August 21, 2025 • 46 mins
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.
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Speaker 1 (00:01):
Welcome to Stuff You Should Know, a production of iHeartRadio.
Speaker 2 (00:11):
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.
Speaker 1 (00:21):
Oh wow, fancy.
Speaker 2 (00:23):
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 caller,
(00:43):
look it in the eye, and say you will not
be boring today, and then do all that. All right, Okay,
we can do it, Chuck. We're professionals.
Speaker 1 (00:53):
I'm glad you feel good about it.
Speaker 2 (00:55):
I do, and I'm going to make you feel good
about it too, because while we're talking about today is
no mere typical economics. 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. We'll explain
all about it. The reason it can be hard to
wrap your head around is because it's so insanely unfair
(01:18):
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.
Speaker 1 (01:27):
Yeah, I would agree, it's nuts.
Speaker 2 (01:30):
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.
That kind of open it up a little more, and
private equity goes around and essentially either buys huge controlling
(01:53):
interests in companies or just buys the company's outright, trims
them down, makes them lean, mean and efficient, and if
ideally turns them around for a healthy profit, walks away
does it again. Everybody who invested gets even richer than
they already were. And that's the basics, the very most
basic definition of private equity.
Speaker 1 (02:15):
Yeah, it's something that has become much more popular in
the past, you know, twenty ish years, but really kind
of started in the seventies, 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.
Speaker 2 (02:38):
Yeah, Yeah, they've actually gone to great links 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 or
walk along, open up a brokerage account, start buying stocks
(02:58):
and bonds. I 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 register as an
accredited investor, which says that you either know what you're
(03:20):
doing so much 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 invest in
private equity, and usually they're what institutional investors, right, like
huge massive funds or college endowments or something.
Speaker 1 (03:42):
Yeah, and the people who really come out on top
are the people that manage these If you're a managing
partner there's a formula known as two and twenty where
the company that you're managing that you have taken over,
they pay you two percent of the total assets of
that company plus twenty percent of the profits above whatever
(04:03):
threshold that you agree on, I guess. 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, maybe to yourself and then renting
it back to that same company at a higher rate.
So yeah, we'll dig into all that. But they're the
people that are really getting rich are the people that
(04:25):
are investing in these but really managing these.
Speaker 2 (04:29):
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,
(04:52):
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.
Speaker 1 (05:10):
Yeah, and they generally do this to private companies. Sometimes
it'll be a controlling interest in a much larger publicly
traded company, but you know, generally we're talking about private
companies here, and you know, 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 leverage buyout,
(05:31):
in which the money to buy this company comes from
a huge loan that that company is also then responsible for.
So it's it's really whoever came I mean, I guess
we'll get to who basically came up with this stuff,
But it's a sort of evil financial genius on a
(05:55):
level that is kind of hard to comprehend that it
was ever allowed to happen.
Speaker 2 (05:59):
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 in 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
(06:22):
you could buy it. That's the best that I can
come up with.
Speaker 1 (06:25):
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 employee more than thirteen million people
and they account for about two trillion of which is
about seven percent of the GDP. And like I said,
it all started out in the seventies with a guy
named Milton Friedman from the University of Chicago, who was
(06:49):
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 share holders.
The people don't matter, the product don't matter, doesn't matter,
rather English grammar doesn't matter, and the only thing that
(07:10):
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 going to all try and do now.
Speaker 2 (07:23):
Yeah, one of the worst ideas in the history of
the world, and it just took off. So, yeah, Friedman,
that was step one. Step two was laid well. Step
two through ten, I would say, is was laid out
by a guy named Michael Jensen, who was an economist
with Harvard Business School in the seventies and eighties, and
he basically said, traditional companies that have you know, you've
(07:46):
got a CEO, and you have employees, and the CEO
has paid a certain salary a year and everything's great.
That doesn't work because the CEO, the person making the
decisions and what moves the company makes, they might be
in conflict with the share they might be spending a
bunch of money, and they don't care. They don't care
about the shareholders, the investors, who, again, as Melton Friedman said,
(08:07):
the entire purpose of the corporation is to enrich the shareholders.
So how can you bring a CEO in line? And
you said a couple of things. One, you can pay
them 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,
(08:29):
that's number one. The number two if you buy a
company using that leverage 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 to get lean
and mean, emphasis on mean, so that it can keep
afloat and pay off of those debts. So like, immediately
(08:52):
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.
Speaker 1 (09:03):
Yeah, and you know we're going to talk about the
different ways this happens. Obviously, firing people is a big
way 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
(09:24):
the company not function as well, it doesn't matter. You know,
sometimes there is fat that can be trim. 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
(09:46):
Street with the great Michael Douglass, I just watched that
again for the billion time recently. Really, 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
arlichenes father's airline just for the sole purpose of breaking
it apart and you know, driving it into the ground
(10:06):
to get rich.
Speaker 2 (10:07):
Right.
Speaker 1 (10:08):
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. Yeah, that buys the
land that the company sits on and then leases it
back to that company, sometimes against their best interest at
like higher rental rates.
Speaker 2 (10:28):
Yeah, I'll give you an example. We'll talk a little
more about Red Lobster. But they got they got taken
over in a leveraged buyout, and the company did exactly that.
They sold off all of their assets, all of their
restaurants to 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
(10:50):
sixteen million dollars a year for just a one percent
property tax on its locations, all of them sixteen million dollars.
Now their leases amount to one hundred and fifty eight
million dollars. Right. So these are just terrible, terrible business decisions.
