Private Equity: Your Ears Will Bleed

Private equity is a business operation where companies are bought and run at their leanest to maximize returns for a handful of investors. It can be a lifeline for a flailing company or run it into the ground. Either way, PE firms make out like bandits. See omnystudio.com/listener https://omnystudio.com/listener for privacy information.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

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• 1:40Speaker 03

  Welcome to Stuff You Should Know, a production of iHeart Radio.

• 1:50Josh Clark?

  Hey, and welcome to the podcast. I'm Josh and there's Chuck and Jerry's here too. And this is Stuff You Should Know, the podcast.

• 2:00Speaker 02

  Oh, wow. Fancy.

• 2:02Josh Clark?

  Yeah, I wanted to dress it up a little bit because it's our job, Chuck, to yank what could be a bone dry, boring economics lesson from the maw of, well, boredom. Shake it up a little bit by the collar. Look it in the eye and say, you will not be boring today. And then do all that.

• 2:29Speaker 02

  All right.

• 2:29Josh Clark?

  Okay, we can do it, Chuck. We're professionals.

• 2:32Speaker 02

  I'm glad you feel good about it.

• 2:34Josh Clark?

  I do, and I'm gonna make you feel good about it, too. Because what we're talking about today is no mere typical economics.

• 2:43Josh Clark?

  And we're famous for having trouble wrapping our heads around economics. This one can be that way, too. We're talking about private equity today, and we'll explain all about it. The reason it can be hard to wrap your head around is because it's so insanely unfair, the structure of it, that it just doesn't make sense. So you just kind of have to accept it on its face that this is actually how it is.

• 3:06Speaker 02

  Yeah, I would agree.

• 3:08Josh Clark?

  It's nuts. So private equity, I guess we should probably start out with a little bit of a definition, Charles. It's an alternative investment vehicle. And essentially what it is, is it's a fund, a private fund. You have to basically be in the club to even invest in this, at least traditionally, they've kind of opened it up a little more. And private equity goes around and essentially either buys huge controlling interests in companies, or just buys the companies outright. Trims them down, makes them lean, mean, and efficient. And ideally turns them around for a healthy profit, walks away, does it again. Everybody who invested gets even richer than they already were.

• 3:49Josh Clark?

  And that's the basics, the very most basic definition of private equity.

• 3:54Speaker 02

  Yeah, it's something that's become much more popular in the past 20-ish years, but really kind of started in the 70s, as we'll see. And it's an alternative investment, so it's not like stocks or bonds or anything. It's generally a little riskier. There's less oversight, there's less transparency. And they want to keep it that way.

• 4:17Josh Clark?

  Yeah, yeah, they've actually gone to great lengths to make sure that it's much less transparent. One reason why the government, who is in charge of regulating stuff to make it transparent, like stocks and bonds and disclosures and all that, is that you, or I, or anybody could walk along, open up a brokerage account, start buying stocks and bonds. You don't have to be savvy at all to invest in private equity because of the risk, because it's just so different from traditional stocks and bonds and normal investments. The government says you're on your own. As a matter of fact, you have to, you have to register as an accredited investor, which says that you either know what you're doing so much

• 5:00Josh Clark?

  that we don't have to worry about you losing your shirt, like you're going to just deal with it if that happens. Or you have so much money, it's not really going to matter if you lose your investment. Those are the people who can, um, can invest in private equity. And usually they're what institutional investors, right? Like huge massive like funds or college endowments or something.

• 5:21Speaker 02

  Yeah. Uh, and the people who, um, really come out on top are the people that manage these.

• 5:26Josh Clark?

  Uh huh.

• 5:26Speaker 02

  Uh, if you're a managing partner, um, there's a formula known as two and 20, where the company that you're managing, that you have taken over, uh, they pay you 2% of the total assets of that company plus, uh, 20% of the profits above whatever threshold that you agree on, I guess. Uh, and then there's all sorts of other ways that they can make money as we'll see, like, you know, selling the land that the business sits on, uh, maybe to yourself and then renting it back to

• 5:56Josh Clark?

  I know.

• 5:57Speaker 02

  that same company at a higher rate. Um, so yeah, we'll, we'll dig into all that. But there, um, the people that are really getting rich are the people that are, um, investing in these, but really managing these.

• 6:08Josh Clark?

  Right. So if you ever hear a news story about some guy who ran some great venerated company into the ground and they're like, yeah, I mean, even I lost my investment. Do not feel bad for them because they made probably hundreds of millions or billions of dollars for themselves from those fees and those fees can't be taken back like because that company's in bankruptcy because you can show that they did a terrible job of managing this company. Doesn't matter. They get to keep that money no matter what the turnout is, no matter how many people lose their jobs. That is why almost everyone in the world hates private equity people.

• 6:49Speaker 02

  Yeah, and they generally do this to private companies. Sometimes it'll be a controlling interest in a much larger publicly traded company. But generally, we're talking about private companies here. And we're going to go through industries and different examples of specific companies in a bit. But it's usually, almost always, what's called a leveraged buyout, in which the money to buy this company comes from a huge loan that that company is also then responsible for. So it's really, whoever came, I mean, I guess we'll get to who basically came up with this stuff.

• 7:29Speaker 02

  But it's a sort of evil financial genius on a level that is kind of hard to comprehend that it was ever allowed to happen.

• 7:38Josh Clark?

