WEBVTT - Private Equity: Your Ears Will Bleed 0:00:01.440 --> 0:00:04.920 Welcome to Stuff You Should Know, a production of iHeartRadio. 0:00:11.119 --> 0:00:13.560 Hey, and welcome to the podcast. I'm Josh, and there's 0:00:13.680 --> 0:00:16.279 Chuck and Jerry's here too, and this is Stuff you 0:00:16.360 --> 0:00:19.119 should know the podcast. 0:00:21.680 --> 0:00:22.840 Oh wow, fancy. 0:00:23.200 --> 0:00:25.120 Yeah. I wanted to dress it up a little bit 0:00:25.239 --> 0:00:31.480 because it's our job, Chuck, to yank what could be 0:00:31.640 --> 0:00:37.320 a bone dry, boring economics lesson from the maw of 0:00:38.120 --> 0:00:42.640 well boredom. Shake it up a little bit by the caller, 0:00:43.680 --> 0:00:45.239 look it in the eye, and say you will not 0:00:45.320 --> 0:00:51.200 be boring today, and then do all that. All right, Okay, 0:00:51.240 --> 0:00:52.920 we can do it, Chuck. We're professionals. 0:00:53.320 --> 0:00:54.880 I'm glad you feel good about it. 0:00:55.320 --> 0:00:57.000 I do, and I'm going to make you feel good 0:00:57.000 --> 0:01:00.280 about it too, because while we're talking about today is 0:01:00.320 --> 0:01:06.800 no mere typical economics. And we're famous for having trouble 0:01:06.800 --> 0:01:09.760 wrapping our heads around economics. This one can be that 0:01:09.800 --> 0:01:12.600 way too. We're talking about private equity today. We'll explain 0:01:12.680 --> 0:01:14.920 all about it. The reason it can be hard to 0:01:14.959 --> 0:01:18.640 wrap your head around is because it's so insanely unfair 0:01:18.880 --> 0:01:21.880 the structure of it, that it just doesn't make sense. 0:01:22.480 --> 0:01:24.319 So you just kind of have to accept it on 0:01:24.360 --> 0:01:26.520 its face that this is actually how it is. 0:01:27.520 --> 0:01:29.720 Yeah, I would agree, it's nuts. 0:01:30.360 --> 0:01:32.640 So private equity, I guess we should probably start out 0:01:32.680 --> 0:01:36.200 with a little bit of a definition, Charles. It's an 0:01:36.240 --> 0:01:39.840 alternative investment vehicle. And essentially what it is is it's 0:01:39.880 --> 0:01:42.240 a fund, a private fund. You have to basically be 0:01:42.319 --> 0:01:45.840 in the club to even invest in this, at least traditionally. 0:01:45.840 --> 0:01:48.320 That kind of open it up a little more, and 0:01:48.640 --> 0:01:53.240 private equity goes around and essentially either buys huge controlling 0:01:53.280 --> 0:01:58.080 interests in companies or just buys the company's outright, trims 0:01:58.120 --> 0:02:02.640 them down, makes them lean, mean and efficient, and if 0:02:02.840 --> 0:02:05.920 ideally turns them around for a healthy profit, walks away 0:02:06.040 --> 0:02:09.600 does it again. Everybody who invested gets even richer than 0:02:09.639 --> 0:02:13.120 they already were. And that's the basics, the very most 0:02:13.160 --> 0:02:15.119 basic definition of private equity. 0:02:15.880 --> 0:02:19.160 Yeah, it's something that has become much more popular in 0:02:19.160 --> 0:02:21.560 the past, you know, twenty ish years, but really kind 0:02:21.600 --> 0:02:25.200 of started in the seventies, as we'll see. And it's 0:02:25.240 --> 0:02:28.720 an alternative investment, so it's not like stocks or bonds 0:02:28.800 --> 0:02:32.560 or anything. It's generally a little riskier. There's less oversight, 0:02:32.919 --> 0:02:37.160 there's less transparency, and they want to keep it that way. 0:02:38.400 --> 0:02:40.920 Yeah, Yeah, they've actually gone to great links to make 0:02:40.960 --> 0:02:44.600 sure that it's much less transparent. One reason why the government, 0:02:44.760 --> 0:02:48.480 who is in charge of regulating stuff to make it 0:02:48.560 --> 0:02:51.440 transparent like stocks and bonds and disclosures and all that, 0:02:52.040 --> 0:02:55.600 is that you or I or anybody could walk or 0:02:55.680 --> 0:02:58.800 walk along, open up a brokerage account, start buying stocks 0:02:58.800 --> 0:03:01.320 