And the reason why is because anytime a big influx
(11:10):
of cash comes in, it gets divided up 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 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
(11:33):
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
(11:55):
it's bad, it's so bad that it almost it almost
makes it seem like there shouldn't be this type of
business model.
Speaker 1 (12:04):
Yeah, for sure. Sometimes it's a real quick thing, like
in the case of Wall Street, like there was no
long term plan for Gordon Gecko and Blue Star Air.
It was like a house flip. 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
(12:24):
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.
Speaker 2 (12:39):
Yeah, And like you said, one of the big things
that happens is including layoffs, including just sucking 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
(12:59):
into it, because the people who bought the company don't
really care about the company or what it does.
Speaker 1 (13:06):
Good time for a break, I think so, and.
Speaker 2 (13:08):
Then we'll come back and talk some more about the
history of this whole thing. Huh.
Speaker 1 (13:11):
All right, I need to go get some palmade and
grease my hairback real quick. I'll be right back.
Speaker 2 (13:15):
Okay, definitely should I'm not large childs of each my ski.
Speaker 1 (13:51):
I should mention real quick that I I love Wall
Street so much that I was watching it again and
I was like, I wonder if there's a t that
says Anacott Steel. It's just one of the companies that they,
you know, one of the fictional companies at Oliver Stone
wrote it to the movie, and sure enough there's an
Anacot Steel T shirt. I bought it. I love it.
(14:13):
I hate the message of the movie and Gordon Geko.
I don't think he's the hero or anything like that, right,
But it's just a movie I've always loved and now
I got my Annacott Steel shirt. It just kind of
as a movie crusher type. So when people see me
that know that movie, they'll be like, oh Wall Street.
Speaker 2 (14:27):
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 Latin sweater. I love that thing.
That was one of my more beloved pieces of clothing.
Speaker 1 (14:39):
You know, I met the guy who owns that sweater.
Oh really, Dan Johnson No Lee Ownkrik I think is
his name. He's a big animation guy. I think he
did Coco and a bunch of other big, oh cool
animated films, and he was such a fan of the
Shining that he bought that real sweater at auction.
Speaker 2 (14:58):
Good for him. I hope he's never tried it on
because that's a tiny sweater.
Speaker 1 (15:02):
Well you wouldn't a big guy.
Speaker 2 (15:04):
It doesn't matter. That is still a very Danny was
not a he was a tiny guy.
Speaker 1 (15:09):
Yeah. Should we talk about history?
Speaker 2 (15:12):
Yeah? I think we should chuck. So this whole thing
is kind of newish, right, I Mean we usually associated
with the eighties, and it's pretty accurate, but it goes
back a little further. It's just the eighties or when
it really took shape and got off the rails the
first time.
Speaker 1 (15:27):
Yeah, for sure, the first leverage buyouts that came after
World War Two. There were some dudes from Bear Stearns,
Jerome Cohlberg, 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
(15:47):
you know, family owned businesses. This is in the nineteen
sixties and in the mid seventies they formed Colberg, Cravis
and Roberts the KKR business and their first big success
story for them is making a ton of money doing
One of these was a machine tooling company or a
tool company rather called is that Holdale Whodale? Whodale maybe
(16:09):
who dat hou Dai La Industries. This was in nineteen
seventy nine. They bought it for three hundred and eighty
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
(16:30):
to pay a double what the previous CEO got and
we're going to start raking in these fees as the
fund manager.
Speaker 2 (16:37):
Yeah, and so Wodale, which at the time of this
purchase was doing really well. It had been around since
I think the nineteen 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
(16:59):
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 why you can't even say back, just giving it
away to investors, or keeping up with their interest payments
on these loans that they eventually just sink and end
(17:22):
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.
Speaker 1 (17:30):
Yeah, for sure. About ten 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.
Speaker 2 (17:42):
I haven't, have you, No, I've always wanted to.
Speaker 1 (17:46):
Hey, it's out there, buddy.
Speaker 2 (17:47):
Okay, that's not a Tom Wolf book. I'm thinking of
a man in full, aren't I?
Speaker 1 (17:53):
Yeah, I think so. I can't remember who wrote the book,
but the book was called Barbarians at the Gate colon
the Fall of RGR Nibisco because it's about RJR Nibisco
and there is no more RJR Nibisco. There's RJR and
there's Nibisco. But that company ceased to exist after that
leverage buyout.
Speaker 2 (18:11):
Yeah, and I think two thousand 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 nineteen eighty nine, I think you
said two thousand 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
(18:33):
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 fifty times richer than they were and
do the whole thing again. Right, So, they got a
bad name in the eighties, and by the time the
(18:55):
nineties 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, goldn Sachs for a little while. And
then additionally some other firms whose names we know because
(19:15):
this stuff is just so nuts that it makes the news.
Bain Capital was founded in the eighties, Blackstone founded in
the eighties. Carlisle Group founded in the eighties. So the
eighties were a big deal. The nineties everybody kind of
kept a low profile, and then the two thousands of
booms started to come back again.
Speaker 1 (19:33):
Yeah, big boom, you know everything crash. We've done a
couple of episodes kind of around the two thousand and
eight crash. But a lot of private 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 some
(19:57):
more you know, guardrails and reporting requirement it's on this
private equity business, because that's a term that kind of
just came around in the twenty first century. Even though
it was happening. Private equity as a term came around,
I think in the early two thousands, and even though
they put some more reporting requirements around, it still way
less transparent and way fewer requirements than you know, the
(20:21):
publicly traded companies and the stock market and banks and
stuff like that. Right, But there's been a real boom
since that time. The number of companies publicly traded has
dropped about half since nineteen ninety six where it was
at its peak, and a couple of years ago, in
twenty twenty three, there were five times as many private
equity backfirms as publicly held companies.
