Speaker 1: Welcome to Stuff You Should Know, a production of iHeartRadio.
Speaker 2: Hey, and welcome to the podcast. I'm Josh, and there's
Speaker 2: Chuck and Jerry's here too, and this is Stuff you
Speaker 2: should know the podcast.
Speaker 1: Oh wow, fancy.
Speaker 2: Yeah. I wanted to dress it up a little bit
Speaker 2: because it's our job, Chuck, to yank what could be
Speaker 2: a bone dry, boring economics lesson from the maw of
Speaker 2: well boredom. Shake it up a little bit by the caller,
Speaker 2: look it in the eye, and say you will not
Speaker 2: be boring today, and then do all that. All right, Okay,
Speaker 2: we can do it, Chuck. We're professionals.
Speaker 1: I'm glad you feel good about it.
Speaker 2: I do, and I'm going to make you feel good
Speaker 2: about it too, because while we're talking about today is
Speaker 2: no mere typical economics. And we're famous for having trouble
Speaker 2: wrapping our heads around economics. This one can be that
Speaker 2: way too. We're talking about private equity today. We'll explain
Speaker 2: all about it. The reason it can be hard to
Speaker 2: wrap your head around is because it's so insanely unfair
Speaker 2: the structure of it, that it just doesn't make sense.
Speaker 2: So you just kind of have to accept it on
Speaker 2: its face that this is actually how it is.
Speaker 1: Yeah, I would agree, it's nuts.
Speaker 2: So private equity, I guess we should probably start out
Speaker 2: with a little bit of a definition, Charles. It's an
Speaker 2: alternative investment vehicle. And essentially what it is is it's
Speaker 2: a fund, a private fund. You have to basically be
Speaker 2: in the club to even invest in this, at least traditionally.
Speaker 2: That kind of open it up a little more, and
Speaker 2: private equity goes around and essentially either buys huge controlling
Speaker 2: interests in companies or just buys the company's outright, trims
Speaker 2: them down, makes them lean, mean and efficient, and if
Speaker 2: ideally turns them around for a healthy profit, walks away
Speaker 2: does it again. Everybody who invested gets even richer than
Speaker 2: they already were. And that's the basics, the very most
Speaker 2: basic definition of private equity.
Speaker 1: Yeah, it's something that has become much more popular in
Speaker 1: the past, you know, twenty ish years, but really kind
Speaker 1: of started in the seventies, as we'll see. And it's
Speaker 1: an alternative investment, so it's not like stocks or bonds
Speaker 1: or anything. It's generally a little riskier. There's less oversight,
Speaker 1: there's less transparency, and they want to keep it that way.
Speaker 2: Yeah, Yeah, they've actually gone to great links to make
Speaker 2: sure that it's much less transparent. One reason why the government,
Speaker 2: who is in charge of regulating stuff to make it
Speaker 2: transparent like stocks and bonds and disclosures and all that,
Speaker 2: is that you or I or anybody could walk or
Speaker 2: walk along, open up a brokerage account, start buying stocks
Speaker 2: and bonds. I don't have to be savvy at all
Speaker 2: to invest in private equity because of the risk, because
Speaker 2: it's just so different from traditional stocks and bonds and
Speaker 2: normal investments. The government says you're on your own. As
Speaker 2: a matter of fact, you have to register as an
Speaker 2: accredited investor, which says that you either know what you're
Speaker 2: doing so much that we don't have to worry about
Speaker 2: you losing your shirt, like you're going to just deal
Speaker 2: with it if that happens, or you have so much
Speaker 2: money it's not really going to matter if you lose
Speaker 2: your investment. Those are the people who can invest in
Speaker 2: private equity, and usually they're what institutional investors, right, like
Speaker 2: huge massive funds or college endowments or something.
Speaker 1: Yeah, and the people who really come out on top
Speaker 1: are the people that manage these If you're a managing
Speaker 1: partner there's a formula known as two and twenty where
Speaker 1: the company that you're managing that you have taken over,
Speaker 1: they pay you two percent of the total assets of
Speaker 1: that company plus twenty percent of the profits above whatever
Speaker 1: threshold that you agree on, I guess. And then there's
Speaker 1: all sorts of other ways that they can make money,
Speaker 1: as we'll see, like you know, selling the land that
Speaker 1: the business sits on, maybe to yourself and then renting
Speaker 1: it back to that same company at a higher rate.
Speaker 1: So yeah, we'll dig into all that. But they're the
Speaker 1: people that are really getting rich are the people that
Speaker 1: are investing in these but really managing these.
Speaker 2: Right, So if you ever hear a news story about
Speaker 2: some guy who ran some great venerated company into the
Speaker 2: ground and they're like, yeah, I mean even I lost
Speaker 2: my investment, do not feel bad for them because they
Speaker 2: made probably hundreds of millions or billions of dollars for
Speaker 2: themselves from those fees, and those fees can't be taken back,
Speaker 2: like because that company's in bankruptcy. Because you can show
Speaker 2: that they did a terrible job of managing this company,
Speaker 2: doesn't matter. They get to keep that money no matter
Speaker 2: what the turnout is. No matter how many people lose
Speaker 2: their jobs. That is why almost everyone in the world
Speaker 2: hates private equity people.
Speaker 1: Yeah, and they generally do this to private companies. Sometimes
Speaker 1: it'll be a controlling interest in a much larger publicly
Speaker 1: traded company, but you know, generally we're talking about private
Speaker 1: companies here, and you know, we're going to go through
Speaker 1: industries and different examples of specific companies in a bit,
Speaker 1: but it's usually almost always what's called a leverage buyout,
Speaker 1: in which the money to buy this company comes from
Speaker 1: a huge loan that that company is also then responsible for.
Speaker 1: So it's it's really whoever came I mean, I guess
Speaker 1: we'll get to who basically came up with this stuff,
Speaker 1: But it's a sort of evil financial genius on a
Speaker 1: level that is kind of hard to comprehend that it
Speaker 1: was ever allowed to happen.
Speaker 2: Yeah, It's the best analogy I've been able to come
Speaker 2: up with is it's like if you went and bought
Speaker 2: a house. The house had to go take out a
Speaker 2: loan in a mortgage so that you could buy and
Speaker 2: own it, and you didn't actually care about the house
Speaker 2: because you're planning on selling it down the road, so
Speaker 2: you didn't keep it up and then you just decided
Speaker 2: to walk away from the house, and the house is
Speaker 2: responsible for paying off the loan it took out so
Speaker 2: you could buy it. That's the best that I can
Speaker 2: come up with.
