Speaker 1: Welcome the Money in Wealth with John Hobryant, a production
Speaker 1: of the Black Effect Podcast Network and iHeartRadio. Yo Yo,
Speaker 1: this is John Hope Bryant and this is money and wealth.
Speaker 1: This is a trending topic. There's been lots of discussion
Speaker 1: about Red Lobster. Everybody knows Red Lobster. We go there,
Speaker 1: we hang. It's one of those places that are how
Speaker 1: they can relate to. I've been there, had decent meals
Speaker 1: there with my family, and folks are upset because it
Speaker 1: went bankrupt. It went busted, and folks want to blame
Speaker 1: private equity for that because it was tied to an
Speaker 1: acquisition by a company Golden Gate Capital, just to be
Speaker 1: very specific. They're out of San Francisco area and they
Speaker 1: acquired the company around twenty fourteen for two point one
Speaker 1: billion dollars, and folks want to say, well, that's because
Speaker 1: of equity. The fault that they went bust is because
Speaker 1: of private equity. And as a result of that, folks
Speaker 1: lost their jobs and vendors have lost their contracts, and
Speaker 1: nobody has place to go to get affordable seafood or
Speaker 1: accessible seafood around the country. Blah blah blah. A lot
Speaker 1: of my so called liberal friends have come out, you know,
Speaker 1: railing against private equity in this example, and my response
Speaker 1: to that is they're right in this one example. They're
Speaker 1: absolutely right. Private equity did not do a good job here,
Speaker 1: and I'm explaining what private equity is in this episode,
Speaker 1: So don't worry about it all unpack you know, the
Speaker 1: what the heck, the what the what on private equity
Speaker 1: we talk about these terms. No one ever explains it
Speaker 1: to you and explain that. I'm explaining a little bit
Speaker 1: about venture capital in other ways to access capital anyway,
Speaker 1: and the good and the bad, whether it's good and bad.
Speaker 1: So stay tuned. But in this particular example, it's a
Speaker 1: bad example. And there there are a lot of being
Speaker 1: said about Red Lobster doing this campaign that allows you
Speaker 1: to buy a lot of food for a little bit
Speaker 1: of money, and its success drove the company out of business.
Speaker 1: Though that's not true. There was I think about ten
Speaker 1: million dollars worth of losses tied to that. They call
Speaker 1: that a loss leader in business, where you do something
Speaker 1: it may cost you two dollars, you sell it for
Speaker 1: a dollar seventy five or dollars fifty because you're trying
Speaker 1: to entice people to come and do business with you.
Speaker 1: That's not enough to cause the company to go under.
Speaker 1: It's a contributing factor. The real thing that caused them
Speaker 1: to go under was a structure of this deal. And
Speaker 1: this gets into the discussion about private equity, which I'm
Speaker 1: gonna get to, but this trending topic on Red Lobster is, yes,
Speaker 1: private equity is a bad job in my view. Yes,
Speaker 1: they were short term oily in it. They were I
Speaker 1: think self centered. I'm not going to say selfish, but
Speaker 1: self centered. They structured this deal with it with an
Speaker 1: emphasis around financing structure, almost alone, or at least primarily,
Speaker 1: and they so handcuffed the operators of the Red Lobster
Speaker 1: chain that it was hard to maneuver. So one of
Speaker 1: the big things they did was a sell lease back.
Speaker 1: They bought the company and used proceeds from selling the
Speaker 1: real estate underneath Red Lobster stores. And by the way,
Speaker 1: there's nothing wrong with this. You know, McDonald's is in
Speaker 1: the real estate business. You know, I'm in the real
Speaker 1: estate business. Real estate is the biggest business in the world.
Speaker 1: Let's not complain about that. But this is a restaurant
Speaker 1: company that should have been had prioritized, you know, the people,
Speaker 1: the food, the jobs, the you know, efficient operations, sustainability,
Speaker 1: and in this particular case, they wanted the money off
Speaker 1: the table right away, in my opinion, so they got
Speaker 1: They did a deal which they did a sell lease
Speaker 1: back where they sold the real estate underneath Red Lobster
Speaker 1: to another company. I won't get into that who in
Speaker 1: kno what, it's less important. And when they did that,
Speaker 1: they also it's been said that the real estate was
Speaker 1: so and leased back at non you know, economical terms.
Speaker 1: That's probably right. They leased it back above market, so
Speaker 1: if market is a dollar, they leased it back at
Speaker 1: a dollar twenty five or dollars fifty from the company
Speaker 1: they sold the real estate too, so they got some
Speaker 1: capital right up front. And it wasn't Red Lobster got
Speaker 1: the capital. The private equity firm got the capital. So
Speaker 1: if you're doing a deal and you want your money
Speaker 1: right up front from the deal, you don't believe in
Speaker 1: the deal. You know, you're not really banking on the
Speaker 1: long term prospects of their success. You're trying to get
Speaker 1: in and you're trying to get out. And so that's
Speaker 1: in my opinion, what happened here that the productuity firm
Speaker 1: got in. They got their money out through a couple
Speaker 1: structural situations, but the biggest one was to sell lease back,
Speaker 1: and I think that was a downfall because that then
Speaker 1: meant that Red Lobster had no flexibility on lease payments.
Speaker 1: If you own the property, you can negotiating with yourself primarily,
Speaker 1: but you know, chunk of cash went to paying lease payments.
Speaker 1: In fact, I just read that the location in Manhattan.
Speaker 1: A lot of these locations have been closed. The location
Speaker 1: in Manhattan is actually struggling because now the landlord there
Speaker 1: wants to triple the rent of that particular location. I'm
Speaker 1: not sure if the landlord is the same company that
Speaker 1: owned all the real estate or if it's different, but
Speaker 1: they want to triple the rent. But if you own
Speaker 1: that real estate, no one can triple your rent unless
Speaker 1: you massachist and wants to triple your own rent. There
Speaker 1: are other missteps the company. There was another company involved
Speaker 1: in this that it bought a share into Red Lobster,
Speaker 1: this Asian seafood company with a lot of scale and
Speaker 1: a good repute, well good reputation, actually a sketchy reputation,
Speaker 1: but at least they knew seafood, and that was supposed
Speaker 1: to have operational efficiency, and you know that didn't work.