and bonds. I don't have to be savvy at all 0:03:01.720 --> 0:03:05.560 to invest in private equity because of the risk, because 0:03:05.560 --> 0:03:08.720 it's just so different from traditional stocks and bonds and 0:03:08.800 --> 0:03:12.600 normal investments. The government says you're on your own. As 0:03:12.639 --> 0:03:15.720 a matter of fact, you have to register as an 0:03:15.720 --> 0:03:20.000 accredited investor, which says that you either know what you're 0:03:20.000 --> 0:03:22.480 doing so much that we don't have to worry about 0:03:22.520 --> 0:03:24.720 you losing your shirt, like you're going to just deal 0:03:24.800 --> 0:03:27.200 with it if that happens, or you have so much 0:03:27.280 --> 0:03:29.400 money it's not really going to matter if you lose 0:03:29.440 --> 0:03:33.880 your investment. Those are the people who can invest in 0:03:33.919 --> 0:03:37.600 private equity, and usually they're what institutional investors, right, like 0:03:37.720 --> 0:03:41.480 huge massive funds or college endowments or something. 0:03:42.080 --> 0:03:45.560 Yeah, and the people who really come out on top 0:03:45.600 --> 0:03:48.560 are the people that manage these If you're a managing 0:03:48.600 --> 0:03:52.240 partner there's a formula known as two and twenty where 0:03:52.840 --> 0:03:55.400 the company that you're managing that you have taken over, 0:03:56.240 --> 0:03:58.680 they pay you two percent of the total assets of 0:03:58.720 --> 0:04:03.400 that company plus twenty percent of the profits above whatever 0:04:03.640 --> 0:04:07.280 threshold that you agree on, I guess. And then there's 0:04:07.360 --> 0:04:09.600 all sorts of other ways that they can make money, 0:04:09.600 --> 0:04:12.920 as we'll see, like you know, selling the land that 0:04:12.960 --> 0:04:16.799 the business sits on, maybe to yourself and then renting 0:04:16.800 --> 0:04:20.000 it back to that same company at a higher rate. 0:04:20.760 --> 0:04:23.599 So yeah, we'll dig into all that. But they're the 0:04:23.600 --> 0:04:25.320 people that are really getting rich are the people that 0:04:25.720 --> 0:04:29.720 are investing in these but really managing these. 0:04:29.800 --> 0:04:32.360 Right, So if you ever hear a news story about 0:04:32.360 --> 0:04:37.560 some guy who ran some great venerated company into the 0:04:37.600 --> 0:04:41.039 ground and they're like, yeah, I mean even I lost 0:04:41.080 --> 0:04:44.120 my investment, do not feel bad for them because they 0:04:44.160 --> 0:04:48.599 made probably hundreds of millions or billions of dollars for 0:04:48.680 --> 0:04:52.200 themselves from those fees, and those fees can't be taken back, 0:04:52.279 --> 0:04:56.120 like because that company's in bankruptcy. Because you can show 0:04:56.160 --> 0:04:58.320 that they did a terrible job of managing this company, 0:04:58.480 --> 0:05:01.040 doesn't matter. They get to keep that money no matter 0:05:01.120 --> 0:05:03.640 what the turnout is. No matter how many people lose 0:05:03.640 --> 0:05:07.360 their jobs. That is why almost everyone in the world 0:05:07.680 --> 0:05:09.520 hates private equity people. 0:05:10.240 --> 0:05:13.839 Yeah, and they generally do this to private companies. Sometimes 0:05:13.839 --> 0:05:17.240 it'll be a controlling interest in a much larger publicly 0:05:17.240 --> 0:05:20.200 traded company, but you know, generally we're talking about private 0:05:20.200 --> 0:05:23.120 companies here, and you know, we're going to go through 0:05:23.160 --> 0:05:26.440 industries and different examples of specific companies in a bit, 0:05:27.440 --> 0:05:31.720 but it's usually almost always what's called a leverage buyout, 0:05:31.920 --> 0:05:36.040 in which the money to buy this company comes from 0:05:36.520 --> 0:05:41.960 a huge loan that that company is also then responsible for. 0:05:42.320 --> 0:05:47.720 So it's it's really whoever came I mean, I guess 0:05:47.720 --> 0:05:50.560 we'll get to who basically came up with this stuff, 0:05:50.560 --> 0:05:55.880 But it's a sort of evil financial genius on a 0:05:55.960 --> 0:05:58.280 level that is kind of hard to comprehend that it 0:05:58.360 --> 0:05:59.480 was ever allowed to happen. 