Speaker 1: Yeah, I mean, that's a thing, and it's a big
Speaker 1: thing right now. Private equity firms, the companies they own
Speaker 1: in the United States employee more than thirteen million people
Speaker 1: and they account for about two trillion of which is
Speaker 1: about seven percent of the GDP. And like I said,
Speaker 1: it all started out in the seventies with a guy
Speaker 1: named Milton Friedman from the University of Chicago, who was
Speaker 1: I mean, it seems very sort of old hat now
Speaker 1: to hear, but he was kind of one of the
Speaker 1: first people to step forward and say the only thing
Speaker 1: any corporation should ever worry about is their share holders.
Speaker 1: The people don't matter, the product don't matter, doesn't matter,
Speaker 1: rather English grammar doesn't matter, and the only thing that
Speaker 1: matters is the profits that we turn for our shareholders.
Speaker 1: And once somebody kind of said the quiet part out loud,
Speaker 1: everybody's like, oh, well, he said it, So that's what
Speaker 1: we're going to all try and do now.
Speaker 2: Yeah, one of the worst ideas in the history of
Speaker 2: the world, and it just took off. So, yeah, Friedman,
Speaker 2: that was step one. Step two was laid well. Step
Speaker 2: two through ten, I would say, is was laid out
Speaker 2: by a guy named Michael Jensen, who was an economist
Speaker 2: with Harvard Business School in the seventies and eighties, and
Speaker 2: he basically said, traditional companies that have you know, you've
Speaker 2: got a CEO, and you have employees, and the CEO
Speaker 2: has paid a certain salary a year and everything's great.
Speaker 2: That doesn't work because the CEO, the person making the
Speaker 2: decisions and what moves the company makes, they might be
Speaker 2: in conflict with the share they might be spending a
Speaker 2: bunch of money, and they don't care. They don't care
Speaker 2: about the shareholders, the investors, who, again, as Melton Friedman said,
Speaker 2: the entire purpose of the corporation is to enrich the shareholders.
Speaker 2: So how can you bring a CEO in line? And
Speaker 2: you said a couple of things. One, you can pay
Speaker 2: them in stock. So that whole thing about how CEOs
Speaker 2: get huge stock packages, now that came from Michael Jensen.
Speaker 2: And the reason why is because now suddenly they're a shareholder,
Speaker 2: so they care about what the shareholders are getting right,
Speaker 2: that's number one. The number two if you buy a
Speaker 2: company using that leverage buyout technique where you make the
Speaker 2: company take out tons of loans so that you can
Speaker 2: buy that company, it's saddled with so much debt that
Speaker 2: it immediately has to figure out how to get lean
Speaker 2: and mean, emphasis on mean, so that it can keep
Speaker 2: afloat and pay off of those debts. So like, immediately
Speaker 2: managers have to trim the fat and it just gets
Speaker 2: more efficient and outperforms just a traditional company, traditionally run company.
Speaker 2: That was Michael Jensen's contributions.
Speaker 1: Yeah, and you know we're going to talk about the
Speaker 1: different ways this happens. Obviously, firing people is a big
Speaker 1: way to trim the fat, to pay back those huge
Speaker 1: loans that someone took out on your behalf that you're
Speaker 1: now responsible for once again. So you know, mass layoffs
Speaker 1: is one way to make that happen. That's one way
Speaker 1: to trim the fat. Even if it, you know, makes
Speaker 1: the company not function as well, it doesn't matter. You know,
Speaker 1: sometimes there is fat that can be trim. So we're
Speaker 1: not saying like no one should ever be laid off
Speaker 1: or anything like that, like we're realistic people, but we're
Speaker 1: talking about, you know, leverage buyouts and kind of how
Speaker 1: they work. So another thing they can do is break
Speaker 1: them apart. And if you've ever seen the movie Wall
Speaker 1: Street with the great Michael Douglass, I just watched that
Speaker 1: again for the billion time recently. Really, Yeah, very very
Speaker 1: good example. It's one of my favorite movies, but very
Speaker 1: very good examples of all this stuff in there as
Speaker 1: far as like buying in his case, when he bought
Speaker 1: arlichenes father's airline just for the sole purpose of breaking
Speaker 1: it apart and you know, driving it into the ground
Speaker 1: to get rich.
Speaker 2: Right.
Speaker 1: But you know, selling off assets is another way to
Speaker 1: do it, like I mentioned, like selling off the land
Speaker 1: that the business sits on. Sometimes that equity firm owns
Speaker 1: the real estate company as well. Yeah, that buys the
Speaker 1: land that the company sits on and then leases it
Speaker 1: back to that company, sometimes against their best interest at
Speaker 1: like higher rental rates.
Speaker 2: Yeah, I'll give you an example. We'll talk a little
Speaker 2: more about Red Lobster. But they got they got taken
Speaker 2: over in a leveraged buyout, and the company did exactly that.
Speaker 2: They sold off all of their assets, all of their
Speaker 2: restaurants to sold them off and then they sold them
Speaker 2: to a company who turned around and leased them to
Speaker 2: Red Lobster. Right, the Red Lobster was paying an estimated
Speaker 2: sixteen million dollars a year for just a one percent
Speaker 2: property tax on its locations, all of them sixteen million dollars.
Speaker 2: Now their leases amount to one hundred and fifty eight
Speaker 2: million dollars. Right. So these are just terrible, terrible business decisions.
Speaker 2: And the reason why is because anytime a big influx
Speaker 2: of cash comes in, it gets divided up among the investors.
Speaker 2: They get tons of money, and it's not just like
Speaker 2: from selling properties, Chuck. One of the other ways that
Speaker 2: investors get their money back, they get return on their
Speaker 2: investment is they'll take out more loans from the company.
Speaker 2: After the company's been bought and has all this extra debt,
Speaker 2: they'll take out even more loans, and when that money
Speaker 2: comes in, rather than spending on the company, they'll divide
Speaker 2: some or all of it up among the investors. So
Speaker 2: it's like a vampire process at its worst. I feel
Speaker 2: like we really should say something to be fair. There
Speaker 2: is a lot of well run, well thought out private
Speaker 2: equity firms that know what they're doing that actually have
Speaker 2: saved companies from going under. It happens. It's just when
Speaker 2: it's bad, it's so bad that it almost it almost
Speaker 2: makes it seem like there shouldn't be this type of
Speaker 2: business model.