  Yeah, it's the best analogy I've been able to come up with is it's like if you went and bought a house, the house had to go take out a loan and a mortgage so that you could buy and own it. And you didn't actually care about the house because you're planning on selling it down the road. So you didn't keep it up. And then you just decided to walk away from the house. And the house is responsible for paying off the loan it took out so you could buy it. That's the best I can come up with.

• 8:05Speaker 02

  Yeah, I mean, that's a thing. And it's a big thing. Right now, private equity firms, the companies they own in the United States employ more than 13 million people. And they account for about 2 trillion of, which is about 7% of the GDP. And like I said, it all started out in the 70s with a guy named Milton Friedman from the University of Chicago, who was, I mean, it seems very sort of old hat now to hear. But he was kind of one of the first people to step forward and say, "The only thing any corporation should ever worry about is their shareholders.

• 8:41Speaker 02

  The people don't matter, the product don't matter, doesn't matter, rather. English grammar doesn't matter." And the only thing that matters is the profits that we turn for our shareholders. And once somebody kind of said the quiet part out loud, everybody's like, oh, well, he said it. So that's what we're gonna all try and do now.

• 9:02Josh Clark?

  Yeah. One of the worst ideas in the history of the world, and it's, it just took off. So yeah, Friedman, that was step one. Step two was laid, well, step two through 10, I would say is was laid out by a guy named Michael Jensen, who was an economist with Harvard Business School in the 70s and 80s. And he basically said, traditional companies that have, you know, you've got a CEO and you have employees and the CEO is paid a certain salary a year and everything's great. That, that doesn't work because the CEO, the person making the decisions and what, what moves the company makes, they might be in conflict with the shareholders. They might be spending a bunch of money and they don't care. They don't care about the

• 9:43Josh Clark?

  shareholders, the investors who, again, as Milton Friedman said, the entire purpose of the corporation is to enrich the shareholders. So how can you bring a CEO in line? And he said a couple of things. One, you can pay him in stock. So that whole thing about how CEOs get huge stock packages now, that came from Michael Jensen. And the reason why is because now suddenly they're a shareholder. So they care about what the shareholders are getting, right? That's number one. Then number two, if you buy a company using that leveraged buyout technique where you make the company take out tons of loans so that you can buy that company, it's saddled with so much debt that it immediately has to figure out how

• 10:23Josh Clark?

  to get lean and mean, emphasis on mean, so that it can keep afloat and pay off of those debts. So like immediately managers have to trim the fat and it just gets more efficient and outperforms just a traditional company, traditionally run company. That was Michael Jensen's contributions.

• 10:42Speaker 02

  Yeah, and you know, we're going to talk about the different ways this happens. Obviously, firing people is a big way to to trim the fat, to pay back those huge loans that someone took out on your behalf that you're now responsible for, once again. So you know, mass layoffs is one way to make that happen. That's one way to trim the fat. Even if it, you know, makes the company not function as well, it doesn't matter.

• 11:06Josh Clark?

  Right.

• 11:07Speaker 02

  You know, sometimes there is fat that can be trimmed. So we're not saying like no one should ever be laid off or anything like that. Like, we're realistic people. But we're talking about, you know, leverage buyouts and kind of how they work. So another thing they can do is break them apart. And if you've ever seen the movie Wall Street with the great Michael Douglas, I just watched that again for the billionth time recently.

• 11:30Josh Clark?

  Oh, really?

• 11:31Speaker 02

  Yeah, very, very good example. It's one of my favorite movies, but very, very good examples of all this stuff in there. As far as like buying, in his case, when he bought Charlie Sheen's father's airline, just for the sole purpose of breaking it apart and, and, you know, driving it into the ground to get rich.

• 11:46Josh Clark?

  Right.

• 11:47Speaker 02

  But, you know, selling off assets is another way to do it. Like I mentioned, like selling off the land that the business sits on. Sometimes that equity firm owns the real estate company as well.

• 11:59Josh Clark?

  Yeah.

• 12:00Speaker 02

  That buys the the land that the company sits on and then leases it back to that company, sometimes against their best interests at like higher rental rates.

• 12:07Josh Clark?

  Yeah, I'll give you an example. We'll talk a little more about Red Lobster, but they got, they got taken over into leverage buyout. And the company did exactly that. They sold off all of their assets, all of their restaurants, just sold them off. And then they sold them to a company who turned around and leased them to Red Lobster, right? The Red Lobster was paying an estimated $16 million a year for just a 1% property tax on its locations, all of them, $16 million. Now their leases amount to $158 million, right? So these are just terrible, terrible business decisions. And the reason why is because anytime a big influx of cash comes in, it gets divided up.

• 12:52Josh Clark?

  Among the investors, they get tons of money. And it's not just like from selling properties, Chuck. One of the other ways that investors get their money back, they get a return on their investment, is they'll take out more loans from the company. After the company's been bought and has all this extra debt, they'll take out even more loans. And when that money comes in, rather than spending on the company, they'll divide some or all of it up among the investors. So it's like a vampire process. At its worst, I feel like we really should say something to be fair. There is a lot of well-run, well-thought-out private equity firms that know what they're doing, that actually have saved companies from going under. It happens. It's just when it's bad, it's so bad that it almost,

• 13:38Josh Clark?

  it almost makes it seem like there shouldn't be this, this, this type of, of business model.

• 13:43Speaker 02

  Yeah, for sure. Sometimes it's a real, a quick thing, like in the case of Wall Street, like there was no long-term plan for Gordon Gekko.

• 13:49Josh Clark?

  Right.