0:05:59.760 --> 0:06:02.600 Yeah, It's the best analogy I've been able to come 0:06:02.680 --> 0:06:05.240 up with is it's like if you went and bought 0:06:05.240 --> 0:06:07.479 a house. The house had to go take out a 0:06:07.520 --> 0:06:10.039 loan in a mortgage so that you could buy and 0:06:10.120 --> 0:06:12.880 own it, and you didn't actually care about the house 0:06:12.880 --> 0:06:15.200 because you're planning on selling it down the road, so 0:06:15.240 --> 0:06:17.760 you didn't keep it up and then you just decided 0:06:17.800 --> 0:06:19.680 to walk away from the house, and the house is 0:06:19.720 --> 0:06:22.680 responsible for paying off the loan it took out so 0:06:22.760 --> 0:06:24.920 you could buy it. That's the best that I can 0:06:24.960 --> 0:06:25.520 come up with. 0:06:25.960 --> 0:06:28.360 Yeah, I mean, that's a thing, and it's a big 0:06:28.400 --> 0:06:31.600 thing right now. Private equity firms, the companies they own 0:06:31.640 --> 0:06:34.200 in the United States employee more than thirteen million people 0:06:35.000 --> 0:06:38.280 and they account for about two trillion of which is 0:06:38.279 --> 0:06:41.920 about seven percent of the GDP. And like I said, 0:06:41.960 --> 0:06:45.160 it all started out in the seventies with a guy 0:06:45.240 --> 0:06:49.240 named Milton Friedman from the University of Chicago, who was 0:06:49.880 --> 0:06:52.600 I mean, it seems very sort of old hat now 0:06:52.640 --> 0:06:54.279 to hear, but he was kind of one of the 0:06:54.279 --> 0:06:57.000 first people to step forward and say the only thing 0:06:57.040 --> 0:07:00.479 any corporation should ever worry about is their share holders. 0:07:02.279 --> 0:07:05.800 The people don't matter, the product don't matter, doesn't matter, 0:07:05.880 --> 0:07:10.480 rather English grammar doesn't matter, and the only thing that 0:07:10.520 --> 0:07:13.840 matters is the profits that we turn for our shareholders. 0:07:13.920 --> 0:07:17.640 And once somebody kind of said the quiet part out loud, 0:07:18.280 --> 0:07:21.800 everybody's like, oh, well, he said it, So that's what 0:07:21.800 --> 0:07:23.040 we're going to all try and do now. 0:07:23.240 --> 0:07:25.640 Yeah, one of the worst ideas in the history of 0:07:25.680 --> 0:07:29.560 the world, and it just took off. So, yeah, Friedman, 0:07:29.680 --> 0:07:33.600 that was step one. Step two was laid well. Step 0:07:33.640 --> 0:07:36.080 two through ten, I would say, is was laid out 0:07:36.120 --> 0:07:39.760 by a guy named Michael Jensen, who was an economist 0:07:39.800 --> 0:07:42.880 with Harvard Business School in the seventies and eighties, and 0:07:42.960 --> 0:07:46.640 he basically said, traditional companies that have you know, you've 0:07:46.680 --> 0:07:48.640 got a CEO, and you have employees, and the CEO 0:07:48.680 --> 0:07:51.320 has paid a certain salary a year and everything's great. 0:07:52.480 --> 0:07:55.520 That doesn't work because the CEO, the person making the 0:07:55.600 --> 0:07:58.880 decisions and what moves the company makes, they might be 0:07:58.920 --> 0:08:01.360 in conflict with the share they might be spending a 0:08:01.400 --> 0:08:03.520 bunch of money, and they don't care. They don't care 0:08:03.560 --> 0:08:07.880 about the shareholders, the investors, who, again, as Melton Friedman said, 0:08:07.920 --> 0:08:11.520 the entire purpose of the corporation is to enrich the shareholders. 0:08:11.960 --> 0:08:14.760 So how can you bring a CEO in line? And 0:08:14.800 --> 0:08:16.480 you said a couple of things. One, you can pay 0:08:16.520 --> 0:08:19.640 them in stock. So that whole thing about how CEOs 0:08:19.640 --> 0:08:23.040 get huge stock packages, now that came from Michael Jensen. 