Speaker 2 (20:42):
Yeah, because it's you don't have to worry about the
government meddling with your stuff. It's crazy. So some of
the some of these deals make headlines, and usually when
it makes headlines is 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
(21:04):
big ones that I remember was Toys r US.
Speaker 1 (21:08):
Yeah, one of this.
Speaker 2 (21:09):
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, I mean, even more
(21:31):
importantly than that loss of nostalgia is that thirty thousand
people lost their jobs because of a private equity takeover
Toys Rus that eventually ran it into the ground.
Speaker 1 (21:42):
Yeah. I mean it makes some of those earlier ones
where you know, on Thy twelve hundred people lose their
job seemed quaint.
Speaker 2 (21:48):
Yeah, thirty thousand people just sorry, you don't have a
job anymore.
Speaker 1 (21:53):
Yeah, there's this guy. I mean, we got to talk
about Seers because that's another one iconic brand, iconic brick
and order store. I would say there's some nostalgia tied
up in Sears for sure.
Speaker 2 (22:05):
Sure.
Speaker 1 (22:05):
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 two
thousand and two, and Ed Lampert comes in he was
a goldman sax guy and he I think former by
this time. But he buys up a bunch of the
debt from Kmart they come out of bankruptcy, and then
he has a hedge fund e SL Investments, and they
(22:28):
were the largest shareholder, and so thus he becomes the
chairman and can then run the show.
Speaker 2 (22:33):
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
(22:56):
very good. Sears was doing amazing tens and tens of
billionions 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,
he's this is his firm, so he is directly taking
hundreds of millions of dollars that two percent of the
(23:18):
assets every year, plus that twenty percent 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
(23:38):
about it. One of the big things they did was
a stock buy back. 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
supplying demand, they're they're worth less than if they're scarcer.
So you go as the company and buy those shares back.
And because there's fewer shares on the market, share price
(24:00):
can increase. Right, So if you're holding shares in the company,
your share price goes up and you make the company
buy the stocksback. 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 six billion dollars and bought stockback to raise
(24:23):
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, and so the company
just almost immediately started to just falter.
Speaker 1 (24:41):
Yeah, so things start faltering. This is around two thousand
and seven or so, and ESL, which again was at
Lampert's company, They and some other firms then loan money
to themselves almost two point six billion dollars and so
they're now also collecting interests and fees on that. So
(25:03):
about four hundred million in interests in 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 different divisions. ESL is buying shares in
most of those smaller divisions as well once they break
it apart. And then in twenty fifteen, Ed Lampert founded
(25:27):
a real estate company called Sarritage Growth Properties. They bought
two hundred and sixty six seers and Kmart buildings and
then rented them back to themselves.
Speaker 2 (25:38):
It's like robbing Peter to pay Peter.
Speaker 1 (25:40):
Yeah, it's just sounds like such an obvious policing.
Speaker 2 (25:45):
It is and grift 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. So obviously, after a fairly short
time seven years, this company, Seers Holding, filed for bankruptcy.
And again, bankruptcy doesn't mean like, oh that's it amount
(26:08):
of money. It means like, hey, I can't pay my
debts back. So I'm going to negotiate with all 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
(26:32):
the first thing you do to slash costs of fear
corporators fire people. They closed stores, chuck. They had thirty
five hundred Seers and Kmart stores when those two companies merged. Okay,
by seven years later they were down to seven hundred,
and today there's eight eight eighty eight, eight hundred zero eight.
Speaker 1 (26:58):
Yeah, there's eight of those left. It was, you know, again,
tens of thousands of jobs and eleven billion dollars in
unpaid debt to creditors. And Ed Lampert ends up making
about one point for personally personing about one point four
billion dollars from managing that fund.
Speaker 2 (27:17):
Two things I saw. The Wall Street Journal estimated that
under Lampert's watch of this, I think seven years, two
hundred thousand people lost their jobs from Sears and k martin. Yeah,
that's got to be a record, man. And then also
he was quoted as saying like, yeah, I'm really bummed
about this whole thing. It was a real loss. It
(27:40):
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.
Speaker 1 (27:50):
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 twenty fourteen, Golden Gate Cap Capital San Francisco
company bought Red Lobster two point one billion dollars. They
said it was quote an exceptionally strong brand with an
unparalleled market position, and in order to pay for that deal,
(28:11):
they sold, As you mentioned, they sold the real estate
of five hundred restaurants for about one point five 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.
Speaker 2 (28:27):
Yeah, and again that one point five billion. I'm 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.
Speaker 1 (28:41):
Oh, you and I have dined at Red Lobster before
one time. It's probably the only time I've been there
in the past forty years. And you never, I don't think,
disclosed to meet that.
Speaker 2 (28:54):
Did I not.
Speaker 1 (28:56):
No, All you talked about was how much you love
those what are they? Little cheesy biscuits, the cheddar bay bisis.
Speaker 2 (29:00):
That is why I worked at Red Lobster so it
could be closer to them. It was only for a
couple of weeks, so I was like, I gotta stop
eating these.
Speaker 1 (29:07):
I didn't know you ever waited tables at all.
Speaker 2 (29:08):
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
(29:30):
you're like, you just you ruined our dining experience, are
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.
Speaker 1 (29:40):
Yeah, you and Emily. Emily was waited tables for a
very very short time for similar reasons.