Speaker 1: Yeah, for sure. Sometimes it's a real quick thing, like
Speaker 1: in the case of Wall Street, like there was no
Speaker 1: long term plan for Gordon Gecko and Blue Star Air.
Speaker 1: It was like a house flip. You buy this company
Speaker 1: sort of a smaller company, and you want to make
Speaker 1: it look good for maybe another private equity firm to
Speaker 1: come along and buy. So you're gonna, if you're a
Speaker 1: manager of that firm, you're gonna make a lot of
Speaker 1: very short term decisions that make it appear much healthier
Speaker 1: than it really is on paper. So they can just
Speaker 1: kind of turn it and flip it and get a
Speaker 1: big payoff, and then it's someone else's problem where they're
Speaker 1: gonna do the same thing. Probably.
Speaker 2: Yeah, And like you said, one of the big things
Speaker 2: that happens is including layoffs, including just sucking the company
Speaker 2: dry of its money, is the customer suffers as well.
Speaker 2: Usually the product or the service takes a really big
Speaker 2: hit because you're trying to figure out how to put
Speaker 2: that same thing out and charge as much as you
Speaker 2: can for it by putting as little as you can
Speaker 2: into it, because the people who bought the company don't
Speaker 2: really care about the company or what it does.
Speaker 1: Good time for a break, I think so, and.
Speaker 2: Then we'll come back and talk some more about the
Speaker 2: history of this whole thing. Huh.
Speaker 1: All right, I need to go get some palmade and
Speaker 1: grease my hairback real quick. I'll be right back.
Speaker 2: Okay, definitely should I'm not large childs of each my ski.
Speaker 1: I should mention real quick that I I love Wall
Speaker 1: Street so much that I was watching it again and
Speaker 1: I was like, I wonder if there's a t that
Speaker 1: says Anacott Steel. It's just one of the companies that they,
Speaker 1: you know, one of the fictional companies at Oliver Stone
Speaker 1: wrote it to the movie, and sure enough there's an
Speaker 1: Anacot Steel T shirt. I bought it. I love it.
Speaker 1: I hate the message of the movie and Gordon Geko.
Speaker 1: I don't think he's the hero or anything like that, right,
Speaker 1: But it's just a movie I've always loved and now
Speaker 1: I got my Annacott Steel shirt. It just kind of
Speaker 1: as a movie crusher type. So when people see me
Speaker 1: that know that movie, they'll be like, oh Wall Street.
Speaker 2: Right, No, I get it, I get it. I used
Speaker 2: to have a sweatshirt that was like the print of
Speaker 2: Danny's sweater, the Apollo Latin sweater. I love that thing.
Speaker 2: That was one of my more beloved pieces of clothing.
Speaker 1: You know, I met the guy who owns that sweater.
Speaker 1: Oh really, Dan Johnson No Lee Ownkrik I think is
Speaker 1: his name. He's a big animation guy. I think he
Speaker 1: did Coco and a bunch of other big, oh cool
Speaker 1: animated films, and he was such a fan of the
Speaker 1: Shining that he bought that real sweater at auction.
Speaker 2: Good for him. I hope he's never tried it on
Speaker 2: because that's a tiny sweater.
Speaker 1: Well you wouldn't a big guy.
Speaker 2: It doesn't matter. That is still a very Danny was
Speaker 2: not a he was a tiny guy.
Speaker 1: Yeah. Should we talk about history?
Speaker 2: Yeah? I think we should chuck. So this whole thing
Speaker 2: is kind of newish, right, I Mean we usually associated
Speaker 2: with the eighties, and it's pretty accurate, but it goes
Speaker 2: back a little further. It's just the eighties or when
Speaker 2: it really took shape and got off the rails the
Speaker 2: first time.
Speaker 1: Yeah, for sure, the first leverage buyouts that came after
Speaker 1: World War Two. There were some dudes from Bear Stearns,
Speaker 1: Jerome Cohlberg, Henry Kravis with a K, and George Roberts,
Speaker 1: so they were KKR. They got together they started, you know,
Speaker 1: with this idea of leverage buyouts for small companies, like
Speaker 1: you know, family owned businesses. This is in the nineteen
Speaker 1: sixties and in the mid seventies they formed Colberg, Cravis
Speaker 1: and Roberts the KKR business and their first big success
Speaker 1: story for them is making a ton of money doing
Speaker 1: One of these was a machine tooling company or a
Speaker 1: tool company rather called is that Holdale Whodale? Whodale maybe
Speaker 1: who dat hou Dai La Industries. This was in nineteen
Speaker 1: seventy nine. They bought it for three hundred and eighty
Speaker 1: million bucks, of which they paid about a million bucks.
Speaker 1: Once again, as we've already learned, the company was saddled
Speaker 1: with debt immediately covering the remainder of that money, and
Speaker 1: they got a new CEO. They said, hey, we're going
Speaker 1: to pay a double what the previous CEO got and
Speaker 1: we're going to start raking in these fees as the
Speaker 1: fund manager.
Speaker 2: Yeah, and so Wodale, which at the time of this
Speaker 2: purchase was doing really well. It had been around since
Speaker 2: I think the nineteen teens. It was, it was fat
Speaker 2: with cash, the employees were happy, and these guys just
Speaker 2: ran it into the ground and sucked as much money
Speaker 2: as they could out of it. And the what usually
Speaker 2: gets companies in this case is they're so settled with
Speaker 2: that that a recession comes along or things shift like
Speaker 2: we go from brick and mortar stores to online, and
Speaker 2: they don't have the cash to keep up because they're
Speaker 2: spending too much of it either giving it back to
Speaker 2: investors why you can't even say back, just giving it
Speaker 2: away to investors, or keeping up with their interest payments
Speaker 2: on these loans that they eventually just sink and end
Speaker 2: up in bankruptcy and their debt gets restructured and if
Speaker 2: they're lucky, they can come back out of it and
Speaker 2: try the whole thing again.
Speaker 1: Yeah, for sure. About ten years after that, one of
Speaker 1: the big, big ones, early ones, took place, such that
Speaker 1: they wrote a book about it and made a movie
Speaker 1: about it. If you've seen the movie Barbarians at the
Speaker 1: Gate with James Garner.
Speaker 2: I haven't, have you, No, I've always wanted to.
