kind of like vintage Zimmerman. But as devil's advocate, sometimes you do get better service.
PE firms are known to cut the bloat and make things more efficient, so that also trickles down to customer experience as well. Yeah. I would say a lot of times PE firms like what they say they're good at is improving operations. So if that's a big part of the business, that can be something that as a customer you might experience improved operations. OK, and we'll wrap up this episode with our main takeaways. After this break, we'll talk about is PE evil or just misunderstood?
OK, and we're back, so let's wrap up the episode. So Sheree is PE evil or just misunderstood? My take personally is that private equity as a funding and like finance mechanism isn't inherently evil. Yeah, I would agree with that. I just think that if it's something that's touching, like your salad chain, your hospital, your favorite clothing brand, it's important to understand it so you can know how it affects your everyday life.
And part of understanding it is actually knowing what private equity is, which now you guys do after this episode, and then understanding what are their goals, what are they optimizing for so that you can figure out how it affects you. Because when you follow the money, you end up seeing the incentives of the firms and what they're trying to go for. Yeah, the hot people understand incentives. And if you like this episode, Please remember to like,
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