Speaker 1: For a lot of reasons. That didn't work, So there's
Speaker 1: a lot of contributing factors. Interest rates went up, so
Speaker 1: the debt costs of debt became more expensive. The private
Speaker 1: equity firm, I think, tried to get the returns upfront.
Speaker 1: That didn't work here. The cell lease back deal, which
Speaker 1: works sometimes, did not work here at all, and did
Speaker 1: settled the company with a lot of debt that they
Speaker 1: couldn't pay back. And they tried to make a dollar
Speaker 1: at fifteen cents and it didn't work. And if your
Speaker 1: outflowakses your inflow, then your overhead is your downfall. So
Speaker 1: I can go into much more detail, but I think
Speaker 1: you get it that. Yes, the critics here are correct
Speaker 1: that the strategies of improving operations improving efficiency as a
Speaker 1: result of its pride equity firm getting involved with a
Speaker 1: company did not work here. In fact, I think the
Speaker 1: productually firm took money off the table, off the front end,
Speaker 1: and that hurt the company. It was a short term
Speaker 1: gain versus a long term plan, which created long term
Speaker 1: pain for the company. And a good company I think
Speaker 1: a decent company went bust and a lot of jobs
Speaker 1: got lost and all that kind of stuff. So there
Speaker 1: was an increase in rate costs, industries, labor costs, challenges, operations,
Speaker 1: all that's true, promotions that didn't pay off. But the
Speaker 1: primary thing was this very very uh, the financial engineering
Speaker 1: was wrong. Right, So sometimes things work, sometimes these don't
Speaker 1: don't don't This one didn't work in my opinion, and
Speaker 1: private equity should feel not good about this. And in
Speaker 1: old society, I don't know an explanation, apology, reinvestment. You know,
Speaker 1: somebody needs to reboot this brand. I think it's got
Speaker 1: it's got a place in the marketplace. But this this
Speaker 1: didn't work. Okay, Now stay tuned because I'm going to
Speaker 1: actually unpack what all this stuff actually means and why
Speaker 1: or whether it's good or bad. Stay tuned. Hey, Hey,
Speaker 1: this is John O'Brien and this is Money and Wealth
Speaker 1: on the Black Effect Network podcast network and iHeartRadio, and
Speaker 1: I am about to unpack something that people walk around
Speaker 1: thinking they're dumb or stupid or they're a shamed because
Speaker 1: they hear all these phrase phrases and terms and no
Speaker 1: one has explained it to them. There's no Financial Literacy
Speaker 1: by the way, go get my best selling book, Financial
Speaker 1: Literacy for All is number one still on Amazon and
Speaker 1: several categories. It came out number one nonfiction on both
Speaker 1: Publishers Weekly and USA Today National Bestseller List, number twelve
Speaker 1: overall on the USA Today list of all books, and
Speaker 1: it's still on the Amazon list. And I get constant
Speaker 1: feedback on it, and I want feedback from you after
Speaker 1: you buy it and read it. Everybody should have this
Speaker 1: on their kitchen table once a week. As you open
Speaker 1: it up, dogeared with notes and highlights and comments, as
Speaker 1: you and your family unpack and repack money with yourselves
Speaker 1: in mind, as you begin to build your own generational
Speaker 1: wealth and the business plan for your life and your family.
Speaker 1: So we are unpacking these terms that get thrown about
Speaker 1: that no one's explains to you. And one of them
Speaker 1: I'm going to unpack today, big one private equity and
Speaker 1: as a subset of that, yes, a subset venture capital.
Speaker 1: And is it good or bad? Let's get into this. So.
Speaker 1: Private equity is a form of investment that involves capital
Speaker 1: not listed on a public exchange. It consists of funds
Speaker 1: and investors that directly invest in private companies or engage
Speaker 1: in buyouts of public companies, resulting in the delisting of
Speaker 1: public equity, which means in English, the company that was
Speaker 1: public then went private. It was public. You hear about
Speaker 1: companies going in public. Some companies find it valuable to
Speaker 1: go from public to private, and that's done with private equity.
Speaker 1: And I'm gonna give you a shocker in a second
Speaker 1: about private equity. Here's a breakdown of key elements of
Speaker 1: how it works. Fund structure. Private equity firms raise funds
Speaker 1: from institutional investors most I'm going to get into this
Speaker 1: in a minute, because there's a butt and an and
Speaker 1: in high net worth individuals. These funds are then used
Speaker 1: to invest in various companies. A PE private equity fund
Speaker 1: typically has a limited lifespan around ten years. There are
Speaker 1: some private equity firms that go on forever. But this
Speaker 1: you know, some terms have a miss sort of a
Speaker 1: mission statement investment strategy. Buyouts are one example. I got
Speaker 1: into a bad example of a private equity deal in
Speaker 1: my opinion, which was the acquisition of Red Lobster. I
Speaker 1: don't think they did a good job or it was
Speaker 1: that beneficial to society. So, you know, buyouts are a
Speaker 1: primary example where PE firms buy a controlling interest in
Speaker 1: a company. The goal is to improve the company's performance
Speaker 1: and then to sell it at a profit. There's nothing
Speaker 1: wrong with that. If you're on a gas station, you
Speaker 1: know ultimately you want to sell it for what a profit,
Speaker 1: There's nothing wrong with that. You own a piece of
Speaker 1: real estate, you want a home, you want to sell
Speaker 1: it for a profit. You're not buying it to sell
Speaker 1: it at a loss. You want some stock, you want
Speaker 1: to sell it for a profit. There's nothing wrong with
Speaker 1: that on balance. Okay, so stayed with me. A venture capital?