Speaker 1: Hey, it's out there, buddy.
Speaker 2: Okay, that's not a Tom Wolf book. I'm thinking of
Speaker 2: a man in full, aren't I?
Speaker 1: Yeah, I think so. I can't remember who wrote the book,
Speaker 1: but the book was called Barbarians at the Gate colon
Speaker 1: the Fall of RGR Nibisco because it's about RJR Nibisco
Speaker 1: and there is no more RJR Nibisco. There's RJR and
Speaker 1: there's Nibisco. But that company ceased to exist after that
Speaker 1: leverage buyout.
Speaker 2: Yeah, and I think two thousand people lost their jobs
Speaker 2: as the company was sold off in pieces and then finally,
Speaker 2: like you said, the whole thing went down. And at
Speaker 2: the time, this is nineteen eighty nine, I think you
Speaker 2: said two thousand people losing their job because some corporate
Speaker 2: raiders came in and screwed up a good thing that was.
Speaker 2: That was enormous news, and that really kind of put
Speaker 2: a period on the end of what had become almost
Speaker 2: like the wild West, Like these people were in some
Speaker 2: cases like outlaw folk heroes who were just coming into
Speaker 2: corporates and taking everything. People getting laid off and then
Speaker 2: they go off fifty times richer than they were and
Speaker 2: do the whole thing again. Right, So, they got a
Speaker 2: bad name in the eighties, and by the time the
Speaker 2: nineties rolled around, things got a little more legit, a
Speaker 2: little more structured. Some of the players involved got a
Speaker 2: little more I don't know, it was more legitimate players
Speaker 2: than just some maverick guy who worked at bear Stearns
Speaker 2: or you know, goldn Sachs for a little while. And
Speaker 2: then additionally some other firms whose names we know because
Speaker 2: this stuff is just so nuts that it makes the news.
Speaker 2: Bain Capital was founded in the eighties, Blackstone founded in
Speaker 2: the eighties. Carlisle Group founded in the eighties. So the
Speaker 2: eighties were a big deal. The nineties everybody kind of
Speaker 2: kept a low profile, and then the two thousands of
Speaker 2: booms started to come back again.
Speaker 1: Yeah, big boom, you know everything crash. We've done a
Speaker 1: couple of episodes kind of around the two thousand and
Speaker 1: eight crash. But a lot of private private equity firms
Speaker 1: did okay. It's not like they were completely unscathed or
Speaker 1: anything like that, but they were better off than a
Speaker 1: lot of financial institutions after the crash, And after that,
Speaker 1: Congress was like, hey, maybe we should have some some
Speaker 1: more you know, guardrails and reporting requirement it's on this
Speaker 1: private equity business, because that's a term that kind of
Speaker 1: just came around in the twenty first century. Even though
Speaker 1: it was happening. Private equity as a term came around,
Speaker 1: I think in the early two thousands, and even though
Speaker 1: they put some more reporting requirements around, it still way
Speaker 1: less transparent and way fewer requirements than you know, the
Speaker 1: publicly traded companies and the stock market and banks and
Speaker 1: stuff like that. Right, But there's been a real boom
Speaker 1: since that time. The number of companies publicly traded has
Speaker 1: dropped about half since nineteen ninety six where it was
Speaker 1: at its peak, and a couple of years ago, in
Speaker 1: twenty twenty three, there were five times as many private
Speaker 1: equity backfirms as publicly held companies.
Speaker 2: Yeah, because it's you don't have to worry about the
Speaker 2: government meddling with your stuff. It's crazy. So some of
Speaker 2: the some of these deals make headlines, and usually when
Speaker 2: it makes headlines is because it's gotten so bad that
Speaker 2: the average person wants their blood to boil reading about it.
Speaker 2: So the news says, here, read this. One of the
Speaker 2: big ones that I remember was Toys r US.
Speaker 1: Yeah, one of this.
Speaker 2: And this is another thing it will also make news
Speaker 2: if like a beloved nostalgic brand just gets torn apart
Speaker 2: by corporators. And Toys r Us definitely fit that bill.
Speaker 2: You know, most people our age have memories of going
Speaker 2: to Toys r Us and it being like, how does
Speaker 2: this place exist? This is the most amazing place on
Speaker 2: the planet. In addition to that, I mean, even more
Speaker 2: importantly than that loss of nostalgia is that thirty thousand
Speaker 2: people lost their jobs because of a private equity takeover
Speaker 2: Toys Rus that eventually ran it into the ground.
Speaker 1: Yeah. I mean it makes some of those earlier ones
Speaker 1: where you know, on Thy twelve hundred people lose their
Speaker 1: job seemed quaint.
Speaker 2: Yeah, thirty thousand people just sorry, you don't have a
Speaker 2: job anymore.
Speaker 1: Yeah, there's this guy. I mean, we got to talk
Speaker 1: about Seers because that's another one iconic brand, iconic brick
Speaker 1: and order store. I would say there's some nostalgia tied
Speaker 1: up in Sears for sure.
Speaker 2: Sure.
Speaker 1: And a guy named Edward Lampert is someone who may
Speaker 1: not be on your radar unless you follow this stuff
Speaker 1: a little more closely. Kmart files for bankruptcy in two
Speaker 1: thousand and two, and Ed Lampert comes in he was
Speaker 1: a goldman sax guy and he I think former by
Speaker 1: this time. But he buys up a bunch of the
Speaker 1: debt from Kmart they come out of bankruptcy, and then
Speaker 1: he has a hedge fund e SL Investments, and they
Speaker 1: were the largest shareholder, and so thus he becomes the
Speaker 1: chairman and can then run the show.
Speaker 2: Right, and he says, Kmart, I think we should buy Sears,
Speaker 2: And he had a pretty big stake in Sears too,
Speaker 2: so much so that he was later accused of devaluing
Speaker 2: Sears so that he could buy it through Kmart for cheaper. Regardless,
Speaker 2: Kmart bought Sears and they formed the Sears Holding Company,
Speaker 2: which was this huge, massive retailer. Kmart was not doing
Speaker 2: very good. Sears was doing amazing tens and tens of
Speaker 2: billionions of dollars in sales every year, and for the
Speaker 2: first couple of years things were going pretty well. But
Speaker 2: Edward Lampert, being a corporate rating private equity guy, again,
Speaker 2: he's this is his firm, so he is directly taking
Speaker 2: hundreds of millions of dollars that two percent of the
Speaker 2: assets every year, plus that twenty percent when he gets
Speaker 2: above performance goals. So by juicing this company and like
Speaker 2: boosting the stock price and the value of all this stuff.