Speaker 2 (29:45):
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 found.
Speaker 1 (29:53):
Yeah, I was pretty good at it.
Speaker 2 (29:54):
I believe that.
Speaker 1 (29:55):
You know. Also glad those days are behind me. Yeah,
I think my retirement job is going to be uh,
stadium worker. I want to like that before I want
to like sell beer at a base at Brays game.
Speaker 2 (30:07):
Let's hear what you got cold? Bea I ha cold,
that's pretty good. You gotta you gotta grow one of
those Walrus mustaches.
Speaker 1 (30:17):
Two for one and they're like, you can't do that,
you can't make deals.
Speaker 2 (30:20):
The one I always remember is popcorn, peanuts, cararalcorn hair.
Speaker 1 (30:24):
Is that it the price you got to finish it
up with?
Speaker 2 (30:26):
Here? Yeah, that's how you get people's attention. So oh yeah,
back to Red Lobster.
Speaker 1 (30:32):
Yeah, I can smell the cheesy biscuits.
Speaker 2 (30:34):
They're so good man, and they're ranch dressing is world
class as well. It's just unlike any other ranch. It's
really good. Oh all right, I'm glad that Red Lobster
are still around as far as I know, despite all
these different companies trying their best to run it into
the ground. COVID dip definitely didn't help. Yeah, twenty twenty hit,
Covid hit and Red Lobster, which was already This is
what I was talking about. When a company is saddled
(30:57):
with a bunch of debt and new lost, 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, Tie Union Group, stepped in and was like, hey,
we'll buy Red Lobster. We have a really good idea.
So this is their seafood supplier. They became the exclusive
(31:19):
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 twenty 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. And they lost like
(31:43):
eleven million dollars in just three months of trying that
because they grossly underestimated how much shrimp people would eat
if there was no bottom to it.
Speaker 1 (31:53):
Yeah. I mean, if you're talking to you know, medium
sized shrimp, I can eat, you know, if I'm really
trying thirty wow meal.
Speaker 2 (32:06):
Wow. That's a lot of shrimp, dude, not the huge ones.
Speaker 1 (32:09):
No, I got it's if it's endless and it's solved
for a very set rate. Uh. And I'm, you know,
maybe trying to impress my date.
Speaker 2 (32:18):
Right, surely not fried though, right, you're just talking like
peel and.
Speaker 1 (32:23):
E oh, that's more like forty.
Speaker 2 (32:25):
Oh my god, you could eat thirty fried.
Speaker 1 (32:28):
I probably I probably could not eat forty eight peel
and eat. I don't know if I could eat forty
I mean, if I'm not eating cheesy biscuits and French
fries and cole salaw and so you're being serious, then
I could probably eat thirty fried shrimp for sure.
Speaker 2 (32:40):
Okay, I'm going to be your date for that one.
Speaker 1 (32:43):
Not well, I hope to impress you.
Speaker 2 (32:46):
Oh what else? Oh, I've got one. One of the
things 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.
(33:07):
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 fifteen dollars federal minimum wage taken out of
the stimulus package, which is exactly what Rourke Capital managed
(33:30):
to do several years back.
Speaker 1 (33:32):
That's right. And if you're wondering, is that named after
you know, mister Rourke from Fantasy Island. No, it's named
like seriously named for Howard Rourke ein rand Hero. And
do with that what you.
Speaker 2 (33:47):
Will yeah, from the fountain.
Speaker 1 (33:49):
That's right, all right. I guess we could talk a
little bit about newspapers and physical print media because I mean,
they have been in trouble anyway. So not all of
the losses of the print media industry are due to
private equity equity firms, but private equity ownership of newspapers
rose from five percent in twentyd and one to twenty
(34:11):
three percent in twenty nineteen. 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 and editorial staff, like
(34:32):
massive cuts and staff, which means cuts in things like
local government. And they've shown that results in a decline
and participation in local elections.
Speaker 2 (34:40):
Oh yeah, 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 going
to do a whole episode on that right after this. Okay, Great,
we'll make it up as we go along. Great is
another one. They were sitting pretty I think they were
(35:03):
worth almost six billion dollars in twenty seventeen, got bought
out and by twenty twenty three they were worth three
hundred and fifty million dollars 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.
Speaker 1 (35:25):
For sure, I think we should take a second break, okay,
and we'll be back right after this.
Speaker 2 (35:54):
Definitely should.
Speaker 1 (36:00):
Childs of each.
Speaker 2 (36:02):
Ysk kid 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 twenty first century in
the United States too.
Speaker 1 (36:22):
Yeah, there's in twenty twenty four a loan by one
count at least there were one hundred and sixty six
leverage buyouts in healthcare just in that one year, and
seven of the eight biggest healthcare bankruptcies that year were
from companies owned by private equity firms or hospitals in
healthcare organizations right.
Speaker 2 (36:43):
The private equity firm dental practices rose drew dramatically from
the teens to the twenty twenties, and that results in
things like companies push I read an article about the
Dental Express in Ohio telling a mom that her three
year old needed seven in root canals.
Speaker 1 (37:01):
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 twenty five percent rise in hospital
acquired complications like something you got while you were there.
Speaker 2 (37:19):
Right, And I think thirty eight percent 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
(37:41):
eleven percent just because pe'es 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.
Speaker 1 (37:57):
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.