Speaker 1: Did I just say venture capital? Yes? Venture capital is
Speaker 1: a subset hello of private equity investors in a startup
Speaker 1: in early stage. Companies with high growth potential also often
Speaker 1: tap venture capitalists. So venture capital typically involves lower, smaller
Speaker 1: amounts of money targeted toward a company in an early
Speaker 1: stage to help them get moving. But that is still
Speaker 1: private equity. Growth capital investing in a more mature company
Speaker 1: that needs funding to expand or restructure operations, internew markets,
Speaker 1: or finance significent acquisitions. I'm going to come back to
Speaker 1: this very important. There's a black example of this. A
Speaker 1: couple actually mentioned value creation. PE firms. Private equity firms
Speaker 1: PE stands for private equity aim to create value by
Speaker 1: improving a company's performance, often through operational improvements, strategic redirection,
Speaker 1: cost reductions in the sometimes that means layoffs and leveraging synergies.
Speaker 1: They may also change management teams and drive efficiency. Okay, Now,
Speaker 1: before I get further into this, you're saying, okay, John,
Speaker 1: help me out, man, I don't have all day. Is
Speaker 1: it good or is it bad? Okay? On balance? Waiting
Speaker 1: for it? Ready? Ready? Is it good or is it bad?
Speaker 1: Are private equity firms good or bad? They are good?
Speaker 1: On balance they are good. And so now there's uproar John,
Speaker 1: What do you mean? You just said that this red
Speaker 1: lobster deal was a trategedy, a travesty. You agreed with
Speaker 1: the the pundits and the critics of this who you
Speaker 1: know don't like capitalism, free enterprise. Yeah, I do agree.
Speaker 1: It was a bad example. Let me tell you about
Speaker 1: a couple of good examples. In fact, I'll give you
Speaker 1: several good examples, but I'm going to get personal first.
Speaker 1: Reginald Lewis, who is the Martin of the King Junior
Speaker 1: Wall Street. He's the first black Man to do a
Speaker 1: billion dollar deal. Reginald Lewis bought a company called Beatrice International,
Speaker 1: which was in thirty countries. He was a lawyer and
Speaker 1: investment banker who wanted to do a big deal. He
Speaker 1: couldn't access bank capital and traditional forms of capital were
Speaker 1: not available to him. This is a deal that was
Speaker 1: a billion dollars in the eighties. It would be twenty
Speaker 1: thirty billion dollars a day, just an incredible amount of money.
Speaker 1: This guy had utzma coming out of his ears. Who
Speaker 1: do you think you are? Somebody would say, and people
Speaker 1: did say, who do you think you are? He thought
Speaker 1: he could buy this company. He thought that it was undervalue,
Speaker 1: that the parent company did not appreciate the values underneath it.
Speaker 1: He thought he could maximize its value. And so he
Speaker 1: went about the business of trying to acquire this company.
Speaker 1: And when he couldn't find traditional forms of capital, he
Speaker 1: went to a guy named Mike Milkin, who's a friend
Speaker 1: of mine, who back then was at Lehman Brothers. I
Speaker 1: believe it was and and a sort of a first
Speaker 1: cousin to private equity is junk bonds and private equity
Speaker 1: or literally equity money from rich people institutions, so it's capital,
Speaker 1: but job bonds are a form of capital, but it's
Speaker 1: it's a long term debt instrument, and it's a high
Speaker 1: yielding which means it's expensive. So the deal really has
Speaker 1: to make sense, which meant that reginal Lewis really was
Speaker 1: quite brilliant what he did. So Michael Milkin sort of
Speaker 1: went around all of Wall Street who said no to
Speaker 1: Reginald Lewis, and he did this deal anyway. He backed
Speaker 1: them with a billion dollars worth of worth of junk
Speaker 1: bonds or not a billion oxworth, but a lot of
Speaker 1: his being or deal was high junk bonds, and it
Speaker 1: worked out. Reginald Lewis bought Beatrice International, and he went
Speaker 1: in and he did some negotiate, some great negotiations and
Speaker 1: had a great strategy after his acquisition of streamlining operations
Speaker 1: that might have met laying off people, closing offices. He
Speaker 1: improved profitability. He implemented cost cutting measures, sold off non
Speaker 1: core assets of the company mean things are not critical
Speaker 1: to the company's success, leveraged strong brand recognition for Beatrice products,
Speaker 1: and then drove growth and he exited that company. Beatrice
Speaker 1: exited with incredible profits. Were all involved in nineteen ninety
Speaker 1: six when it was sold and everybody won, including his family.
Speaker 1: And there's a foundation in place. There's a museum in
Speaker 1: Baltimore that is I think self funding. There's the family
Speaker 1: has a family office. I'll get in what a family
Speaker 1: office is in another podcast episode. You all need to
Speaker 1: know what a family office is, and you need to
Speaker 1: get one when you build enough wealth. But he created
Speaker 1: generational wealth and he hooked up a lot of people
Speaker 1: you need to translate hooked up, by the way, who
Speaker 1: are better off because Reginald Lewis was there and because
Speaker 1: this deal worked, and he could not arguably have gotten
Speaker 1: it done without at that time, I'm Michael Milkin. I
Speaker 1: believe my friend Henry Kravitz also helped a KKR, but
Speaker 1: it was primarily Michael Milkin who got this done when
Speaker 1: everybody said no to Reginald Lewis, so he had to
Speaker 1: go to alternative financing structures. And he was brilliant enough
Speaker 1: to make it work and to put the company and
Speaker 1: its long term prospects first. He didn't take the money
Speaker 1: off the table right away. He did the deal. He
Speaker 1: waited several years before he started seeing benefits. That's the
Speaker 1: way this stuff should work when the priorities are straight.