Speaker 2: He's getting huge percentages of that every year. Right. The
Speaker 2: problem is these bad management decisions. This is when it
Speaker 2: goes bad, and this is when you end up reading
Speaker 2: about it. One of the big things they did was
Speaker 2: a stock buy back. Right. And if you have a
Speaker 2: bunch of stock out there, a bunch of shares out
Speaker 2: there on the market, just by like the laws of
Speaker 2: supplying demand, they're they're worth less than if they're scarcer.
Speaker 2: So you go as the company and buy those shares back.
Speaker 2: And because there's fewer shares on the market, share price
Speaker 2: can increase. Right, So if you're holding shares in the company,
Speaker 2: your share price goes up and you make the company
Speaker 2: buy the stocksback. It's not like you're out there doing
Speaker 2: it yourself. Right. The better thing to do traditionally, for
Speaker 2: if you want your business to keep running, is to
Speaker 2: use that money to keep your business running. But instead
Speaker 2: they took six billion dollars and bought stockback to raise
Speaker 2: the share price, and they only spent I think this
Speaker 2: is over a couple of years. They only spent half
Speaker 2: of that on capital expenditures like keeping up your properties
Speaker 2: maintaining your buildings, stuff like that, and so the company
Speaker 2: just almost immediately started to just falter.
Speaker 1: Yeah, so things start faltering. This is around two thousand
Speaker 1: and seven or so, and ESL, which again was at
Speaker 1: Lampert's company, They and some other firms then loan money
Speaker 1: to themselves almost two point six billion dollars and so
Speaker 1: they're now also collecting interests and fees on that. So
Speaker 1: about four hundred million in interests in fees to the
Speaker 1: big loan that they gave themselves, and Sears continues to
Speaker 1: sort of tank, or the Sears Holding Company continues to tank.
Speaker 1: That's when they break it up. They spun off, they
Speaker 1: start spinning off different divisions. ESL is buying shares in
Speaker 1: most of those smaller divisions as well once they break
Speaker 1: it apart. And then in twenty fifteen, Ed Lampert founded
Speaker 1: a real estate company called Sarritage Growth Properties. They bought
Speaker 1: two hundred and sixty six seers and Kmart buildings and
Speaker 1: then rented them back to themselves.
Speaker 2: It's like robbing Peter to pay Peter.
Speaker 1: Yeah, it's just sounds like such an obvious policing.
Speaker 2: It is and grift and it's totally legal. That's the thing.
Speaker 2: They're not breaking any laws. All of this is completely legal.
Speaker 2: It's just despicably unfair. So obviously, after a fairly short
Speaker 2: time seven years, this company, Seers Holding, filed for bankruptcy.
Speaker 2: And again, bankruptcy doesn't mean like, oh that's it amount
Speaker 2: of money. It means like, hey, I can't pay my
Speaker 2: debts back. So I'm going to negotiate with all these
Speaker 2: people and hopefully reduce it by two thirds and then
Speaker 2: I can manage that. So I'm going to come back
Speaker 2: out of bankruptcy and try to continue on. That's what
Speaker 2: that's that was the result for Sears Holding. But part
Speaker 2: of this restructuring was that they started slashing costs. And
Speaker 2: the first thing you do to slash costs of fear
Speaker 2: corporators fire people. They closed stores, chuck. They had thirty
Speaker 2: five hundred Seers and Kmart stores when those two companies merged. Okay,
Speaker 2: by seven years later they were down to seven hundred,
Speaker 2: and today there's eight eight eighty eight, eight hundred zero eight.
Speaker 1: Yeah, there's eight of those left. It was, you know, again,
Speaker 1: tens of thousands of jobs and eleven billion dollars in
Speaker 1: unpaid debt to creditors. And Ed Lampert ends up making
Speaker 1: about one point for personally personing about one point four
Speaker 1: billion dollars from managing that fund.
Speaker 2: Two things I saw. The Wall Street Journal estimated that
Speaker 2: under Lampert's watch of this, I think seven years, two
Speaker 2: hundred thousand people lost their jobs from Sears and k martin. Yeah,
Speaker 2: that's got to be a record, man. And then also
Speaker 2: he was quoted as saying like, yeah, I'm really bummed
Speaker 2: about this whole thing. It was a real loss. It
Speaker 2: was a real opportunity cost for me, meaning he could
Speaker 2: have done this with a different company and maybe made
Speaker 2: out even better than he did.
Speaker 1: So you mentioned Red Lobster, and this was very much
Speaker 1: in the news. It feels like it was more recent. Well,
Speaker 1: I guess some of this stuff was a little more recent.
Speaker 1: But in twenty fourteen, Golden Gate Cap Capital San Francisco
Speaker 1: company bought Red Lobster two point one billion dollars. They
Speaker 1: said it was quote an exceptionally strong brand with an
Speaker 1: unparalleled market position, and in order to pay for that deal,
Speaker 1: they sold, As you mentioned, they sold the real estate
Speaker 1: of five hundred restaurants for about one point five billion bucks,
Speaker 1: and a company called American Realty Capital partners bought that
Speaker 1: land and then once again leased it back at a
Speaker 1: higher rate, like above market rates.
Speaker 2: Yeah, and again that one point five billion. I'm a
Speaker 2: significant portion of it just went right to investors. I'm
Speaker 2: not sure how much, but that was that's the playbook, right.
Speaker 2: I also have to say I worked at Red Lobster
Speaker 2: as a server for a little bit.
Speaker 1: Oh, you and I have dined at Red Lobster before
Speaker 1: one time. It's probably the only time I've been there
Speaker 1: in the past forty years. And you never, I don't think,
Speaker 1: disclosed to meet that.
Speaker 2: Did I not.
Speaker 1: No, All you talked about was how much you love
Speaker 1: those what are they? Little cheesy biscuits, the cheddar bay bisis.
Speaker 2: That is why I worked at Red Lobster so it
Speaker 2: could be closer to them. It was only for a
Speaker 2: couple of weeks, so I was like, I gotta stop
Speaker 2: eating these.
Speaker 1: I didn't know you ever waited tables at all.