• 13:50Speaker 02

  And Blue Star Air. It was like a house flip. You, you, you buy this company, sort of a smaller company, and you want to make it look good for maybe another private equity firm to come along and buy. So you're gonna, if you're a manager of that firm, you're gonna make a lot of very short-term decisions that make it appear much healthier than it really is on paper. So they can just kind of turn it and flip it and get a big payoff. And then it's someone else's problem, where they're gonna do the same thing, probably.

• 14:18Josh Clark?

  Yeah. And like you said, one of the big things that happens is including layoffs, including just sucking the, the company dry of its money, is the customer suffers as well. Usually the product or the service takes a really big hit because you're trying to figure out how to put that same thing out and charge as much as you can for it by putting as little as you can into it. Because the people who bought the company don't really care about the company or what it does.

• 14:45Speaker 02

  Good time for a break?

• 14:46Josh Clark?

  I think so. And then we'll come back and talk some more about the history of this whole thing, huh?

• 14:50Speaker 02

  All right, I need to go get some pomade and grease my hair back real quick. I'll be right back.

• 14:54Josh Clark?

  Okay.

• 15:21Josh Clark?

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• 18:14Speaker 02

  I should mention real quick that I love Wall Street so much that I was watching it again and I was like, I wonder if there's a T-shirt that says Anacott Steel. It's just one of the companies that they, you know, one of the fictional companies that Oliver Stone wrote into the movie. And sure enough, there's an Anacott Steel T-shirt. I bought it. I love it. I hate the message of the movie and Gordon Gekko, I don't think he's the hero or anything like that. But it's just a movie I've always loved and now I got my Anacott Steel shirt. It just kind of is a movie crusher type. So when people see me that know that movie, they'll be like, oh, Wall Street.

• 18:50Josh Clark?

  Right, no, I get it, I get it. I used to have a sweatshirt that was like the print of Danny's sweater, the Apollo 11 sweater. I loved that thing. That was one of my more beloved pieces of clothing.

• 19:02Speaker 02

  You know, I met the guy who owns that sweater.

• 19:04Josh Clark?

  Oh, really? Stan Johnson?

• 19:07Speaker 02

  No, Lee Unkrick, I think is his name. He's a big animation guy. I think he did Coco and a bunch of other big.

• 19:14Josh Clark?

  Oh, cool.

• 19:16Speaker 02

  Animated films. And he was such a fan of The Shining that he bought that real sweater at auction.

• 19:21Josh Clark?

  Good for him. I hope he's never tried it on because that's a tiny sweater.

• 19:25Speaker 02

  Well, you weren't a big guy.

• 19:27Josh Clark?

  It doesn't matter. That is still a very, Danny was not a, he was, he was a tiny guy.

• 19:32Speaker 02

  Yeah. Should we talk about history?

• 19:35Josh Clark?

  Yeah, I think we should Chuck. So this whole thing is kind of newish, right? I mean, we usually associate with the 80s and it's pretty accurate, but it goes back a little further. It's just the 80s are when it really took shape and got off the rails the first time.

• 19:49Speaker 02

  Yeah, for sure. The first leverage buyouts though came after World War II. There were some dudes from Bear Stearns, Jerome Kolberg, Henry Kravis with a K and George Roberts. So they were KKR. They got together, they started, you know, with this idea of leverage buyouts for small companies like, you know, family owned businesses. This is in the 1960s. And in the mid 70s, they formed Kolberg, Kravis and Roberts, the KKR business. And their first big success story for them as far as making a ton of money doing one of these was a machine tooling company, or a tool company rather called, is that Holdail?

• 20:30Josh Clark?

  Houdail?

• 20:31Speaker 02

  Houdail, maybe?

• 20:31Josh Clark?

  Houda?

• 20:33Speaker 02

  H O U D A I L L E Industries. This is in 1979. They bought it for 380 million bucks, of which they paid about a million bucks. Once again, as we've already learned, the company was saddled with debt immediately covering the remainder of that money. And they got a new CEO. They said, hey, we're going to pay you double what the previous CEO got. And we're going to start raking in these fees as the, as the fund manager.

• 21:00Josh Clark?

  Yeah. And so Houdail, which at the time of this purchase was doing really well. It had been around since I think the 19 teens. It was, it was fat with cash. The employees were happy and these guys just ran it into the ground and sucked as much money as they could out of it. And the, what usually gets companies in this case is they're so settled with that, that a recession comes along or things shift, like we go from brick and mortar stores to online. And they don't have the cash to keep up because they're spending too much of it, either giving it back to investors. Well, you can't even say back, just giving it away to investors or keeping up with their interest payments on these loans

• 21:42Josh Clark?

  that they eventually just sink and end up in bankruptcy and their debt gets restructured. And if they're lucky, they can come back out of it and try the whole thing again.

• 21:52Speaker 02

  Yeah, for sure. About 10 years after that, one of the big, big ones, early ones took place, such that they wrote a book about it and made a movie about it. If you've seen the movie Barbarians at the Gate with James Garner.

• 22:05Josh Clark?

  I haven't. Have you?

• 22:06Speaker 02

  Uh, no.

• 22:07Josh Clark?

  I've always wanted to.

• 22:09Speaker 02

  Hey, it's out there, buddy.

• 22:10Josh Clark?

  Okay, that's not a, that's not a Tom Wolfe book. I'm thinking of A Man in Full, aren't I?