Speaker 1: And another example of a deal that worked then involves
Speaker 1: an African American in private equity is a guy you
Speaker 1: might know named John Hope Bryant. Yes, I did a
Speaker 1: private equity deal. I did a private equity deal with
Speaker 1: the Promise Homes Company, and it was an in case
Speaker 1: two individuals who are wealthy, Michael Arraghetty and Tony Resler,
Speaker 1: who are principles of a company called Area's Management that
Speaker 1: is about one hundred and fifty billion dollars of money
Speaker 1: under Assets Center Management, and individually they invested in a
Speaker 1: business idea I had along with myself contributing my involvement
Speaker 1: in equity and all that kind of stuff, and we
Speaker 1: grew that company from zero to one hundred and well,
Speaker 1: I had one hundred and sixty million dollars a book value,
Speaker 1: but I sold it into a joint venture for one
Speaker 1: hundred and twenty one million dollars Christmas Eve twenty twenty one,
Speaker 1: and I went through Taco Bell when the deal was closing,
Speaker 1: as I told Charlemagne, and I did an interview with him.
Speaker 1: You should go watch back and watch that interview. By
Speaker 1: the way, got a lot of attention and we cover
Speaker 1: a lot of ground in an hour and five minutes.
Speaker 1: So thank you Charlemagne for doing that. I heeart and
Speaker 1: this deal. When the deal closed, I got the wire
Speaker 1: transfer went through. I was getting the number one with
Speaker 1: a hard shale Taco Supreme at Taco Bell. But this
Speaker 1: is an example of private equity. And I had to
Speaker 1: pay these guys back their money plus or return and
Speaker 1: I'm thankful for that. And that was and there was
Speaker 1: banks involved had to pay them back plus their interest.
Speaker 1: And then that's it's cool. That works. Everybody worked out.
Speaker 1: We created economic opportunity, a new business model. In fact,
Speaker 1: if you look this upsorder on the Dictionary of the Web,
Speaker 1: if you ask artificial intelligence to give you a conclusion
Speaker 1: of how I did that deal, it says that John
Speaker 1: Hoaps Brien's Promise Homes company exemplifies a successful venture that
Speaker 1: combines social impact with sound business practices. The company's growth
Speaker 1: and success are attributed to strategic financing, private equity, effective partnerships,
Speaker 1: and a clear mission to address the affordable housing crisis
Speaker 1: well empowering communities. And I would also add to that
Speaker 1: make sure I was driving returns. And it says here
Speaker 1: as I went about this, that I secured initial capital
Speaker 1: to fund its acquisition, my acquisition strategy I'm talking about
Speaker 1: myself and reading about it. This funding came from a
Speaker 1: mix of private equity, impact investors, and strategic partnerships. The
Speaker 1: initial capital enabled the company to make large scale purchases
Speaker 1: of single family homes across various markets, completely correct. And
Speaker 1: then I added financial literacy, financial cost coaching, make sure
Speaker 1: that are the vendors plumbers, heating, electrical lighting, roofing, all
Speaker 1: these vendors who are significantly people of color and women
Speaker 1: who are left out of the economic strategy. That's not
Speaker 1: leaving out mainstream vendors. We still do business with them too,
Speaker 1: but to make sure there was a prioritization of access
Speaker 1: to people who don't normally get contracts and opportunities. And
Speaker 1: every year we've done about three to four million dollars
Speaker 1: of contracting last time I check with minority vendors. That's significant.
Speaker 1: I mean, we got to point where almost fifty five
Speaker 1: percent of our examples were minority in women, and I
Speaker 1: think to this day it's still about half. So that's
Speaker 1: a good thing though. So those are two examples of
Speaker 1: venture capital, and I'm going to give you some more
Speaker 1: examples of good examples of venture capital. But now let
Speaker 1: me go back to explaining venture capital itself. So those
Speaker 1: are two examples of growth capital within venture capital investment strategy.
Speaker 1: So I talked about buyouts venture capital, which is a
Speaker 1: subset of private equity. I talked about growth capital. I
Speaker 1: just gave you two examples that are African American. Then
Speaker 1: there's value creation pe firms private equity aim to create
Speaker 1: value by improving a company's performance, often through operational improvements.
Speaker 1: There you go strategic redirection. Okay, so I'm just covering
Speaker 1: this again. So you see this ties into what Reggie
Speaker 1: Lewis did, ties into what I what I did in
Speaker 1: that firm. I've got many other ventures, but I gave
Speaker 1: you that one example, and I'm still a lot to
Speaker 1: talk about it. God blessed Reginald Lewis. He passed. He
Speaker 1: died of a brain aneurism, so he can't explain this
Speaker 1: to you, but luckily I can. I met his daughter, Christine.
Speaker 1: She's fantastic, so watch out for her. Christein Lewis. Okay,
Speaker 1: number four exit strategies. The ultimate goal is to is
Speaker 1: to sell the investment at a profit. There's nothing wrong
Speaker 1: with a profit, all right. It's good capitalism and bad capitalism.
Speaker 1: Good capitalism is where I benefit, you benefit more. Bad
Speaker 1: capitalism is where I benefit and you pay a price
Speaker 1: for it right at scale. So what we want is
Speaker 1: good capitalism and good capitalists. So even if you wanted
Speaker 1: to money like a socialist, you've got to first collect
Speaker 1: it like a capitalist. Hello. So you need to make
Speaker 1: a profit. You need to be able to do well
Speaker 1: and do good at the same time. That's what this
Speaker 1: podcast series is going to do. Over time. I want
Speaker 1: you to give this entire series to someone you love.
Speaker 1: People starting a family, people going to college, people going
Speaker 1: one of the second lease on life, people trying to
Speaker 1: figure out how to make them nine to five payoff
Speaker 1: in a five to nine A side hustle. How do
Speaker 1: you build wealth? You make money during the day, it's
Speaker 1: called making a living. You build wealth in your sleep.
Speaker 1: This podcast is going to help you do both with
Speaker 1: dignity and so look at it as a well and
Speaker 1: educational platform that also happens to be a little entertaining
Speaker 1: and hopefully pretty cool. So Exit Strategy making a profit
Speaker 1: by selling this thing initial public offerings, taking the company
Speaker 1: public and selling shares on the stock exchange. So now
Speaker 1: you have private equity. Now, let me give you another
Speaker 1: example for those who are still cynics who are saying, ah, John,
Speaker 1: you know you're just dealing with rich people. And Reginald
Speaker 1: Lewis was rich and he was dealing with rich people.