Speaker 2: So the reason why I don't talk about that that
Speaker 2: much is because that I'm one of the worst servers
Speaker 2: of all time. Something happens to me between walking from
Speaker 2: you know, the kitchen to your table, and my personality
Speaker 2: just drops out of me somehow, and I forget stuff
Speaker 2: and I'm just terrible, Like the kind of waiter where
Speaker 2: you're like, you just you ruined our dining experience, are
Speaker 2: so bad. That was the kind of waiter I was.
Speaker 2: So I learned after probably six or seven places to
Speaker 2: just stop trying to be a server.
Speaker 1: Yeah, you and Emily. Emily was waited tables for a
Speaker 1: very very short time for similar reasons.
Speaker 2: Yeah, it's just it's Yeah, you have to be in
Speaker 2: the right kind of mindset to pull it off. It's
Speaker 2: not as easy as it looks. I found.
Speaker 1: Yeah, I was pretty good at it.
Speaker 2: I believe that.
Speaker 1: You know. Also glad those days are behind me. Yeah,
Speaker 1: I think my retirement job is going to be uh,
Speaker 1: stadium worker. I want to like that before I want
Speaker 1: to like sell beer at a base at Brays game.
Speaker 2: Let's hear what you got cold? Bea I ha cold,
Speaker 2: that's pretty good. You gotta you gotta grow one of
Speaker 2: those Walrus mustaches.
Speaker 1: Two for one and they're like, you can't do that,
Speaker 1: you can't make deals.
Speaker 2: The one I always remember is popcorn, peanuts, cararalcorn hair.
Speaker 1: Is that it the price you got to finish it
Speaker 1: up with?
Speaker 2: Here? Yeah, that's how you get people's attention. So oh yeah,
Speaker 2: back to Red Lobster.
Speaker 1: Yeah, I can smell the cheesy biscuits.
Speaker 2: They're so good man, and they're ranch dressing is world
Speaker 2: class as well. It's just unlike any other ranch. It's
Speaker 2: really good. Oh all right, I'm glad that Red Lobster
Speaker 2: are still around as far as I know, despite all
Speaker 2: these different companies trying their best to run it into
Speaker 2: the ground. COVID dip definitely didn't help. Yeah, twenty twenty hit,
Speaker 2: Covid hit and Red Lobster, which was already This is
Speaker 2: what I was talking about. When a company is saddled
Speaker 2: with a bunch of debt and new lost, that's hard
Speaker 2: to keep up through through rough times or changes. Right,
Speaker 2: same thing with Red Lobster. And I guess one of
Speaker 2: its seafood suppliers, Tie Union Group, stepped in and was like, hey,
Speaker 2: we'll buy Red Lobster. We have a really good idea.
Speaker 2: So this is their seafood supplier. They became the exclusive
Speaker 2: shrimp supplier to Red Lobster the company that owned it
Speaker 2: that now owned Red Lobster, and the CEO is like,
Speaker 2: you guys get this. You know, the endless shrimp promotion
Speaker 2: for twenty bucks. We're going to make it a permanent
Speaker 2: menu item, and we're going to sell them so much
Speaker 2: shrimp because we're their exclusive supplier of shrimp. Bam. And
Speaker 2: he said, bam, that's a quote. And they lost like
Speaker 2: eleven million dollars in just three months of trying that
Speaker 2: because they grossly underestimated how much shrimp people would eat
Speaker 2: if there was no bottom to it.
Speaker 1: Yeah. I mean, if you're talking to you know, medium
Speaker 1: sized shrimp, I can eat, you know, if I'm really
Speaker 1: trying thirty wow meal.
Speaker 2: Wow. That's a lot of shrimp, dude, not the huge ones.
Speaker 1: No, I got it's if it's endless and it's solved
Speaker 1: for a very set rate. Uh. And I'm, you know,
Speaker 1: maybe trying to impress my date.
Speaker 2: Right, surely not fried though, right, you're just talking like
Speaker 2: peel and.
Speaker 1: E oh, that's more like forty.
Speaker 2: Oh my god, you could eat thirty fried.
Speaker 1: I probably I probably could not eat forty eight peel
Speaker 1: and eat. I don't know if I could eat forty
Speaker 1: I mean, if I'm not eating cheesy biscuits and French
Speaker 1: fries and cole salaw and so you're being serious, then
Speaker 1: I could probably eat thirty fried shrimp for sure.
Speaker 2: Okay, I'm going to be your date for that one.
Speaker 1: Not well, I hope to impress you.
Speaker 2: Oh what else? Oh, I've got one. One of the
Speaker 2: things that a lot of these companies do is they
Speaker 2: take over and buy a business that they just don't
Speaker 2: understand the business of, and that's how they run it
Speaker 2: into the ground. That'll happen a lot. We'll talk about
Speaker 2: that here or there. But there are some niche private
Speaker 2: equity firms that focus on specific kinds of businesses. They
Speaker 2: know what they're doing, and one of them is Rourke Capital.
Speaker 2: They're big on fast food industry. And when you have
Speaker 2: a very powerful, wealthy firm like that that's zeroed in
Speaker 2: on the ups and downs of their particular industry, you
Speaker 2: have the kind of people who will lobby successfully to
Speaker 2: get the fifteen dollars federal minimum wage taken out of
Speaker 2: the stimulus package, which is exactly what Rourke Capital managed
Speaker 2: to do several years back.
Speaker 1: That's right. And if you're wondering, is that named after
Speaker 1: you know, mister Rourke from Fantasy Island. No, it's named
Speaker 1: like seriously named for Howard Rourke ein rand Hero. And
Speaker 1: do with that what you.
Speaker 2: Will yeah, from the fountain.
Speaker 1: That's right, all right. I guess we could talk a
Speaker 1: little bit about newspapers and physical print media because I mean,
Speaker 1: they have been in trouble anyway. So not all of
Speaker 1: the losses of the print media industry are due to
Speaker 1: private equity equity firms, but private equity ownership of newspapers
Speaker 1: rose from five percent in twentyd and one to twenty
Speaker 1: three percent in twenty nineteen. And you know, there have
Speaker 1: been supposedly analyses done that show that ownership of print
Speaker 1: media by a private equity firm can improve circulation, but
Speaker 1: it also will lead to reduction and editorial staff, like
Speaker 1: massive cuts and staff, which means cuts in things like
Speaker 1: local government. And they've shown that results in a decline
Speaker 1: and participation in local elections.