0:08:23.280 --> 0:08:26.440 And the reason why is because now suddenly they're a shareholder, 0:08:26.680 --> 0:08:29.320 so they care about what the shareholders are getting right, 0:08:29.400 --> 0:08:32.640 that's number one. The number two if you buy a 0:08:32.679 --> 0:08:36.120 company using that leverage buyout technique where you make the 0:08:36.160 --> 0:08:39.080 company take out tons of loans so that you can 0:08:39.080 --> 0:08:42.240 buy that company, it's saddled with so much debt that 0:08:42.320 --> 0:08:44.720 it immediately has to figure out how to get lean 0:08:45.080 --> 0:08:48.959 and mean, emphasis on mean, so that it can keep 0:08:49.000 --> 0:08:52.760 afloat and pay off of those debts. So like, immediately 0:08:52.800 --> 0:08:55.160 managers have to trim the fat and it just gets 0:08:55.559 --> 0:09:00.840 more efficient and outperforms just a traditional company, traditionally run company. 0:09:01.000 --> 0:09:03.280 That was Michael Jensen's contributions. 0:09:03.720 --> 0:09:05.880 Yeah, and you know we're going to talk about the 0:09:05.880 --> 0:09:10.640 different ways this happens. Obviously, firing people is a big 0:09:10.679 --> 0:09:13.600 way to trim the fat, to pay back those huge 0:09:13.600 --> 0:09:16.120 loans that someone took out on your behalf that you're 0:09:16.120 --> 0:09:20.360 now responsible for once again. So you know, mass layoffs 0:09:20.440 --> 0:09:22.000 is one way to make that happen. That's one way 0:09:22.040 --> 0:09:24.720 to trim the fat. Even if it, you know, makes 0:09:24.760 --> 0:09:29.080 the company not function as well, it doesn't matter. You know, 0:09:29.240 --> 0:09:31.360 sometimes there is fat that can be trim. So we're 0:09:31.360 --> 0:09:33.080 not saying like no one should ever be laid off 0:09:33.160 --> 0:09:36.839 or anything like that, like we're realistic people, but we're 0:09:36.880 --> 0:09:40.440 talking about, you know, leverage buyouts and kind of how 0:09:40.480 --> 0:09:43.440 they work. So another thing they can do is break 0:09:43.440 --> 0:09:46.040 them apart. And if you've ever seen the movie Wall 0:09:46.080 --> 0:09:49.360 Street with the great Michael Douglass, I just watched that 0:09:49.400 --> 0:09:53.200 again for the billion time recently. Really, Yeah, very very 0:09:53.200 --> 0:09:55.040 good example. It's one of my favorite movies, but very 0:09:55.120 --> 0:09:57.439 very good examples of all this stuff in there as 0:09:57.440 --> 0:09:59.840 far as like buying in his case, when he bought 0:10:00.040 --> 0:10:03.600 arlichenes father's airline just for the sole purpose of breaking 0:10:03.600 --> 0:10:06.400 it apart and you know, driving it into the ground 0:10:06.440 --> 0:10:06.920 to get rich. 0:10:07.120 --> 0:10:07.320 Right. 0:10:08.200 --> 0:10:11.680 But you know, selling off assets is another way to 0:10:11.720 --> 0:10:13.720 do it, like I mentioned, like selling off the land 0:10:13.720 --> 0:10:18.280 that the business sits on. Sometimes that equity firm owns 0:10:19.120 --> 0:10:21.679 the real estate company as well. Yeah, that buys the 0:10:22.040 --> 0:10:24.120 land that the company sits on and then leases it 0:10:24.160 --> 0:10:27.520 back to that company, sometimes against their best interest at 0:10:27.520 --> 0:10:28.520 like higher rental rates. 0:10:28.600 --> 0:10:31.200 Yeah, I'll give you an example. We'll talk a little 0:10:31.200 --> 0:10:33.880 more about Red Lobster. But they got they got taken 0:10:33.920 --> 0:10:37.040 over in a leveraged buyout, and the company did exactly that. 0:10:37.080 --> 0:10:39.199 They sold off all of their assets, all of their 0:10:39.240 --> 0:10:42.679 restaurants to sold them off and then they sold them 0:10:42.679 --> 0:10:44.920 to a company who turned around and leased them to 0:10:45.720 --> 0:10:49.960 Red Lobster. Right, the Red Lobster was paying an estimated 0:10:50.040 --> 0:10:53.440 sixteen million dollars a year for just a one percent 0:10:53.480 --> 0:10:57.800 property tax on its locations, all of them sixteen million dollars. 