Speaker 1: Let me give you a real practical like HOMEBOYE Shopping
Speaker 1: Network example of private equity. Let me hold on, I'm
Speaker 1: getting too excited. IPOs Initial public offerings going public trade
Speaker 1: sales selling a company to another company in the same industry.
Speaker 1: Secondary sales selling the investment to another private equity firm
Speaker 1: or financial investor. Risk and rewards. PE investments can be
Speaker 1: highly lucrative, but also come with significant risks. They typically
Speaker 1: require a longer investment horizon, and can be liquid means
Speaker 1: you can't access your cash compared to public market investments.
Speaker 1: Going public are dealing with a public entity. I can
Speaker 1: buy and sell a share of Coca Cola or whatever tomorrow,
Speaker 1: but you can't just buy and sell a share a
Speaker 1: private equity interest. Now, what's the Homeboy Shopping Network version
Speaker 1: a private equity? Ballplayers, professional athletes, entertainers who take private
Speaker 1: equity their own money from this contract at the NBA.
Speaker 1: I go back and listen to my podcast I did
Speaker 1: just recently on professional players going bust at scale. Few
Speaker 1: of them succeeding, but most of them going bust. Seventy
Speaker 1: percent of professional athletes on average go bankrupt or have
Speaker 1: financial significant financial travails five years after retirement because they
Speaker 1: confused making money with building wealth. They think that making money,
Speaker 1: like my dad thought, was actually that cash flow is profit.
Speaker 1: It's not. And they thought that money would last forever.
Speaker 1: It won't. And they were not financially literate, and that
Speaker 1: ultimately financial literacy is a civil rights issue of this generation,
Speaker 1: which is why you've got to buy and read my
Speaker 1: book Financial Literacy for All, my sixth book. Arguably I'm
Speaker 1: being told these days by those who've read it in Bassiat,
Speaker 1: Andrew Young, Bishop, TD Jakes, Dugcant, Millan, the A. Walmart
Speaker 1: who did the four and others, that it's really critical
Speaker 1: for today's society. So ball players are private equity. They're
Speaker 1: taking this contract one hundred millions, twenty million, fifty million
Speaker 1: dollars contract right, and they're taking some of that money
Speaker 1: and giving it to Pooky them a boo boo jojo
Speaker 1: I'm making I'm joking, but you know, we all have
Speaker 1: a jojo in our family, and they're letting get letting
Speaker 1: them funder to start a restaurant or open a club.
Speaker 1: I was about to say something else. You could probably
Speaker 1: imagine what I'm about to say, or to start a
Speaker 1: barbershop or whatever. Write some air idea they had. And
Speaker 1: if and if your cousin and your friend comes to
Speaker 1: you and you say, and they want thirty thousand dollars
Speaker 1: of your money, they're asking you for private equity. Private equity.
Speaker 1: Private is yours equity, your money to start a business.
Speaker 1: And if you say, where's a business plan and they say,
Speaker 1: what's that? Run run for the heels, like that's that
Speaker 1: thing is not going to work out well most time,
Speaker 1: you know, nine times out of ten it's going to
Speaker 1: be a And then they're gonna blame you. They're gonna
Speaker 1: blame you for asking for your money back. Yes, you
Speaker 1: know we hang around nine broke be the tenth. But
Speaker 1: I just I wanted to connect those dots for you
Speaker 1: that the money that professional athletes and entertainers use to
Speaker 1: fund neighborhood projects, community projects for that are for profit,
Speaker 1: but people they love, whether it's ten thousand and thirty thousand,
Speaker 1: three hundred thousand and three million, or forty million. All
Speaker 1: these examples I put in my last podcast on why
Speaker 1: athletes go broke? Those are examples of private equity at
Speaker 1: the community level. So we need to get private equity
Speaker 1: from the streets to the suites. We need to make
Speaker 1: sure we're bank qualified. I did a piece with my
Speaker 1: brother Ti this on his podcast series I think called Expeditiously.
Speaker 1: You should go check it out, and it's got a
Speaker 1: lot of views online where I discussed non recourse and
Speaker 1: recourse debt. Recourse debt, this this is different now debt.
Speaker 1: By the way, debt and equity are both forms of capital.
Speaker 1: I'm trying to cover a lot of ground here. Please
Speaker 1: excuse me. Debt and equity so alone and money you
Speaker 1: own are both versions of capital. Private equity, whether it's
Speaker 1: in the streets or the suites, are still both versions
Speaker 1: of private equity. It's private equity. It's money that I have,
Speaker 1: or money that an institution, a pension fund or whatever
Speaker 1: might have, or money that a high networth individual a
Speaker 1: billionaire might have. Do they want to put to work
Speaker 1: at higher than average returns. There's nothing wrong with that.
Speaker 1: As long as you do it where you're doing well
Speaker 1: and doing good at the same time, you're gonna have
Speaker 1: winners and losers. Here's some examples, some good examples of
Speaker 1: private equity. I really need some feedback on this segment
Speaker 1: because I'm covering a lot of ground and a deep
Speaker 1: topic and a short period of times. I need to
Speaker 1: know from you whether this worked and whether the light
Speaker 1: is going on with you right. But so, if you
Speaker 1: can be a private equity investor, you can have a
Speaker 1: private equity firm, somebody watching this or listening to this
Speaker 1: with you know, making thousand dollars investments, making a five
Speaker 1: hundred dollars investment, making a fifty thousand dollars one hundred
Speaker 1: thousand dollars investment private equity. So somebody gets a bank
Speaker 1: loan that's debt, and then they come to you because
Speaker 1: they don't have the equity, and then they might get
Speaker 1: by the way, crowdfunding is another form of securing maybe
Speaker 1: private equity. So I just want to get your mind open.