Speaker 2: Oh yeah, like the loss of local government news reporting
Speaker 2: has had an enormous effect on the United States. It's
Speaker 2: just crazy, like the cascading effect it had. We're going
Speaker 2: to do a whole episode on that right after this. Okay, Great,
Speaker 2: we'll make it up as we go along. Great is
Speaker 2: another one. They were sitting pretty I think they were
Speaker 2: worth almost six billion dollars in twenty seventeen, got bought
Speaker 2: out and by twenty twenty three they were worth three
Speaker 2: hundred and fifty million dollars because it just got run
Speaker 2: into the ground. That's a good example of a company
Speaker 2: that didn't know what they were doing, buying a business
Speaker 2: that they didn't know anything about that and then they
Speaker 2: just made terrible decisions.
Speaker 1: For sure, I think we should take a second break, okay,
Speaker 1: and we'll be back right after this.
Speaker 2: Definitely should.
Speaker 1: Childs of each.
Speaker 2: Ysk kid Okay, Chuck, we're back. And here's where we
Speaker 2: really get into the problems. I mean, aside from people
Speaker 2: getting laid off, people being neglected in the hospitals they
Speaker 2: go to because they're owned by private equity firms. That's
Speaker 2: become a big problem in the twenty first century in
Speaker 2: the United States too.
Speaker 1: Yeah, there's in twenty twenty four a loan by one
Speaker 1: count at least there were one hundred and sixty six
Speaker 1: leverage buyouts in healthcare just in that one year, and
Speaker 1: seven of the eight biggest healthcare bankruptcies that year were
Speaker 1: from companies owned by private equity firms or hospitals in
Speaker 1: healthcare organizations right.
Speaker 2: The private equity firm dental practices rose drew dramatically from
Speaker 2: the teens to the twenty twenties, and that results in
Speaker 2: things like companies push I read an article about the
Speaker 2: Dental Express in Ohio telling a mom that her three
Speaker 2: year old needed seven in root canals.
Speaker 1: Yeah, for sure. And the same goes with hospitals. Hospitals,
Speaker 1: if they're owned by a private equity firm, they result
Speaker 1: in higher charges, more safety issues. There's one study that
Speaker 1: said there was a twenty five percent rise in hospital
Speaker 1: acquired complications like something you got while you were there.
Speaker 2: Right, And I think thirty eight percent more blood infections
Speaker 2: from IV ports. That's just from not having enough staff
Speaker 2: or inexperienced staff. It's just not good and it gets
Speaker 2: even worse. They're also into hospices, nursing homes, and it
Speaker 2: just follows the same pattern that you would expect. A
Speaker 2: study found that private equity ownership increases mortality rates by
Speaker 2: eleven percent just because pe'es cutting corners to save costs.
Speaker 2: So that's a huge, huge issue. I think that that
Speaker 2: one needs regulation where it's like you can't sorry, you guys,
Speaker 2: can't own healthcare stuff that's just off limits for you.
Speaker 1: Yeah, I mean, anyone who's been through the trauma of
Speaker 1: a loved one and having to go to a nursing
Speaker 1: home in the past. I mean, I don't know when
Speaker 1: it was good, but we had to go through that
Speaker 1: with Emily's grandmother, and just the state of that industry
Speaker 1: is horrific. It's the opposite of what it should be
Speaker 1: in almost every way.
Speaker 2: Yeah, and housing too is another big deal. I think Blackstone,
Speaker 2: which we mentioned, was founded back in the eighties. They're
Speaker 2: known as the United States's largest landlord. They owned three
Speaker 2: hundred thousand units of rental housing in the US as
Speaker 2: of twenty twenty three. And as you would expect, when
Speaker 2: private equity comes along, rents go up. The maintenance people
Speaker 2: are slower to respond because they've been laid off, and
Speaker 2: just things kind of go downhill rather than get better
Speaker 2: like they're supposed to. That's the reason private equity is
Speaker 2: supposed to exist. It's supposed to take kind of slow
Speaker 2: lumbering companies that are in a position to do better
Speaker 2: than they are and make them do better. It's not
Speaker 2: supposed to make everything go down hill. But that's how
Speaker 2: it happens a lot.
Speaker 1: Yeah, I mean, sometimes it does happen for the better.
Speaker 1: Like one great example is Hilton, the hotel chain. There
Speaker 1: was a leveraged buy out from Blackstone in two thousand
Speaker 1: and seven of Hilton and the great procession you know, Hit.
Speaker 1: I guess it was like the next year in two
Speaker 1: thousand and eight, and obviously it's going to really affect
Speaker 1: the tourism industry. But they brought in a CEO from Blackstone,
Speaker 1: a guy named Christopher Nesstta, who actually made things better.
Speaker 1: He said, hey, let's invest in emerging markets, let's invest
Speaker 1: in the future, and like digital strategies like apps where
Speaker 1: you can check in and get your hotel key through
Speaker 1: an app and things like that, just you know, instead
Speaker 1: of just shuddering things like actually investing, reinvesting in the company, right,
Speaker 1: And it turned out to be really you know, all
Speaker 1: these things were really popular moves, and Blackstone sold Hilton
Speaker 1: back to the public market after it had been yanked
Speaker 1: out of the public market. They sold it back in
Speaker 1: twenty thirteen and sold out of their stake in twenty eighteen.
Speaker 1: Made a ton of profit fourteen billion dollars over eleven years.
Speaker 1: But the company itself, Hilton, was doing great and continues
Speaker 1: to do great.
Speaker 2: Yeah, they doubled the number of rooms today that they
Speaker 2: had in two thousand and seven when they took over,
Speaker 2: when Blackstone took over. So yeah, that's a big success story.
Speaker 2: It wasn't like a pump and dump. Hilton's still doing well,
Speaker 2: like you were saying. Burger King's another one too. They
Speaker 2: got bought by a Brazilian firm called three G Capital,
Speaker 2: and they just they just made some really good moves
Speaker 2: in a lot of voice. Again, this is from an
Speaker 2: investor standpoint, not necessarily from the standpoint of the people
Speaker 2: at corporate who were laid off or anything like that.
Speaker 2: But as far as firms go, three G made something
Speaker 2: like twenty eight billion dollars over fourteen years and it
Speaker 2: only invested one billion, So that's a pretty good return
Speaker 2: on investment.
Speaker 1: Private equity coming in.
Speaker 2: Why'd you do that?
Speaker 1: Oh?
Speaker 2: Just because hate you got me.