• 22:15Speaker 02

  Yeah, I think so. I can't remember who wrote the book, but the book was called Barbarians at the Gate: The Fall of RJR Nabisco, because it's about RJR Nabisco, and there is no more RJR Nabisco. There's RJR and there's Nabisco, but that company ceased to exist after that leveraged buyout.

• 22:33Josh Clark?

  Yeah, and I think 2,000 people lost their jobs as the company was sold off in pieces. And then finally, like you said, the whole thing went down. And at the time, this is 1989, I think you said, 2,000 people losing their job because some corporate raiders came in and screwed up a good thing. That was, that was enormous news. And that really kind of put a period on the end of what had become almost like the Wild West. Like, these people were, in some cases, like outlaw folk heroes who were just coming into corporates and taking everything. People getting laid off and then they go off 50 times richer than they were and do the whole thing again, right? So they got a bad name in the 80s.

• 23:17Josh Clark?

  And by the time the 90s rolled around, things got a little more legit, a little more structured. Some of the players involved got a little more, I don't know, it was more legitimate players than just some maverick guy who worked at Bear Stearns or, you know, Goldman Sachs for a little while. And then additionally, some other firms, whose names we know, because this stuff is just so nuts that it makes the news. Bain Capital was founded in the 80s. Blackstone founded in the 80s. Carlyle Group founded in the 80s. So the 80s were a big deal. The 90s, everybody kind of kept a low profile. And then the 2000s, a boom started to come back again.

• 23:56Speaker 02

  Yeah, a big boom. You know, everything crashed. We've done a couple of episodes kind of around the 2008 crash. But a lot of private equity firms did okay. It's not like they were completely unscathed or anything like that, but they were better off than a lot of financial institutions after the crash. And after that, Congress was like, hey, maybe we should have some more, you know, guardrails and reporting requirements on this private equity business. Because that's a term that kind of just came around in the 21st century, even though it was happening, private equity as a term came around, I think, in the early 2000s. And even though they put some more reporting requirements around it, still way less transparent

• 24:39Speaker 02

  and way fewer requirements than, you know, the publicly traded companies and the stock market and banks and stuff like that.

• 24:47Josh Clark?

  Right.

• 24:48Speaker 02

  But there's been a real boom since that time. The number of companies publicly traded has dropped about half since 1996, where it was at its peak. And a couple of years ago, in 2023, there were five times as many private equity-backed firms as publicly held companies.

• 25:05Josh Clark?

  Yeah, because it's just, you don't have to worry about the government meddling with your stuff. It's crazy. So, some of the, some of these, like, deals make headlines, and usually when it makes headlines, it's because it's gotten so bad that the average person wants their blood to boil reading about it. So, the news says, here, read this. One of the big ones that I remember was Toys R Us.

• 25:30Speaker 02

  Yeah.

• 25:31Josh Clark?

  And this is another thing. It will also make news if, like, a beloved nostalgic brand just gets torn apart by corporators. And Toys R Us definitely fit that bill. You know, most people our age have memories of going to Toys R Us and it being like, how does this place exist? This is the most amazing place on the planet. In addition to that, even more importantly than that loss of nostalgia, is that 30,000 people lost their jobs because of a private equity takeover of Toys R Us that eventually ran it into the ground.

• 26:05Speaker 02

  Yeah. I mean, it makes some of those earlier ones where, you know, 1,000, 1,200 people lose their jobs seem quaint.

• 26:11Josh Clark?

  Yeah. 30,000 people just, sorry, you don't have a job anymore.

• 26:15Speaker 02

  Yeah, there's this guy, I mean, we got to talk about Sears, because that's another one. Iconic brand, iconic brick and mortar store.

• 26:24Speaker 02

  I would say there's some nostalgia tied up in Sears for sure.

• 26:27Josh Clark?

  Sure.

• 26:28Speaker 02

  And a guy named Edward Lampert is someone who may not be on your radar unless you follow this stuff a little more closely. Kmart files for bankruptcy in 2002 and Ed Lampert comes in. He was a Goldman Sachs guy and he, I think, former by this time.

• 26:43Josh Clark?

  Right.

• 26:43Speaker 02

  But he buys up a bunch of the debt from Kmart. They come out of bankruptcy and then he has a hedge fund, ESL Investments, and they were the largest shareholder and so thus he becomes the chairman and can then run the show.

• 26:56Josh Clark?

  Right, and he says, Kmart, I think we should buy Sears. And he had a pretty big stake in Sears too, so much so that he was later accused of devaluing Sears so that he could buy it through Kmart for cheaper. Regardless, Kmart bought Sears and they formed the Sears Holding Company, which was this huge, massive retailer. Kmart was not doing very good. Sears was doing amazing, tens and tens of billions of dollars in sales every year. And for the first couple of years, things were going pretty well. But Edward Lampert, being a corporate rating, private equity guy, again, this is his firm.

• 27:34Josh Clark?

  So he is directly taking hundreds of millions of dollars, that 2% of the assets every year, plus that 20% when he gets above performance goals. So by juicing this company and like boosting the stock price and the value of all this stuff, he's getting huge percentages of that every year, right? The problem is these bad management decisions. This is when it goes bad and this is when you end up reading about it. One of the big things they did was a stock buyback, right? And if you have a bunch of stock out there, a bunch of shares out there on the market, just by like the laws of supply and demand, they're worth less than if they're scarcer.

• 28:16Josh Clark?