Speaker 1: That is not just these quote rich people doing private equity.
Speaker 1: Ball players do private equity. Professional athletes, somebody from your
Speaker 1: neighborhood can do. You can do private equity. I've done
Speaker 1: private equity. They just gave you an example, just one example. Okay,
Speaker 1: here's some good examples of the corporate level of private equity.
Speaker 1: You always hear about the bad ones, and these created jobs,
Speaker 1: just to be clear, the stained jobs and create jobs
Speaker 1: for the cynate who say, yeah, John, but Ban Capital
Speaker 1: and Dunkin Brands. In two thousand and six, Band Capital,
Speaker 1: along with Carlisle Group and Thomas h. Lee Partners, acquired
Speaker 1: Dunkin Brands, which includes Dunkin Donuts and Basket Robins, so
Speaker 1: two point four billion dollars. The private equity firms implemented
Speaker 1: various operational improvements and expanded the brand globally. In two
Speaker 1: thousand and one, Dunkin Brands went public. In twenty twelve,
Speaker 1: the firm had sold most of their shares, realizing significant
Speaker 1: returns for their investment. And the companies today are prospering
Speaker 1: and have jobs and all that kind of stuff. Blackstone
Speaker 1: in Hilton Worldwide. Blackstone is you know a firm that
Speaker 1: you may not have heard of, but you've heard of Hilton.
Speaker 1: In two thousand and seven, Blackstone acquired Hilton Worldwide for
Speaker 1: twenty six billion. Despite the economic downturn in the midst
Speaker 1: when they did this deal, because you know, the economic
Speaker 1: crisis happened two thousand and eight two thousand and nine at
Speaker 1: Blackstone improved Hilton's operations and expanded its hotel portfolio. Hilton
Speaker 1: went public in twenty thirteen. By twenty eighteen, blacks On
Speaker 1: the exit the investment, realizing a profit of fourteen billion dollars.
Speaker 1: Lots of money, yes, lots of risk. They could have
Speaker 1: lost it all and they could have lost twenty six billion.
Speaker 1: They made fourteen billion. Kudos to them, and Hilton is
Speaker 1: thriving today. JPG Capital and J Crew. In nineteen ninety seven,
Speaker 1: JPG Capital acquired an eighty eight percent stake in J
Speaker 1: Crew for five hundred million dollars. The PE firm revamped
Speaker 1: the company's image and product line, leading to a significant turnaround.
Speaker 1: J Crew went public in two thousand and six, and then,
Speaker 1: of course, the Pe firm exited the investment. Bosh Alms
Speaker 1: that was acquired by Warburg Pinkas for four point five
Speaker 1: billion in two thousand and seven and by twenty thirteen
Speaker 1: was sold to Valiant Pharmaceuticals now Bosh Health for eight
Speaker 1: point seven billion dollars. So you sing the bumps right.
Speaker 1: In these examples, they also created what jobs, so it
Speaker 1: wasn't just the rich people who did well. Bank Capital
Speaker 1: and Dunkin Brands job creation, job sustainability, and in job creation.
Speaker 1: Bank Capital's investment in Dunkin Brands helped expand the company significantly,
Speaker 1: both domestically and internationally. This expansion led to the creation
Speaker 1: of numerous jobs and Dunkin Donuts and Basket and robbing stores,
Speaker 1: as well as their corporate offices. The company's growth under
Speaker 1: private equity ownership resulted it increased employment opportunities across this
Speaker 1: franchise network Hilton Hotels. I shouldn't have to say much
Speaker 1: about this. You see it for yourself. But they're hiring,
Speaker 1: they're expanding, the growing, So there you go. There Jay Crew.
Speaker 1: The investment period saw j Crew expand its product lines
Speaker 1: and store locations, contributing their job creation in retail and
Speaker 1: corporate positions. Now you can't guarantee it's going to last forever,
Speaker 1: but that was This is a result of these particular deals,
Speaker 1: and the companies are out of it. They let you know,
Speaker 1: these companies are on their own Washton law where they're
Speaker 1: all with new owners. This also is example where growth
Speaker 1: facilitated job pretension and creation and manufacturing research and development
Speaker 1: and sales positions. The expansion and operational improvements under the
Speaker 1: PE firm help maintain and grow the workforce. And now
Speaker 1: are there bad examples of private equity firms buying somebody
Speaker 1: and just you have disaster? App Absolutely and it's not
Speaker 1: just Red Lobster Toys r Us. It breaks my hearts.
Speaker 1: I love Toys r Us. We all have a Toys
Speaker 1: r Us story growing up if you're from my generation.
Speaker 1: In two thousand and five, consortium of PE firms including
Speaker 1: Well Hello Bang Capital, they had a good one and
Speaker 1: here's a bad one. The company struggled with a heavy
Speaker 1: debt load from the buyout. Despite efforts to turn the
Speaker 1: company around, Toys Rs file bankruptcy in twenty seventeen, so
Speaker 1: twelve years later and liquidated US operations in twenty eight
Speaker 1: Team this makes me sad. The resort of the enclosure
Speaker 1: of hundreds of stores and the loss of thousands of
Speaker 1: jobs not good. I think that was a Toys Rus
Speaker 1: was a decent, if not a really good company. Serious holdings.
Speaker 1: We all know sears my god. Let mean, who has
Speaker 1: a serious layaway story right Seriars might have gone out
Speaker 1: of business anyway. It was just not well run and
Speaker 1: did not have a good business plan. But Sears was
Speaker 1: the Amazon of that time. It was a Walmart of
Speaker 1: that time. It was you know, they should have you know,
Speaker 1: how do you destroy this great brand? The fact they
Speaker 1: did online before they were online, they had a Sears
Speaker 1: catalog and they had mail order. You'd think that they'd
Speaker 1: be the first to market for online. But they just
Speaker 1: didn't pay attention. Just like today, you want to be Netflix,
Speaker 1: you don't want to be Blockbuster. Blockbuster was a company
Speaker 1: not subject to PA. This wasn't private equity failure. This
Speaker 1: was just bad management. They could have bought Netflix for
Speaker 1: a fraction of what it's worth, like like pennies on
Speaker 1: the dollar. Netflix came to them to be so they said,
Speaker 1: now I'm not interested and we're Blockbuster. Arrogance Ambassador Andrew
Speaker 1: Young says that men and women failed for three reasons arrogance, pride,
Speaker 1: and greed. And this is an example of arrogance and pride.