0:10:58.040 --> 0:11:00.760 Now their leases amount to one hundred and fifty eight 0:11:00.960 --> 0:11:07.200 million dollars. Right. So these are just terrible, terrible business decisions. 0:11:07.440 --> 0:11:10.720 And the reason why is because anytime a big influx 0:11:10.760 --> 0:11:14.560 of cash comes in, it gets divided up among the investors. 0:11:15.000 --> 0:11:17.720 They get tons of money, and it's not just like 0:11:17.760 --> 0:11:20.240 from selling properties, Chuck. One of the other ways that 0:11:20.320 --> 0:11:23.439 investors get their money back, they get return on their 0:11:23.480 --> 0:11:27.440 investment is they'll take out more loans from the company. 0:11:27.480 --> 0:11:30.160 After the company's been bought and has all this extra debt, 0:11:30.400 --> 0:11:33.400 they'll take out even more loans, and when that money 0:11:33.440 --> 0:11:36.319 comes in, rather than spending on the company, they'll divide 0:11:36.400 --> 0:11:39.080 some or all of it up among the investors. So 0:11:39.120 --> 0:11:43.120 it's like a vampire process at its worst. I feel 0:11:43.160 --> 0:11:45.600 like we really should say something to be fair. There 0:11:45.679 --> 0:11:48.760 is a lot of well run, well thought out private 0:11:48.760 --> 0:11:51.400 equity firms that know what they're doing that actually have 0:11:51.920 --> 0:11:55.320 saved companies from going under. It happens. It's just when 0:11:55.360 --> 0:11:59.360 it's bad, it's so bad that it almost it almost 0:11:59.400 --> 0:12:02.680 makes it seem like there shouldn't be this type of 0:12:02.800 --> 0:12:03.680 business model. 0:12:04.320 --> 0:12:07.360 Yeah, for sure. Sometimes it's a real quick thing, like 0:12:07.400 --> 0:12:09.040 in the case of Wall Street, like there was no 0:12:09.120 --> 0:12:12.600 long term plan for Gordon Gecko and Blue Star Air. 0:12:13.559 --> 0:12:17.280 It was like a house flip. You buy this company 0:12:17.559 --> 0:12:19.920 sort of a smaller company, and you want to make 0:12:19.960 --> 0:12:22.520 it look good for maybe another private equity firm to 0:12:22.559 --> 0:12:24.840 come along and buy. So you're gonna, if you're a 0:12:24.880 --> 0:12:26.599 manager of that firm, you're gonna make a lot of 0:12:26.720 --> 0:12:30.800 very short term decisions that make it appear much healthier 0:12:30.800 --> 0:12:32.880 than it really is on paper. So they can just 0:12:32.960 --> 0:12:35.040 kind of turn it and flip it and get a 0:12:35.040 --> 0:12:37.520 big payoff, and then it's someone else's problem where they're 0:12:37.559 --> 0:12:39.160 gonna do the same thing. Probably. 0:12:39.280 --> 0:12:41.280 Yeah, And like you said, one of the big things 0:12:41.320 --> 0:12:45.439 that happens is including layoffs, including just sucking the company 0:12:45.520 --> 0:12:49.319 dry of its money, is the customer suffers as well. 0:12:50.080 --> 0:12:52.560 Usually the product or the service takes a really big 0:12:52.640 --> 0:12:55.080 hit because you're trying to figure out how to put 0:12:55.120 --> 0:12:57.240 that same thing out and charge as much as you 0:12:57.320 --> 0:12:59.440 can for it by putting as little as you can 0:12:59.520 --> 0:13:02.760 into it, because the people who bought the company don't 0:13:02.840 --> 0:13:05.520 really care about the company or what it does. 0:13:06.840 --> 0:13:08.839 Good time for a break, I think so, and. 0:13:08.800 --> 0:13:10.320 Then we'll come back and talk some more about the 0:13:10.360 --> 0:13:11.480 history of this whole thing. Huh. 0:13:11.720 --> 0:13:14.199 All right, I need to go get some palmade and 0:13:14.200 --> 0:13:15.920 grease my hairback real quick. I'll be right back. 0:13:15.960 --> 0:13:49.920 Okay, definitely should I'm not large childs of each my ski. 0:13:51.720 --> 0:13:55.840 I should mention real quick that I I love Wall 0:13:55.840 --> 0:13:58.120 Street