  So you go as the company and buy those shares back and because there's fewer shares on the market, your share price can increase, right? So if you're holding shares in the company, your share price goes up and you make the company buy the stocks back. It's not like you're out there doing it yourself, right? The better thing to do traditionally for if you want your business to keep running is to use that money to keep your business running. But instead, they took $6 billion and bought stock back to raise the share price. And they only spent, I think this is over a couple of years, they only spent half of that on capital expenditures, like keeping up your properties, maintaining your buildings, stuff like that.

• 28:59Josh Clark?

  And so the company just almost immediately started to just falter.

• 29:04Speaker 02

  Yeah, so things start faltering. This is around 2007 or so. And ESL, which again was Ed Lampert's company, they and some other firms then loaned money to themselves, almost $2.6 billion. And so they're now also collecting interest and fees on that. So about $400 million in interest and fees to the big loan that they gave themselves. And Sears continues to sort of tank, or the Sears Holding Company continues to tank. That's when they break it up. They spun off, they start spinning off the different divisions. ESL is buying shares in most of those smaller divisions as well, once they break it apart.

• 29:46Speaker 02

  And then in 2015, Ed Lampert founded a real estate company called Seritage Growth Properties. They bought 266 Sears and Kmart buildings and then rented them back to themselves.

• 30:00Josh Clark?

  Right. It's like robbing Peter to pay Peter.

• 30:03Speaker 02

  Yeah, it's, just sounds like such an obvious fleecing.

• 30:08Josh Clark?

  It is.

• 30:09Speaker 02

  And grift.

• 30:09Josh Clark?

  And it's totally legal. That's the thing. They're not breaking any laws. All of this is completely legal. It's just despicably unfair.

• 30:20Josh Clark?

  So obviously, after a fairly short time, seven years, this company, Sears Holding, filed for bankruptcy. And again, bankruptcy doesn't mean like, oh, that's it, I'm out of money. It means like, hey, I can't pay my debts back, so I'm going to negotiate with all of these people and hopefully reduce it by two-thirds. And then I can manage that, so I'm going to come back out of bankruptcy and Try to continue on. That's what that's that was the result for Sears Holding. But part of this restructuring was that they started slashing costs. And the first thing you do to slash costs if you're a corporation is fire people. They closed stores, Chuck. They had 3,500 Sears and Kmart stores when those two companies merged.

• 31:05Josh Clark?

  Okay, by seven years later, they were down to 700. And today, there's eight, eight.

• 31:15Speaker 02

  Eighty?

• 31:16Josh Clark?

  Eight.

• 31:17Speaker 02

  Eight hundred?

• 31:18Josh Clark?

  Zero eight.

• 31:21Speaker 02

  Yeah, there's eight of those left. It was, you know, again, tens of thousands of jobs. And $11 billion in unpaid debt to creditors. And Ed Lampert ends up making about 1.4, personally, making about 1.4 billion dollars from managing that fund.

• 31:40Josh Clark?

  Two, two things. I saw the Wall Street Journal estimated that under Lampert's watch of this, I think, seven years, 200,000 people lost their jobs from Sears and Kmart.

• 31:53Speaker 02

  Yeah.

• 31:53Josh Clark?

  That's got to be a record, Ben. And then also, he was quoted as saying like, yeah, I'm really bummed about this whole thing. It was a real loss. It was a real opportunity cost for me. Meaning, he could have done this with a different company and maybe made out even better than he did.

• 32:12Speaker 02

  So you mentioned Red Lobster, and this was very much in the news. It feels like it was more recent. Well, I guess some of this stuff was a little more recent, but in 2014, Golden Gate Capital, a San Francisco company, bought Red Lobster, $2.1 billion. They said it was, quote, "an exceptionally strong brand with an unparalleled market position." And in order to pay for that deal, they sold, as you mentioned, they sold the real estate of 500 restaurants for about 1.5 billion bucks. And a company called American Realty Capital Partners bought that land and then, once again, leased it back at a higher rate, like above market rates.

• 32:49Josh Clark?

  Yeah. And again, that 1.5 billion, a significant portion of it just went right to investors. I'm not sure how much, but that was, that's the playbook, right? I also have to say, I worked at Red Lobster as a server for a little bit.

• 33:04Speaker 02

  Whoa.

• 33:06Speaker 02

  You and I have dined at Red Lobster before one time. It's probably the only time I've been there in the past 40 years.

• 33:12Josh Clark?

  Okay.

• 33:14Speaker 02

  And you never, I don't think, disclosed to me that.

• 33:17Josh Clark?

  Did I not?

• 33:18Speaker 02

  No, all you talked about was how much you love those, what are they, little cheesy biscuits?

• 33:21Josh Clark?

  The Cheddar Bay biscuits. That is why I worked at Red Lobster, so I could be closer to them. It was only for a couple of weeks. I was like, I gotta stop eating these.

• 33:30Speaker 02

  I didn't know you ever waited tables at all.

• 33:31Josh Clark?

  So the reason why I don't talk about that that much is because that I'm one of the worst servers of all time. Something happens to me between walking from, you know, the kitchen to your table, and my personality just drops out of me somehow, and I forget stuff, and I'm just terrible. Like, the kind of waiter where you're like, you just, you ruined our dining experience. You're so bad. That was the kind of waiter I was. So I learned after probably six or seven places to just stop trying to be a server.

• 34:03Speaker 02

  Yeah, you and Emily. Emily was waited tables for a very, very short time for similar reasons.

• 34:08Josh Clark?

  Yeah, it's just, it's, yeah, you have to be in the right kind of mindset to pull it off. It's not as easy as it looks, I've found.

• 34:16Speaker 02

  Yeah, I was pretty good at it.