Speaker 1: I don't know well art at least arrogance, and because
Speaker 1: they should have sold. They should have bought Netflix and
Speaker 1: then converted their business plan. But they didn't, and Blockbuster
Speaker 1: went out of business without pees help. Private equities help
Speaker 1: just because of bad decision making. Okay, so sears Hedge
Speaker 1: fund manager Edward Lambert Els Investments acquired Seis and merged
Speaker 1: it with k martin another brand that was iconic that
Speaker 1: went poof in two thousand and five. The outcome the
Speaker 1: strategy focused heavily on cost cutting and real estate sales. Hello,
Speaker 1: here we go again, rather than investing in store upgrades.
Speaker 1: Are adapting to the changing retail environment? What did I
Speaker 1: just say? Series file bankruptcy in twenty eighteen, leading massive
Speaker 1: store closures and significant Hello job losses. Payless Shoes twenty twelve,
Speaker 1: here's golding Get Capital again acquired Payless Shoes with a
Speaker 1: friend of mine, got Ristis sol Blum Capital did this
Speaker 1: deal also as part of a larger deal involving collective brands.
Speaker 1: Payless file for bankruptcy in twenty seventeen and again in
Speaker 1: twenty nineteen. The company closed thousands of stores, resulting in
Speaker 1: significant job losses. The heavy debt load from the buyout
Speaker 1: was cited as a major factor in the company's financial troubles.
Speaker 1: Once again a short term mindset in my opinion, and
Speaker 1: not focusing on but focusing too much on the financing
Speaker 1: structure and not on operational excellence and how do I
Speaker 1: create a great brand, the great company and get my
Speaker 1: money down the road when it's successful. Shopco is another
Speaker 1: example where they struggled under the weight of debt in
Speaker 1: operational issues. The company file for bankruptcy in twenty nineteen
Speaker 1: and liquidated stores job losses. There's a bunch of examples
Speaker 1: deb shops. But there's you know, there's when you look
Speaker 1: at this on balance, you know, do you want different
Speaker 1: forms of capital that you can pull from or do
Speaker 1: you just want to say, you know, no, I'm good,
Speaker 1: we want private equity to go away. Genie have to say, okay, well,
Speaker 1: if private equity wasn't around, then what you know, where
Speaker 1: would you get where would business people get get their money? Uh?
Speaker 1: Venture capital, which I told you is a former private equity.
Speaker 1: That's one example. Angel Investors, which is an individual version
Speaker 1: version of a venture capital firm, which is hello, private
Speaker 1: equity bank loans. Okay, this is not private equity. These
Speaker 1: are fdi C insured banks. But this is debt. Now
Speaker 1: you got to make monthly payments and you better make
Speaker 1: sure you know what you're doing because you want you
Speaker 1: want to have years to fail. You'll have months to fail,
Speaker 1: and banks will win. They will get their money back,
Speaker 1: they'll own everything. So you don't have to worry about
Speaker 1: blaming a private firm that you can't find. You can
Speaker 1: blame a bank you can find, but they're going to
Speaker 1: but it don't matter who you blame, either you pay
Speaker 1: them or they going to own the asset. So bank
Speaker 1: loans are another example. But you got to qualify for
Speaker 1: a bank loan, right and if you're small enough, you
Speaker 1: can maybe get an SBA. We partner with the SBA
Speaker 1: operation hope get a small business and a lot of
Speaker 1: big companies, by the way, came through this Small Business Administration,
Speaker 1: so this is a good thing. So this is an
Speaker 1: option small companies becoming big companies through the SBA. So
Speaker 1: get a guarantee maybe from the bank through the SBA,
Speaker 1: which allows you to have more flexible qualification criteria and
Speaker 1: accessing a bank. Crowdfunding Okay, this is again private equity,
Speaker 1: but it's suitable for startups and small businesses. Capital raises
Speaker 1: from a large number of individuals, typically through online platforms.
Speaker 1: Any of this stuff, you guys want me to go
Speaker 1: deeper in. Please put comments where you see this podcast
Speaker 1: or video post it and I will I read them.
Speaker 1: My team reads them. Black Effect teams need read them,
Speaker 1: and we do respond. Government grants and subsidies often aims
Speaker 1: at specific sectors like technology, healthcare, or grain energy. The
Speaker 1: great structure is non repayable funds provided by government agencies.
Speaker 1: It helps foster innovation and support strategic industries. Research grants
Speaker 1: from the National Institute of Health as an example of
Speaker 1: a government grant. But it's you know, not everybody can
Speaker 1: get these grants, right. You can't just you can't be uncredible.