so much that I was watching it again and 0:13:58.160 --> 0:14:00.880 I was like, I wonder if there's a t that 0:14:00.960 --> 0:14:04.600 says Anacott Steel. It's just one of the companies that they, 0:14:04.679 --> 0:14:06.720 you know, one of the fictional companies at Oliver Stone 0:14:06.760 --> 0:14:09.640 wrote it to the movie, and sure enough there's an 0:14:09.679 --> 0:14:12.600 Anacot Steel T shirt. I bought it. I love it. 0:14:13.400 --> 0:14:15.559 I hate the message of the movie and Gordon Geko. 0:14:15.600 --> 0:14:17.640 I don't think he's the hero or anything like that, right, 0:14:18.160 --> 0:14:20.320 But it's just a movie I've always loved and now 0:14:20.320 --> 0:14:22.720 I got my Annacott Steel shirt. It just kind of 0:14:22.800 --> 0:14:25.440 as a movie crusher type. So when people see me 0:14:25.520 --> 0:14:27.680 that know that movie, they'll be like, oh Wall Street. 0:14:27.480 --> 0:14:29.320 Right, No, I get it, I get it. I used 0:14:29.320 --> 0:14:31.560 to have a sweatshirt that was like the print of 0:14:32.440 --> 0:14:36.560 Danny's sweater, the Apollo Latin sweater. I love that thing. 0:14:36.640 --> 0:14:38.880 That was one of my more beloved pieces of clothing. 0:14:39.400 --> 0:14:41.440 You know, I met the guy who owns that sweater. 0:14:41.720 --> 0:14:46.760 Oh really, Dan Johnson No Lee Ownkrik I think is 0:14:46.760 --> 0:14:49.880 his name. He's a big animation guy. I think he 0:14:49.880 --> 0:14:52.480 did Coco and a bunch of other big, oh cool 0:14:53.240 --> 0:14:56.400 animated films, and he was such a fan of the 0:14:56.400 --> 0:14:58.680 Shining that he bought that real sweater at auction. 0:14:58.880 --> 0:15:00.720 Good for him. I hope he's never tried it on 0:15:00.800 --> 0:15:01.960 because that's a tiny sweater. 0:15:02.600 --> 0:15:03.760 Well you wouldn't a big guy. 0:15:04.400 --> 0:15:06.880 It doesn't matter. That is still a very Danny was 0:15:06.920 --> 0:15:08.600 not a he was a tiny guy. 0:15:09.280 --> 0:15:11.320 Yeah. Should we talk about history? 0:15:12.640 --> 0:15:15.880 Yeah? I think we should chuck. So this whole thing 0:15:15.960 --> 0:15:18.800 is kind of newish, right, I Mean we usually associated 0:15:18.840 --> 0:15:21.160 with the eighties, and it's pretty accurate, but it goes 0:15:21.200 --> 0:15:23.720 back a little further. It's just the eighties or when 0:15:23.760 --> 0:15:25.920 it really took shape and got off the rails the 0:15:25.920 --> 0:15:26.480 first time. 0:15:27.000 --> 0:15:30.080 Yeah, for sure, the first leverage buyouts that came after 0:15:30.120 --> 0:15:33.760 World War Two. There were some dudes from Bear Stearns, 0:15:34.760 --> 0:15:38.400 Jerome Cohlberg, Henry Kravis with a K, and George Roberts, 0:15:38.400 --> 0:15:43.560 so they were KKR. They got together they started, you know, 0:15:43.640 --> 0:15:47.320 with this idea of leverage buyouts for small companies, like 0:15:47.720 --> 0:15:49.880 you know, family owned businesses. This is in the nineteen 0:15:49.960 --> 0:15:54.480 sixties and in the mid seventies they formed Colberg, Cravis 0:15:54.480 --> 0:15:59.040 and Roberts the KKR business and their first big success 0:15:59.080 --> 0:16:01.360 story for them is making a ton of money doing 0:16:01.360 --> 0:16:04.000 One of these was a machine tooling company or a 0:16:04.000 --> 0:16:09.040 tool company rather called is that Holdale Whodale? Whodale maybe 0:16:09.080 --> 0:16:13.920 who dat hou Dai La Industries. This was in nineteen 0:16:13.960 --> 0:16:15.720 seventy nine. They bought it for three hundred and eighty 0:16:15.720 --> 0:16:19.800 million bucks, of which they paid about a million bucks. 0:16:20.120 --> 0:16:24.200 Once again, as we've already learned, the company was saddled 0:16:24.200 --> 0:16:28.240 with debt immediately covering the remainder of that money, and 0:16:28.400 --> 0:16:30.440 they got a new CEO. They said, hey, we're going 0:16:30.520 --> 0:16:33.360 to pay a double what the previous CEO got and 0:16:33.440 --> 0:16:36.240 we're going to start raking in these fees as the 0:16:36.640 --> 0:16:37.360 fund manager. 