Speaker 1: So here's the thing. Alternative investments make a lot of money.
Speaker 1: We've seen that there's less oversight, So you know, one
Speaker 1: of the ways that they make a lot of money
Speaker 1: is that they're just allowed to do things that you
Speaker 1: can't do in traditional sort of slow growth investments like
Speaker 1: stocks and bonds and things like that. But you also
Speaker 1: mentioned earlier that like pension funds like four to one
Speaker 1: k's or where a lot of this money comes from.
Speaker 1: And like, do you have a choice whether or not
Speaker 1: the four one k that you invest in ends up
Speaker 1: being a part of this thing.
Speaker 2: Yeah, I think you can also invest your four to
Speaker 2: one k, now, which for a long time was off
Speaker 2: limits because that's your You the non accredited investor who
Speaker 2: doesn't know what they're doing with private equity. That was
Speaker 2: off limits. But now you can if you want, although
Speaker 2: they say that's probably not a good idea unless you
Speaker 2: know what you're doing.
Speaker 1: Again, well, eighty nine percent of public pension funds have
Speaker 1: some of their money in private equity. I think thirteen
Speaker 1: percent average of thirteen percent of their assets is the average,
Speaker 1: Sometimes more than twenty five percent. But that's that's almost
Speaker 1: ninety percent of public mention funds. It's a lot.
Speaker 2: Yeah, and then I guess one of the other big things.
Speaker 2: So the reason why, well, another reason why people are
Speaker 2: like this is so not right. All of that money
Speaker 2: that those people like Edward Lampert make made that one
Speaker 2: point four billion dollars by running a huge venerated company
Speaker 2: into the ground. He paid at most twenty percent on
Speaker 2: those profits, even though it was personal income for him.
Speaker 2: He didn't pay the personal income tax of like thirty
Speaker 2: seven percent. Instead, he paid twenty percent in capital gains
Speaker 2: tax because the fis that he charged are treated like
Speaker 2: gains from an investment rather than personal income, even though
Speaker 2: anyone would call those fees personal income. So not only
Speaker 2: are the pe firms robbing companies for their own personal
Speaker 2: enrichment getting people laid off, they're not even paying their
Speaker 2: full share of income taxes on it too. So not
Speaker 2: only are they robbing companies for their own personal enrichment
Speaker 2: getting people laid off, they're not even paying their full
Speaker 2: share of income taxes on it too.
Speaker 1: Yeah. This is the kind of thing where in the
Speaker 1: movie version where this is firstborn as an idea, yeah,
Speaker 1: and the person is explaining it to like the people
Speaker 1: at dinner, they keep asking questions that start with yeah,
Speaker 1: but what about and then the answer always starts with oh, no,
Speaker 1: that's the best part.
Speaker 2: Right exactly. It just keeps going like.
Speaker 1: That, yeah, and they're like, no, no, no, but what
Speaker 1: about this, No, no, that's the best part yep. So
Speaker 1: there's a lot of best parts.
Speaker 2: And one of the guys finally puts his fork down
Speaker 2: and stands up, hits the table and goes Bam.
Speaker 1: That's right. But you were talking about the carried interest loophole, right,
Speaker 1: that's what it's called.
Speaker 2: Yeah, Or your personal income is magically treated as returns
Speaker 2: on an investment in text at twenty percent rather than
Speaker 2: thirty seven per or whatever. So if you make one
Speaker 2: hundred million dollars, you pay seventeen million dollars less taxes
Speaker 2: on that one hundred million dollars, and at that point,
Speaker 2: really who cares anyway? Right, Yeah, you would think, so
Speaker 2: that's private equity. I feel like we kind of showed
Speaker 2: our bias a little bit, but it's really tough not
Speaker 2: to be when you really dig into this stuff, you know.
Speaker 1: Yeah, I mean it's not the sole cause of the
Speaker 1: housing crisis, but it's a major player.
Speaker 2: Yeah, and all the other crises that we're facing too,
Speaker 2: economically and socially and politically and probably religiously too. If
Speaker 2: I gave it some.
Speaker 1: Real thought, yeah, personally.
Speaker 2: Yep, since Chuck said personally, I was waiting for it.
Speaker 2: It got you there, because now we just unlocked listener mail.
Speaker 1: Hey guys, this is in response to a tangent that
Speaker 1: you went on during this Saturday's Classic episode when Chuck
Speaker 1: was talking about arguing with his mother about gets to
Speaker 1: pay for dinner. It reminded me of my grandmother, Sheila.
Speaker 1: She always likes to pay for big family dinners and
Speaker 1: has engaged in tricks in the past. For a graduation
Speaker 1: dinner for my brother, my father knew what she was
Speaker 1: doing when she took her purse to the bathroom. So
Speaker 1: that's a good trick. I've done that before. Yeah, that
Speaker 1: wasn't her best trick, though, as even Josh mentioned that
Speaker 1: very trick. The best part did you mention that?
Speaker 2: Yeah? I mentioned that. I remember that. I've done that
Speaker 2: for sure.
Speaker 1: Yeah, Yeah, that's what you gotta do. The best was
Speaker 1: when part of the family was in upstate New York
Speaker 1: for a triathlon. Sheila wasn't even there. She lives in Massachusetts.
Speaker 1: The bill came when dinner was over the night before
Speaker 1: the race. My father and my aunt reached for their
Speaker 1: card and the waitress said it had been taken care of.
Speaker 1: All the adults looked in accusation at each other and
Speaker 1: there was a long silence, and at the exact same
Speaker 1: moment they all threw up their hands crying.
Speaker 2: Sheila all the way over in Massachusetts. Sheila went bam
Speaker 2: that's right.
Speaker 1: My aunt had made the mistake of telling Sheila on
Speaker 1: the phone that where we were going to have dinner,
Speaker 1: and our grandmother called the restaurant and gave her the
Speaker 1: credit card number.
Speaker 2: Beautiful.
Speaker 1: Thanks for all the pods. That is from James. James.
Speaker 1: That's wonderful. Sheila sounds great. I just hope she tips well.
Speaker 2: Oh good point, Chuck, nicely done. If you want to
Speaker 2: be like James. Thank you. By the way, James, that
Speaker 2: was a great email. You can send us an email too.
Speaker 2: Send it off to Stuff Podcasts at iHeartRadio dot com.
Speaker 1: Stuff you Should Know is a production of iHeartRadio. For
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