• 34:17Josh Clark?

  I believe that.

• 34:18Speaker 02

  Also glad those days are behind me. Yeah, I think my retirement job is gonna be stadium worker.

• 34:25Josh Clark?

  I feel like you said that before.

• 34:27Speaker 02

  I wanna like sell beer at a base, at a Braves game.

• 34:29Josh Clark?

  Let's see what you got.

• 34:31Speaker 02

  Cold beer, huh? Cold beer, huh?

• 34:34Josh Clark?

  That's pretty good. You gotta, you gotta grow one of those walrus mustaches.

• 34:39Speaker 02

  Two for one. And they're like, you can't do that. You can't make deals.

• 34:43Josh Clark?

  The one I always remember is popcorn, peanuts, caramel corn, here. Is that at the Braves?

• 34:48Speaker 02

  You always gotta finish it up with here.

• 34:49Josh Clark?

  Yeah, that's how you get people's attention. So, oh yeah, back to Red Lobster.

• 34:55Speaker 02

  Yeah, I can smell the cheesy biscuits.

• 34:57Josh Clark?

  They're so good, man. And their ranch dressing is world-class as well. It's just unlike any other ranch. It's really good.

• 35:02Speaker 02

  Oh, alright.

• 35:04Josh Clark?

  I'm glad that Red Lobster's still around, as far as I know. Despite all these different companies trying their best to run it into the ground, COVID definitely didn't help.

• 35:13Speaker 02

  Yeah.

• 35:13Josh Clark?

  2020 hit, COVID hit, and Red Lobster, which was already, this is what I was talking about, when a company is saddled with a bunch of debt

• 35:22Josh Clark?

  and new costs, that's hard to keep up through, through rough times or changes, right? Same thing with Red Lobster. And I guess one of its seafood suppliers, Thai Union Group stepped in and was like, hey, we'll, we'll buy Red Lobster. We have a really good idea. So this is their seafood supplier. They became the exclusive shrimp supplier to Red Lobster, the company that owned it, that now owned Red Lobster. And the CEO is like, you guys get this. You know, the endless shrimp promotion for 20 bucks? We're going to make it a permanent menu item and we're going to sell them so much shrimp because we're their exclusive supplier of shrimp. Bam. And he said bam, that's a quote.

• 36:04Josh Clark?

  And they lost like 11 million dollars in just three months of trying that because they grossly underestimated how much shrimp people would eat if there was no, no bottom to it.

• 36:15Speaker 02

  Yeah, I mean, if you're talking to, you know, medium sized shrimp, I can eat, you know, if I'm really trying 30.

• 36:27Josh Clark?

  Wow. Wow, that's a lot of shrimp, dude.

• 36:31Speaker 02

  Not the huge ones.

• 36:31Josh Clark?

  No, I know what you mean.

• 36:32Speaker 02

  I got it. If it's endless and it's all for a very set rate, uh, and I'm, you know, maybe trying to impress my date.

• 36:41Josh Clark?

  Right. Surely not fried though, right? You're just talking like peel and eat.

• 36:46Speaker 02

  Oh, that's more like 40.

• 36:48Josh Clark?

  Oh my God, you could eat 30 fried shrimp?

• 36:51Speaker 02

  I probably, I probably could not eat 40 peel and eat. I don't know if I could eat 40. I mean, if you're, if I'm not eating cheesy biscuits and french fries and coleslaw and stuff.

• 36:59Josh Clark?

  No, you're being serious.

• 37:00Speaker 02

  Then I could probably eat 30 fried shrimp for sure.

• 37:03Josh Clark?

  Okay. I'm going to be your date for that one.

• 37:06Speaker 02

  Not, well, I hope to impress you.

• 37:09Josh Clark?

  Oh, what else? Oh, I've got one. One of the things that, that a lot of these companies do is they take over and buy a business that they just don't understand the business of, and that's how they run it into the ground. That'll happen a lot. We'll talk about that here or there. But there are some niche private equity firms that focus on specific kinds of businesses. They know what they're doing. And one of them is Rourke Capital. They're big on fast food industry. And when you have a very powerful wealthy firm like that that's zeroed in on the ups and downs of their particular industry, you have the kind of people who will lobby successfully to get the $15 federal minimum wage taken out of the stimulus package, which is exactly

• 37:51Josh Clark?

  what Rourke Capital managed to do several years back.

• 37:55Speaker 02

  That's right. And if you're wondering, is that named after, you know, Mr. Rourke from Fantasy Island? No, it's named, like, seriously named for Howard Rourke, Ayn Rand hero, and do with that what you will.

• 38:10Josh Clark?

  Yeah, from the fountainhead.

• 38:12Speaker 02

  That's right. All right. I guess we could talk a little bit about newspapers and physical print media because, I mean, they're, they have been in trouble anyway. So not all of the losses of the print media industry are due to private equity firms. But private equity, ownership of newspapers rose from 5% in 2001 to 23% in 2019. And, you know, there have been supposedly analyses done that show that ownership of print media by a private equity firm can improve circulation. But it also will lead to reduction in editorial

• 38:54Speaker 02

  staff, like massive cuts in staff, which means cuts in things like local government. And they've shown that results in a decline in participation in local elections.

• 39:03Josh Clark?

  Oh, yeah. Like, like, the loss of local government news reporting has had an enormous effect on the United States. It's just crazy. Like, the cascading effect it had. We're gonna do a whole episode on that right after this, okay?