0:16:37.760 --> 0:16:40.840 Yeah, and so Wodale, which at the time of this 0:16:40.960 --> 0:16:43.840 purchase was doing really well. It had been around since 0:16:43.880 --> 0:16:47.640 I think the nineteen teens. It was, it was fat 0:16:47.680 --> 0:16:50.880 with cash, the employees were happy, and these guys just 0:16:50.960 --> 0:16:53.720 ran it into the ground and sucked as much money 0:16:53.720 --> 0:16:56.560 as they could out of it. And the what usually 0:16:56.560 --> 0:16:59.360 gets companies in this case is they're so settled with 0:16:59.440 --> 0:17:03.200 that that a recession comes along or things shift like 0:17:03.400 --> 0:17:05.800 we go from brick and mortar stores to online, and 0:17:05.960 --> 0:17:08.160 they don't have the cash to keep up because they're 0:17:08.160 --> 0:17:10.639 spending too much of it either giving it back to 0:17:10.760 --> 0:17:14.359 investors why you can't even say back, just giving it 0:17:14.400 --> 0:17:18.640 away to investors, or keeping up with their interest payments 0:17:18.640 --> 0:17:22.239 on these loans that they eventually just sink and end 0:17:22.320 --> 0:17:25.439 up in bankruptcy and their debt gets restructured and if 0:17:25.480 --> 0:17:28.080 they're lucky, they can come back out of it and 0:17:28.119 --> 0:17:29.320 try the whole thing again. 0:17:30.160 --> 0:17:33.679 Yeah, for sure. About ten years after that, one of 0:17:33.720 --> 0:17:37.199 the big, big ones, early ones, took place, such that 0:17:37.280 --> 0:17:39.400 they wrote a book about it and made a movie 0:17:39.440 --> 0:17:41.440 about it. If you've seen the movie Barbarians at the 0:17:41.440 --> 0:17:42.800 Gate with James Garner. 0:17:42.520 --> 0:17:45.639 I haven't, have you, No, I've always wanted to. 0:17:46.440 --> 0:17:47.560 Hey, it's out there, buddy. 0:17:47.640 --> 0:17:51.320 Okay, that's not a Tom Wolf book. I'm thinking of 0:17:51.359 --> 0:17:52.399 a man in full, aren't I? 0:17:53.280 --> 0:17:56.399 Yeah, I think so. I can't remember who wrote the book, 0:17:56.440 --> 0:17:58.760 but the book was called Barbarians at the Gate colon 0:17:59.200 --> 0:18:02.800 the Fall of RGR Nibisco because it's about RJR Nibisco 0:18:02.840 --> 0:18:06.320 and there is no more RJR Nibisco. There's RJR and 0:18:06.359 --> 0:18:10.000 there's Nibisco. But that company ceased to exist after that 0:18:10.119 --> 0:18:10.800 leverage buyout. 0:18:11.040 --> 0:18:14.120 Yeah, and I think two thousand people lost their jobs 0:18:14.320 --> 0:18:17.440 as the company was sold off in pieces and then finally, 0:18:17.520 --> 0:18:20.879 like you said, the whole thing went down. And at 0:18:20.960 --> 0:18:22.879 the time, this is nineteen eighty nine, I think you 0:18:22.880 --> 0:18:26.040 said two thousand people losing their job because some corporate 0:18:26.119 --> 0:18:29.159 raiders came in and screwed up a good thing that was. 0:18:30.320 --> 0:18:33.520 That was enormous news, and that really kind of put 0:18:33.640 --> 0:18:37.800 a period on the end of what had become almost 0:18:37.840 --> 0:18:41.120 like the wild West, Like these people were in some 0:18:41.200 --> 0:18:44.160 cases like outlaw folk heroes who were just coming into 0:18:44.160 --> 0:18:47.560 corporates and taking everything. People getting laid off and then 0:18:47.560 --> 0:18:50.480 they go off fifty times richer than they were and 0:18:50.520 --> 0:18:53.080 do the whole thing again. Right, So, they got a 0:18:53.119 --> 0:18:54.879 bad name in the eighties, and by the time the 0:18:55.000 --> 0:18:58.520 nineties rolled around, things got a little more legit, a 0:18:58.520 --> 0:19:01.960 little more structured. Some of the players involved got a 0:19:02.000 --> 0:19:06.320 little more I don't know, it was more legitimate players 0:19:06.359 --> 0:19:08.960 than just