Speaker 1: You have to be incredible, actually have to have credibility
Speaker 1: in order to get this kind of money. Corporate venture
Speaker 1: capital This is large companies that invest in startups relevant
Speaker 1: to their industry. But you've got to do a lot
Speaker 1: of research and know the corporation and be able to
Speaker 1: access their venture capital division within that company and know
Speaker 1: the criteria. And you need relationship capital. You can't just
Speaker 1: be hanging around, like I said, hang around nine bro people,
Speaker 1: you would be the tenth talking down capitalism. If you
Speaker 1: want to know capitalists, you've got to get to know
Speaker 1: not just poor people in your family but rich people
Speaker 1: that are should be part of your extended family because
Speaker 1: most of life is relationship capital or do something on
Speaker 1: that relationship capital. Later retained earnings that doesn't relate relate
Speaker 1: to most people, but that is basically a company and
Speaker 1: reinvesting in itself. Initial public offerings. We talked about that
Speaker 1: going public. So there's options to private equity, and if
Speaker 1: you don't like private equity, go do those things. Private
Speaker 1: equity should do more. By the way, they should be
Speaker 1: investing in back in the community. They should have a
Speaker 1: philanthropic focus in my opinion, they should have a social
Speaker 1: impact investment focus. They should have a fund or some
Speaker 1: mechanism for small businesses to access. This is something else
Speaker 1: I'm gonna I'm doing some more thinking on, but I
Speaker 1: think private equity firms should do more given how they
Speaker 1: are benefiting from the legal structure and in sitting in
Speaker 1: the wealthiest country in the world, the biggest economy in
Speaker 1: the world, and accessing in many cases courss of funds
Speaker 1: like pension funds and and other sources of funds that
Speaker 1: derive their money from everyday people, and so that money
Speaker 1: should recycle in my opinion, once they've made their return,
Speaker 1: they if they're doing well, they should also try to
Speaker 1: do good. Okay. So I've talked about a little bit
Speaker 1: about junk bonds, how Regin Lewis got his deal done.
Speaker 1: I've talked a little bit about private equity, how I
Speaker 1: got a deal done. I've talked about several bad examples
Speaker 1: of private equity and a company that I think is
Speaker 1: the post child right now for not doing it right.
Speaker 1: And I won't repeat their name again. I'm not beating
Speaker 1: up on them, but just it's obvious, okay. And I've
Speaker 1: talked about good examples and bad examples and job creation,
Speaker 1: and I think that you should educate yourself on how
Speaker 1: this system works and how you can be a part
Speaker 1: of it and not just criticize it. Because this is
Speaker 1: the world. We live in, a free enterprise democracy, and
Speaker 1: I want you to be a player in free enterprise.
Speaker 1: That's why I'm doing this series to help you come
Speaker 1: up from nothing. That's my last book before this one,
Speaker 1: Up from nothing. Okay. So we just unpacked private equity
Speaker 1: and a little bit of venture capital and a little
Speaker 1: bit of some other stuff and and uh, yeah, you're smarter,
Speaker 1: and now you can go do some deals. Even if
Speaker 1: the Homeboys shopping network, version of venture of a venture
Speaker 1: capital or crowdfunding or private equity, which is our money
Speaker 1: in our pockets. We can all make a profit. Can
Speaker 1: You can invest in your local gas station, or buy
Speaker 1: a local buy two or three local barbershops or whatever
Speaker 1: with private equity, your money, a few other friends money
Speaker 1: in a limited liability corporation partnership. I talked about that
Speaker 1: in one of my other earlier podcasts. And if you're
Speaker 1: putting in a dollar, you want to make sure again
Speaker 1: risk reward. If you're putting in a dollar, I think
Speaker 1: you should want to have two dollars in return. You
Speaker 1: know you're putting in a dollar in three to five
Speaker 1: years later, you want to make sure you're making two
Speaker 1: dollars in that one dollar. And the company that you're
Speaker 1: investing is should be making five dollars right Otherwise why
Speaker 1: are they doing it right? You're not just doing it
Speaker 1: due by somebody's hair or sell products. You're doing it
Speaker 1: to make a profit. I'm gonna I'm gonna cover think
Speaker 1: businesses in our neighborhood too, like weave stories and hair
Speaker 1: weave stories and barbershops. I'm gonna unpack all that so
Speaker 1: you understand how people are making money, some doing it honorably,
Speaker 1: some doing it not so honorably, and you make your
Speaker 1: own decision about how you want to play and how
Speaker 1: you want to do your life. Fan question from CJ,
Speaker 1: who I know and respect Meyer new father by the way,
Speaker 1: but he has a either really smart guy and he
Speaker 1: asks a really smart question. What Nas and jay Z
Speaker 1: you're doing? He says, that's venture capital. It's been reported
Speaker 1: as venture capital. How's that different from Is that different
Speaker 1: from private equity? The answer is, drum roll please, Let's
Speaker 1: see if you get it after you've after you've actually
Speaker 1: listened and learned from this podcast, drum roll please. It
Speaker 1: is the same as private equity. It is a subset
Speaker 1: of private equity. Venture capital is a venture capital is
Speaker 1: short term early in seating small ventures or ventures with
Speaker 1: smaller amounts of money to get them up into growth
Speaker 1: and into a larger capital stack so they can ultimately,
Speaker 1: you know, go public or attract traditional private equity. Private
Speaker 1: equity tends to take a share in the whole business
Speaker 1: or own the whole business, whereas the venture capitalist is
Speaker 1: a participant in the business. They're a shareholder in the business.
Speaker 1: They're not running the business. A venture capitalist is not
Speaker 1: trying to run the business, even though they have a
Speaker 1: team helping the nurse of that business along. Typically so
Speaker 1: jay Z and nas as reported of what they're doing
Speaker 1: during venture capital is private equities, private equity, their private equity,
Speaker 1: or them and their partners invested in somebody else's venture
Speaker 1: early on, early stage. They are a participant a shareholder
Speaker 1: in that, but they don't control it. Whereas private equity
Speaker 1: traditional private equity, it's more a latter stage and typically
Speaker 1: control the venture as they're trying to give it legs,
Speaker 1: so to speak, to reimagine the whole business. So it's
Speaker 1: more of a mature business. Private equity and venture capital
Speaker 1: is more of a startup business. Okay, hopefully this was helpful.
Speaker 1: Good question. CJ. Love and light John O'Brien and get
Speaker 1: the book Financial Literacy for All, take your friends and follow.
Speaker 1: The podcast Money and Wealth with John O'Brien is a
Speaker 1: production of the Black Effect Podcast Network. For more podcasts
Speaker 1: from the Black Effect Podcast Network, visit the iHeartRadio app,
Speaker 1: Apple Podcasts, or wherever you listen to your favorite shows.