Speaker 2 (38:14):
Yeah, and housing too is another big deal. I think Blackstone,
which we mentioned, was founded back in the eighties. They're
known as the United States's largest landlord. They owned three
hundred thousand units of rental housing in the US as
of twenty twenty three. And as you would expect, when
private equity comes along, rents go up. The maintenance people
(38:35):
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 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 down hill. But that's how
(38:58):
it happens a lot.
Speaker 1 (38:59):
Yeah, I mean, sometimes it does happen for the better.
Like one great example is Hilton, the hotel chain. There
was a leveraged buy out from Blackstone in two thousand
and seven of Hilton and the great procession you know, Hit.
I guess it was like the next year in two
thousand and eight, and obviously it's going to really affect
the tourism industry. But they brought in a CEO from Blackstone,
(39:24):
a guy named Christopher Nesstta, 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 shuddering things like actually investing, reinvesting in the company, right,
(39:45):
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
twenty thirteen and sold out of their stake in twenty eighteen.
Made a ton of profit fourteen billion dollars over eleven years.
But the company itself, Hilton, was doing great and continues
(40:07):
to do great.
Speaker 2 (40:08):
Yeah, they doubled the number of rooms today that they
had in two thousand and seven 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 three G Capital,
and they just they just made some really good moves
in a lot of voice. Again, this is from an
(40:30):
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, three G made something
like twenty eight billion dollars over fourteen years and it
only invested one billion, So that's a pretty good return
on investment.
Speaker 1 (40:48):
Private equity coming in.
Speaker 2 (40:53):
Why'd you do that?
Speaker 1 (40:54):
Oh?
Speaker 2 (40:55):
Just because hate you got me.
Speaker 1 (40:59):
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 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
(41:21):
mentioned earlier that like pension funds like four to one
k's or where a lot of this money comes from.
And like, do you have a choice whether or not
the four one k that you invest in ends up
being a part of this thing.
Speaker 2 (41:34):
Yeah, I think you can also invest your four to
one k, 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.
Speaker 1 (41:53):
Again, well, eighty nine percent of public pension funds have
some of their money in private equity. I think thirteen
percent average of thirteen percent of their assets is the average,
Sometimes more than twenty five percent. But that's that's almost
ninety percent of public mention funds. It's a lot.
Speaker 2 (42:10):
Yeah, and then I guess one of the other big things.
So 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 make made that one
point four billion dollars by running a huge venerated company
into the ground. He paid at most twenty percent on
(42:32):
those profits, even though it was personal income for him.
He didn't pay the personal income tax of like thirty
seven percent. Instead, he paid twenty percent in capital gains
tax because the fis that he charged are treated like
gains from an investment rather than personal income, even though
anyone would call those fees personal income. So not only
(42:56):
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.
Speaker 1 (43:18):
Yeah. This is the kind of thing where in the
movie version where this is firstborn as an idea, yeah,
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.
Speaker 2 (43:34):
Right exactly. It just keeps going like.
Speaker 1 (43:36):
That, yeah, and they're like, no, no, no, but what
about this, No, no, that's the best part yep. So
there's a lot of best parts.
Speaker 2 (43:42):
And one of the guys finally puts his fork down
and stands up, hits the table and goes Bam.
Speaker 1 (43:47):
That's right. But you were talking about the carried interest loophole, right,
that's what it's called.
Speaker 2 (43:51):
Yeah, Or your personal income is magically treated as returns
on an investment in text at twenty percent rather than
thirty seven per or whatever. So if you make one
hundred million dollars, you pay seventeen million dollars less taxes
on that one hundred million dollars, and at that point,
really who cares anyway? Right, Yeah, you would think, so
(44:14):
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.
Speaker 1 (44:22):
Yeah, I mean it's not the sole cause of the
housing crisis, but it's a major player.
Speaker 2 (44:28):
Yeah, and all the other crises that we're facing too,
economically and socially and politically and probably religiously too. If
I gave it some.
Speaker 1 (44:38):
Real thought, yeah, personally.
Speaker 2 (44:40):
Yep, since Chuck said personally, I was waiting for it.
It got you there, because now we just unlocked listener mail.
Speaker 1 (44:51):
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 gets to
pay for dinner. It reminded me of my grandmother, Sheila.
She always likes to pay for 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
(45:13):
that's a good trick. I've done that before. Yeah, that
wasn't her best trick, though, as even Josh mentioned that
very trick. The best part did you mention that?
Speaker 2 (45:23):
Yeah? I mentioned that. I remember that. I've done that
for sure.
Speaker 1 (45:26):
Yeah, Yeah, that's what you gotta do. The best was
when part of the family was in upstate New York
for a triathlon. Sheila wasn't even there. She lives in Massachusetts.
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
(45:48):
moment they all threw up their hands crying.
Speaker 2 (45:50):
Sheila all the way over in Massachusetts. Sheila went bam
that's right.
Speaker 1 (45:57):
My aunt had made the mistake of telling Sheila on
the phone that where we were going to have dinner,
and our grandmother called the restaurant and gave her the
credit card number.
Speaker 2 (46:04):
Beautiful.
Speaker 1 (46:06):
Thanks for all the pods. That is from James. James.
That's wonderful. Sheila sounds great. I just hope she tips well.
Speaker 2 (46:12):
Oh good point, Chuck, nicely done. If you want to
be like James. Thank you. By the way, James, that
was a great email. You can send us an email too.
Send it off to Stuff Podcasts at iHeartRadio dot com.
Speaker 1 (46:26):
Stuff you Should Know is a production of iHeartRadio. For
more podcasts my heart Radio, visit the iHeartRadio app, Apple Podcasts,
or wherever you listen to your favorite shows.