• 39:19Speaker 02

  Great.

• 39:19Josh Clark?

  We'll make it up as we go along.

• 39:21Speaker 02

  Great.

• 39:22Josh Clark?

  Vice is another one. They were sitting pretty. I think they were worth almost $6 billion in 2017, got bought out, and by 2023, they were worth $350 million because it just got run into the ground. That's a good example of a company that didn't know what they were doing, buying a business that they didn't know anything about, that, and then they just made terrible decisions.

• 39:48Speaker 02

  For sure. I think we should take a second break.

• 39:50Josh Clark?

  Okay.

• 39:51Speaker 02

  And we'll be back right after this.

• 40:19Josh Clark?

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• 40:42Josh Clark?

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• 40:58Speaker 02

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• 41:48Speaker 04

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• 41:54Josh Clark?

  If you own a home, you already know stuff breaks. It's not if, it's when. And somehow it's always like the AC in July or the fridge right after you go to the grocery store. That's why you always hear people say they don't make appliances like they used to because it's kind of true.

• 42:09Speaker 02

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• 42:22Josh Clark?

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• 43:13Josh Clark?

  Okay, Chuck, we're back. And here's where we really get into the problems. I mean, aside from people getting laid off, people being neglected in the hospitals they go to because they're owned by private equity firms. That's become a big problem in the 21st century in the United States, too.

• 43:29Speaker 02

  Yeah, there's, in 2024 alone, by one count at least, there were 166 leveraged buyouts in healthcare. Just in that one, one year. And seven of the eight biggest healthcare bankruptcies that year were from companies owned by private equity firms or hospitals and healthcare organizations.

• 43:48Josh Clark?

  Right. The private equity firm dental practices rose dramatically from the teens to the 2020s. And that results in things like companies push. I read an article about a dental express in Ohio telling a mom that her three-year-old needed seven root canals.

• 44:08Speaker 02

  Yeah, for sure. And the same goes with hospitals. Hospitals, if they're owned by a private equity firm, they result in higher charges, more safety issues. There's one study that said there was a 25% rise in hospital-acquired complications, like something you got while you were there.

• 44:25Josh Clark?

  Right. And I think 38% more blood infections from IV ports. That's just from not having enough staff or inexperienced staff. It's just not good. And it gets even worse. They're also into hospices, nursing homes, and it just follows the same pattern that you would expect. A study found that private equity ownership increases mortality rates by 11% just because PE's cutting corners to save costs. So that's a huge, huge issue. I think that that one needs regulation where it's like, you can't, sorry, you guys can't own healthcare stuff. That's just off limits for you.

• 45:04Speaker 02

  Yeah. I mean, anyone who's been through the trauma of a loved one and having to go to a nursing home in the past, I mean, I don't know when it was good, but we had to go through that with Emily's grandmother. And just the state of that industry is horrific. It's the opposite of what it should be in almost every way.

• 45:20Josh Clark?

  Yeah. And housing too is another big deal. I think Blackstone, which we mentioned was founded back in the 80s, they're known as the United States' largest landlord. They own 300,000 units of rental housing in the US as of 2023. And as you would expect, when private equity comes along, rents go up, the maintenance people are slower to respond because they've been laid off, and just things kind of go downhill rather than get better. Like, they're supposed to. That's the reason private equity is supposed to exist. It's supposed to take

• 45:55Josh Clark?

  Kind of slow lumbering companies that are in a position to do better than they are and make them do better. It's not supposed to make everything go downhill, but that's how it happens a lot.

• 46:06Speaker 02

  Yeah, I mean, sometimes it does happen for the better. Like, one great example is Hilton, the hotel chain. There was a leveraged buyout from Blackstone in 2007 of Hilton. And the Great Recession, you know, hit, I guess it was like the next year in 2008. And obviously, it's going to really affect the tourism industry. But they brought in a CEO from Blackstone, a guy named Christopher Nacetta, who actually made things better. He said, hey, let's invest in emerging markets. Let's invest in the future and like digital strategies, like apps where you can check in and get your hotel key through an app and things like that. Just, you know, instead of just shuttering things, like actually investing, reinvesting in the company.

• 46:51Josh Clark?

  Right.

• 46:52Speaker 02

  And it turned out to be really, you know, all these things were really popular moves. And Blackstone sold Hilton back to the public market after it had been yanked out of the public market. They sold it back in 2013 and sold out of their stake in 2018. Made a ton of profit, $14 billion over 11 years. But the company itself, Hilton, was doing great and continues to do great.

• 47:15Josh Clark?

  Yeah, they doubled the number of rooms today that they had in 2007 when they took over, when Blackstone took over. So yeah, that's a big success story. It wasn't like a pump and dump. Hilton's still doing well, like you were saying. Burger King's another one, too. They got bought by a Brazilian firm called 3G Capital. And they just, they just made some really good moves in a lot of ways. Again, this is from an investor standpoint, not necessarily from the standpoint of the people at corporate who were laid off or anything like that. But as far as firms go, 3G made something like $28 billion over 14 years, and it had only invested $1 billion. So that's a pretty good return on investment. Private equity coming in.

• 47:59Josh Clark?

  Why'd you do that?

• 48:01Speaker 02

  Oh, just because I know you hate it.

• 48:02Josh Clark?

  You got me.