some maverick guy who worked at bear Stearns 0:19:09.080 --> 0:19:11.719 or you know, goldn Sachs for a little while. And 0:19:11.760 --> 0:19:15.560 then additionally some other firms whose names we know because 0:19:15.640 --> 0:19:18.280 this stuff is just so nuts that it makes the news. 0:19:18.600 --> 0:19:23.040 Bain Capital was founded in the eighties, Blackstone founded in 0:19:23.080 --> 0:19:25.600 the eighties. Carlisle Group founded in the eighties. So the 0:19:25.640 --> 0:19:28.520 eighties were a big deal. The nineties everybody kind of 0:19:28.600 --> 0:19:31.280 kept a low profile, and then the two thousands of 0:19:31.320 --> 0:19:32.760 booms started to come back again. 0:19:33.720 --> 0:19:38.000 Yeah, big boom, you know everything crash. We've done a 0:19:38.000 --> 0:19:40.080 couple of episodes kind of around the two thousand and 0:19:40.119 --> 0:19:44.240 eight crash. But a lot of private private equity firms 0:19:44.240 --> 0:19:47.240 did okay. It's not like they were completely unscathed or 0:19:47.240 --> 0:19:50.040 anything like that, but they were better off than a 0:19:50.040 --> 0:19:53.320 lot of financial institutions after the crash, And after that, 0:19:53.400 --> 0:19:57.520 Congress was like, hey, maybe we should have some some 0:19:57.560 --> 0:20:00.560 more you know, guardrails and reporting requirement it's on this 0:20:00.680 --> 0:20:03.159 private equity business, because that's a term that kind of 0:20:03.200 --> 0:20:05.520 just came around in the twenty first century. Even though 0:20:05.520 --> 0:20:08.159 it was happening. Private equity as a term came around, 0:20:08.440 --> 0:20:11.960 I think in the early two thousands, and even though 0:20:11.960 --> 0:20:15.240 they put some more reporting requirements around, it still way 0:20:15.320 --> 0:20:20.159 less transparent and way fewer requirements than you know, the 0:20:21.119 --> 0:20:24.199 publicly traded companies and the stock market and banks and 0:20:24.200 --> 0:20:27.560 stuff like that. Right, But there's been a real boom 0:20:27.960 --> 0:20:30.600 since that time. The number of companies publicly traded has 0:20:30.680 --> 0:20:34.119 dropped about half since nineteen ninety six where it was 0:20:34.160 --> 0:20:36.359 at its peak, and a couple of years ago, in 0:20:36.359 --> 0:20:39.359 twenty twenty three, there were five times as many private 0:20:39.359 --> 0:20:42.320 equity backfirms as publicly held companies. 0:20:42.840 --> 0:20:45.040 Yeah, because it's you don't have to worry about the 0:20:45.080 --> 0:20:50.720 government meddling with your stuff. It's crazy. So some of 0:20:50.760 --> 0:20:55.120 the some of these deals make headlines, and usually when 0:20:55.119 --> 0:20:58.159 it makes headlines is because it's gotten so bad that 0:20:58.200 --> 0:21:01.320 the average person wants their blood to boil reading about it. 0:21:01.359 --> 0:21:04.399 So the news says, here, read this. One of the 0:21:04.440 --> 0:21:07.800 big ones that I remember was Toys r US. 0:21:08.400 --> 0:21:09.880 Yeah, one of this. 0:21:09.880 --> 0:21:11.920 And this is another thing it will also make news 0:21:11.920 --> 0:21:16.080 if like a beloved nostalgic brand just gets torn apart 0:21:16.200 --> 0:21:19.880 by corporators. And Toys r Us definitely fit that bill. 0:21:21.000 --> 0:21:23.480 You know, most people our age have memories of going 0:21:23.560 --> 0:21:25.680 to Toys r Us and it being like, how does 0:21:25.680 --> 0:21:28.000 this place exist? This is the most amazing place on 0:21:28.040 --> 0:21:31.440 the planet. In addition to that, I mean, even more 0:21:31.480 --> 0:21:35.720 importantly than that loss of nostalgia is that thirty thousand 0:21:35.800 --> 0:21:39.520 people lost their jobs because of a private equity takeover 0:21:39.640 --> 0:21:42.000 Toys Rus that eventually ran it into the ground. 0:21:42.760 --> 0:21:45.040 Yeah. I mean it makes some of those earlier ones 0:21:45.080 --> 0:21:47.399