Welcome to Stuff You Should Know, a production of iHeartRadio.
Speaker 2 (00:11):
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.
Speaker 1 (00:21):
Oh wow, fancy.
Speaker 2 (00:23):
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 caller,
(00:43):
look it in the eye, and say you will not
be boring today, and then do all that. All right, Okay,
we can do it, Chuck. We're professionals.
Speaker 1 (00:53):
I'm glad you feel good about it.
Speaker 2 (00:55):
I do, and I'm going to make you feel good
about it too, because while we're talking about today is
no mere typical economics. 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. We'll explain
all about it. The reason it can be hard to
wrap your head around is because it's so insanely unfair
(01:18):
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.
Speaker 1 (01:27):
Yeah, I would agree, it's nuts.
Speaker 2 (01:30):
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.
That kind of open it up a little more, and
private equity goes around and essentially either buys huge controlling
(01:53):
interests in companies or just buys the company's outright, trims
them down, makes them lean, mean and efficient, and if
ideally turns them around for a healthy profit, walks away
does it again. Everybody who invested gets even richer than
they already were. And that's the basics, the very most
basic definition of private equity.
Speaker 1 (02:15):
Yeah, it's something that has become much more popular in
the past, you know, twenty ish years, but really kind
of started in the seventies, 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.
Speaker 2 (02:38):
Yeah, Yeah, they've actually gone to great links 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 or
walk along, open up a brokerage account, start buying stocks
(02:58):
and bonds. I 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 register as an
accredited investor, which says that you either know what you're
(03:20):
doing so much 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 invest in
private equity, and usually they're what institutional investors, right, like
huge massive funds or college endowments or something.
Speaker 1 (03:42):
Yeah, and the people who really come out on top
are the people that manage these If you're a managing
partner there's a formula known as two and twenty where
the company that you're managing that you have taken over,
they pay you two percent of the total assets of
that company plus twenty percent of the profits above whatever
(04:03):
threshold that you agree on, I guess. 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, maybe to yourself and then renting
it back to that same company at a higher rate.
So yeah, we'll dig into all that. But they're the
people that are really getting rich are the people that
(04:25):
are investing in these but really managing these.
Speaker 2 (04:29):
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,
(04:52):
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.
Speaker 1 (05:10):
Yeah, and they generally do this to private companies. Sometimes
it'll be a controlling interest in a much larger publicly
traded company, but you know, generally we're talking about private
companies here, and you know, 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 leverage buyout,
(05:31):
in which the money to buy this company comes from
a huge loan that that company is also then responsible for.
So it's it's really whoever came I mean, I guess
we'll get to who basically came up with this stuff,
But it's a sort of evil financial genius on a
(05:55):
level that is kind of hard to comprehend that it
was ever allowed to happen.
Speaker 2 (05:59):
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 in 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
(06:22):
you could buy it. That's the best that I can
come up with.
Speaker 1 (06:25):
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 employee more than thirteen million people
and they account for about two trillion of which is
about seven percent of the GDP. And like I said,
it all started out in the seventies with a guy
named Milton Friedman from the University of Chicago, who was
(06:49):
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 share holders.
The people don't matter, the product don't matter, doesn't matter,
rather English grammar doesn't matter, and the only thing that
(07:10):
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 going to all try and do now.
Speaker 2 (07:23):
Yeah, one of the worst ideas in the history of
the world, and it just took off. So, yeah, Friedman,
that was step one. Step two was laid well. Step
two through ten, I would say, is was laid out
by a guy named Michael Jensen, who was an economist
with Harvard Business School in the seventies and eighties, and
he basically said, traditional companies that have you know, you've
(07:46):
got a CEO, and you have employees, and the CEO
has paid a certain salary a year and everything's great.
That doesn't work because the CEO, the person making the
decisions and what moves the company makes, they might be
in conflict with the share they might be spending a
bunch of money, and they don't care. They don't care
about the shareholders, the investors, who, again, as Melton Friedman said,
(08:07):
the entire purpose of the corporation is to enrich the shareholders.
So how can you bring a CEO in line? And
you said a couple of things. One, you can pay
them 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,
(08:29):
that's number one. The number two if you buy a
company using that leverage 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 to get lean
and mean, emphasis on mean, so that it can keep
afloat and pay off of those debts. So like, immediately
(08:52):
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.
Speaker 1 (09:03):
Yeah, and you know we're going to talk about the
different ways this happens. Obviously, firing people is a big
way 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
(09:24):
the company not function as well, it doesn't matter. You know,
sometimes there is fat that can be trim. 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
(09:46):
Street with the great Michael Douglass, I just watched that
again for the billion time recently. Really, 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
arlichenes father's airline just for the sole purpose of breaking
it apart and you know, driving it into the ground
(10:06):
to get rich.
Speaker 2 (10:07):
Right.
Speaker 1 (10:08):
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. Yeah, that buys the
land that the company sits on and then leases it
back to that company, sometimes against their best interest at
like higher rental rates.
Speaker 2 (10:28):
Yeah, I'll give you an example. We'll talk a little
more about Red Lobster. But they got they got taken
over in a leveraged buyout, and the company did exactly that.
They sold off all of their assets, all of their
restaurants to 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
(10:50):
sixteen million dollars a year for just a one percent
property tax on its locations, all of them sixteen million dollars.
Now their leases amount to one hundred and fifty eight
million dollars. Right. So these are just terrible, terrible business decisions.