• 48:06Speaker 02

  So here's the thing. Alternative investments make a lot of money. We've seen that there's less oversight. So, you know, one of the ways that they can make a lot of money is that they're just allowed to do things that you can't do in traditional sort of slow growth investments like stocks and bonds and things like that. But you also mentioned earlier that pension funds, like 401ks, are where a lot of this money comes from. And like, do you have a choice whether or not the 401k that you invest in ends up being a part of this thing?

• 48:40Josh Clark?

  Yeah, I think you can also invest your 401k now, which for a long time was off limits because that's your, you, the non-accredited investor who doesn't know what they're doing with private equity, that was off limits. But now you can if you want, although they say that's probably not a good idea unless you know what you're doing again.

• 49:00Speaker 02

  Well, 89% of public pension funds have some of their money in private equity. I think 13% average of, 13% of their assets is the average, sometimes more than 25%. But that's, that's almost 90% of public pension funds. It's a lot.

• 49:17Josh Clark?

  Yeah. And then I guess one of the other big things, so the, the reason why, well, another reason why people are like, this is so not right. All of that money that those people like Edward Lampert made, made that $1.4 billion by running a huge venerated company into the ground, he paid at most 20% on those profits. Even though it was personal income for him, he didn't pay the personal income tax of like 37%. Instead, he paid 20% in capital gains tax because the fees that he charged are treated like gains from an investment rather than personal income, even though anyone would call those fees personal income.

• 50:02Josh Clark?

  So not only are the PE firms robbing companies for their own personal enrichment, getting people laid off, they're not even paying their full share of income taxes on it too. So not only are they robbing companies for their own personal enrichment, getting people laid off, they're not even paying their full share of income taxes on it too.

• 50:24Speaker 02

  Yeah, this is the kind of thing where in the movie version where this is first born as an idea.

• 50:30Josh Clark?

  Yeah.

• 50:30Speaker 02

  And the person is explaining it to like the people at dinner. They keep asking questions that start with, yeah, but what about? And then the answer always starts with, oh no, that's the best part.

• 50:40Josh Clark?

  Right, exactly. It just keeps going like that.

• 50:43Speaker 02

  Yeah. And they're like, no, no, no, but what about this? No, no, that's the best part.

• 50:46Josh Clark?

  Yep.

• 50:47Speaker 02

  So there's a lot of best parts.

• 50:48Josh Clark?

  And one of the guys finally puts his fork down and stands up, hits the table and goes bam.

• 50:53Speaker 02

  That's right. But you were talking about the carried interest loophole, right? That's what it's called.

• 50:58Josh Clark?

  Yeah, where your personal income is magically treated as returns on an investment and taxed at 20% rather than 37% or whatever. So if you make a hundred million dollars, you pay 17 million dollars less taxes on that hundred million dollars. And at that point, really, who cares anyway, right?

• 51:17Speaker 02

  Yeah.

• 51:19Speaker 02

  You would think.

• 51:20Josh Clark?

  So that's private equity. I feel like we kind of showed our bias a little bit, but it's really tough not to be when you really dig into this stuff, you know?

• 51:29Speaker 02

  Yeah. I mean, it's not the sole cause of the housing crisis, but it's a major player.

• 51:35Josh Clark?

  And all the other crises that we're facing too economically and socially and politically and probably religiously too, if I gave it some real thought.

• 51:46Speaker 02

  Yeah, personally.

• 51:47Josh Clark?

  Yep. Since Chuck said personally, I was waiting for it. It got you there because now we just unlocked listener mail.

• 51:57Speaker 02

  Hey guys, this is in response to a tangent that you went on during this Saturday's classic episode. When Chuck was talking about arguing with his mother about who gets to pay for dinner. It reminded me of my grandmother Sheila. She always likes to pay for her big family dinners and has engaged in tricks in the past. For a graduation dinner for my brother, my father knew what she was doing when she took her purse to the bathroom. So that's a good trick. I've done that before.

• 52:21Josh Clark?

  Yeah.

• 52:22Speaker 02

  That wasn't her best trick though, as even Josh mentioned that very trick. The best part. Did you mention that?

• 52:30Josh Clark?

  Yeah, I mentioned that. I remember that. I've done that for sure.

• 52:33Speaker 02

  Yeah, yeah. That's what you gotta do. Uh, the best was when part of the family was in upstate New York for a triathlon. Sheila wasn't even there. Sheila's in Massachusetts.

• 52:41Josh Clark?

  Hmm.

• 52:42Speaker 02

  The bill came when dinner was over the night before the race. My father and my aunt reached for their card and the waitress said it had been taken care of. All the adults looked in accusation at each other and there was a long silence. And at the exact same moment, they all threw up their hands crying, Sheila!

• 52:57Josh Clark?

  Hmm hmm. Then all the way over in Massachusetts, Sheila went bam!

• 53:02Speaker 02

  That's right. Uh, my aunt had made the mistake of telling Sheila on the phone that, uh, where we were going to have dinner. And our grandmother called the restaurant and gave her the credit card number.

• 53:11Josh Clark?

  Beautiful.

• 53:12Speaker 02

  Uh, thanks for all the pods. That is from James. Uh, James, that's wonderful. Sheila sounds great. I just hope she tips well.

• 53:19Josh Clark?

  Oh, good point, Chuck. Nicely done. Uh, if you want to be like James, thank you, by the way, James, that was a great email. Uh, you can send us an email too. Send it off to [email protected].

• 53:33Speaker 03

  Stuff You Should Know is a production of iHeartRadio. For more podcasts, MyHeartRadio, visit the iHeartRadio app, Apple Podcasts, or wherever you listen to your favorite shows.

• 53:49Josh Clark?

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