And the reason why is because anytime a big influx
(11:10):
of cash comes in, it gets divided up 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 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
(11:33):
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
(11:55):
it's bad, it's so bad that it almost it almost
makes it seem like there shouldn't be this type of
business model.
Speaker 1 (12:04):
Yeah, for sure. Sometimes it's a real quick thing, like
in the case of Wall Street, like there was no
long term plan for Gordon Gecko and Blue Star Air.
It was like a house flip. 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
(12:24):
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.
Speaker 2 (12:39):
Yeah, And like you said, one of the big things
that happens is including layoffs, including just sucking 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
(12:59):
into it, because the people who bought the company don't
really care about the company or what it does.
Speaker 1 (13:06):
Good time for a break, I think so, and.
Speaker 2 (13:08):
Then we'll come back and talk some more about the
history of this whole thing. Huh.
Speaker 1 (13:11):
All right, I need to go get some palmade and
grease my hairback real quick. I'll be right back.
Speaker 2 (13:15):
Okay, definitely should I'm not large childs of each my ski.
Speaker 1 (13:51):
I should mention real quick that I I love Wall
Street so much that I was watching it again and
I was like, I wonder if there's a t that
says Anacott Steel. It's just one of the companies that they,
you know, one of the fictional companies at Oliver Stone
wrote it to the movie, and sure enough there's an
Anacot Steel T shirt. I bought it. I love it.
(14:13):
I hate the message of the movie and Gordon Geko.
I don't think he's the hero or anything like that, right,
But it's just a movie I've always loved and now
I got my Annacott Steel shirt. It just kind of
as a movie crusher type. So when people see me
that know that movie, they'll be like, oh Wall Street.
Speaker 2 (14:27):
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 Latin sweater. I love that thing.
That was one of my more beloved pieces of clothing.
Speaker 1 (14:39):
You know, I met the guy who owns that sweater.
Oh really, Dan Johnson No Lee Ownkrik I think is
his name. He's a big animation guy. I think he
did Coco and a bunch of other big, oh cool
animated films, and he was such a fan of the
Shining that he bought that real sweater at auction.
Speaker 2 (14:58):
Good for him. I hope he's never tried it on
because that's a tiny sweater.
Speaker 1 (15:02):
Well you wouldn't a big guy.
Speaker 2 (15:04):
It doesn't matter. That is still a very Danny was
not a he was a tiny guy.
Speaker 1 (15:09):
Yeah. Should we talk about history?
Speaker 2 (15:12):
Yeah? I think we should chuck. So this whole thing
is kind of newish, right, I Mean we usually associated
with the eighties, and it's pretty accurate, but it goes
back a little further. It's just the eighties or when
it really took shape and got off the rails the
first time.
Speaker 1 (15:27):
Yeah, for sure, the first leverage buyouts that came after
World War Two. There were some dudes from Bear Stearns,
Jerome Cohlberg, 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
(15:47):
you know, family owned businesses. This is in the nineteen
sixties and in the mid seventies they formed Colberg, Cravis
and Roberts the KKR business and their first big success
story for them is making a ton of money doing
One of these was a machine tooling company or a
tool company rather called is that Holdale Whodale? Whodale maybe
(16:09):
who dat hou Dai La Industries. This was in nineteen
seventy nine. They bought it for three hundred and eighty
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
(16:30):
to pay a double what the previous CEO got and
we're going to start raking in these fees as the
fund manager.
Speaker 2 (16:37):
Yeah, and so Wodale, which at the time of this
purchase was doing really well. It had been around since
I think the nineteen 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
(16:59):
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 why you can't even say back, just giving it
away to investors, or keeping up with their interest payments
on these loans that they eventually just sink and end
(17:22):
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.
Speaker 1 (17:30):
Yeah, for sure. About ten 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.
Speaker 2 (17:42):
I haven't, have you, No, I've always wanted to.
Speaker 1 (17:46):
Hey, it's out there, buddy.
Speaker 2 (17:47):
Okay, that's not a Tom Wolf book. I'm thinking of
a man in full, aren't I?
Speaker 1 (17:53):
Yeah, I think so. I can't remember who wrote the book,
but the book was called Barbarians at the Gate colon
the Fall of RGR Nibisco because it's about RJR Nibisco
and there is no more RJR Nibisco. There's RJR and
there's Nibisco. But that company ceased to exist after that
leverage buyout.
Speaker 2 (18:11):
Yeah, and I think two thousand 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 nineteen eighty nine, I think you
said two thousand 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
(18:33):
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 fifty times richer than they were and
do the whole thing again. Right, So, they got a
bad name in the eighties, and by the time the
(18:55):
nineties 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, goldn Sachs for a little while. And
then additionally some other firms whose names we know because
(19:15):
this stuff is just so nuts that it makes the news.
Bain Capital was founded in the eighties, Blackstone founded in
the eighties. Carlisle Group founded in the eighties. So the
eighties were a big deal. The nineties everybody kind of
kept a low profile, and then the two thousands of
booms started to come back again.
Speaker 1 (19:33):
Yeah, big boom, you know everything crash. We've done a
couple of episodes kind of around the two thousand and
eight crash. But a lot of private 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 some
(19:57):
more you know, guardrails and reporting requirement it's on this
private equity business, because that's a term that kind of
just came around in the twenty first century. Even though
it was happening. Private equity as a term came around,
I think in the early two thousands, and even though
they put some more reporting requirements around, it still way
less transparent and way fewer requirements than you know, the
(20:21):
publicly traded companies and the stock market and banks and
stuff like that. Right, But there's been a real boom
since that time. The number of companies publicly traded has
dropped about half since nineteen ninety six where it was
at its peak, and a couple of years ago, in
twenty twenty three, there were five times as many private
equity backfirms as publicly held companies.
Speaker 2 (20:42):
Yeah, because it's you don't have to worry about the
government meddling with your stuff. It's crazy. So some of
the some of these deals make headlines, and usually when
it makes headlines is 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
(21:04):
big ones that I remember was Toys r US.
Speaker 1 (21:08):
Yeah, one of this.
Speaker 2 (21:09):
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, I mean, even more
(21:31):
importantly than that loss of nostalgia is that thirty thousand
people lost their jobs because of a private equity takeover
Toys Rus that eventually ran it into the ground.
Speaker 1 (21:42):
Yeah. I mean it makes some of those earlier ones
where you know, on Thy twelve hundred people lose their
job seemed quaint.
Speaker 2 (21:48):
Yeah, thirty thousand people just sorry, you don't have a
job anymore.
Speaker 1 (21:53):
Yeah, there's this guy. I mean, we got to talk
about Seers because that's another one iconic brand, iconic brick
and order store. I would say there's some nostalgia tied
up in Sears for sure.
Speaker 2 (22:05):
Sure.
Speaker 1 (22:05):
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 two
thousand and two, and Ed Lampert comes in he was
a goldman sax guy and he I think former by
this time. But he buys up a bunch of the
debt from Kmart they come out of bankruptcy, and then
he has a hedge fund e SL Investments, and they
(22:28):
were the largest shareholder, and so thus he becomes the
chairman and can then run the show.
Speaker 2 (22:33):
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
(22:56):
very good. Sears was doing amazing tens and tens of
billionions 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,
he's this is his firm, so he is directly taking
hundreds of millions of dollars that two percent of the
(23:18):
assets every year, plus that twenty percent 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
(23:38):
about it. One of the big things they did was
a stock buy back. 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
supplying demand, they're they're worth less than if they're scarcer.
So you go as the company and buy those shares back.
And because there's fewer shares on the market, share price
(24:00):
can increase. Right, So if you're holding shares in the company,
your share price goes up and you make the company
buy the stocksback. 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 six billion dollars and bought stockback to raise
(24:23):
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, and so the company
just almost immediately started to just falter.
Speaker 1 (24:41):
Yeah, so things start faltering. This is around two thousand
and seven or so, and ESL, which again was at
Lampert's company, They and some other firms then loan money
to themselves almost two point six billion dollars and so
they're now also collecting interests and fees on that. So
(25:03):
about four hundred million in interests in 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 different divisions. ESL is buying shares in
most of those smaller divisions as well once they break
it apart. And then in twenty fifteen, Ed Lampert founded
(25:27):
a real estate company called Sarritage Growth Properties. They bought
two hundred and sixty six seers and Kmart buildings and
then rented them back to themselves.
Speaker 2 (25:38):
It's like robbing Peter to pay Peter.
Speaker 1 (25:40):
Yeah, it's just sounds like such an obvious policing.
Speaker 2 (25:45):
It is and grift 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. So obviously, after a fairly short
time seven years, this company, Seers Holding, filed for bankruptcy.
And again, bankruptcy doesn't mean like, oh that's it amount
(26:08):
of money. It means like, hey, I can't pay my
debts back. So I'm going to negotiate with all 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
(26:32):
the first thing you do to slash costs of fear
corporators fire people. They closed stores, chuck. They had thirty
five hundred Seers and Kmart stores when those two companies merged. Okay,
by seven years later they were down to seven hundred,
and today there's eight eight eighty eight, eight hundred zero eight.
Speaker 1 (26:58):
Yeah, there's eight of those left. It was, you know, again,
tens of thousands of jobs and eleven billion dollars in
unpaid debt to creditors. And Ed Lampert ends up making
about one point for personally personing about one point four
billion dollars from managing that fund.
Speaker 2 (27:17):
Two things I saw. The Wall Street Journal estimated that
under Lampert's watch of this, I think seven years, two
hundred thousand people lost their jobs from Sears and k martin. Yeah,
that's got to be a record, man. And then also
he was quoted as saying like, yeah, I'm really bummed
about this whole thing. It was a real loss. It
(27:40):
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.
Speaker 1 (27:50):
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 twenty fourteen, Golden Gate Cap Capital San Francisco
company bought Red Lobster two point one billion dollars. They
said it was quote an exceptionally strong brand with an
unparalleled market position, and in order to pay for that deal,
(28:11):
they sold, As you mentioned, they sold the real estate
of five hundred restaurants for about one point five 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.
Speaker 2 (28:27):
Yeah, and again that one point five billion. I'm 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.
Speaker 1 (28:41):
Oh, you and I have dined at Red Lobster before
one time. It's probably the only time I've been there
in the past forty years. And you never, I don't think,
disclosed to meet that.
Speaker 2 (28:54):
Did I not.
Speaker 1 (28:56):
No, All you talked about was how much you love
those what are they? Little cheesy biscuits, the cheddar bay bisis.
Speaker 2 (29:00):
That is why I worked at Red Lobster so it
could be closer to them. It was only for a
couple of weeks, so I was like, I gotta stop
eating these.
Speaker 1 (29:07):
I didn't know you ever waited tables at all.
Speaker 2 (29:08):
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
(29:30):
you're like, you just you ruined our dining experience, are
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.
Speaker 1 (29:40):
Yeah, you and Emily. Emily was waited tables for a
very very short time for similar reasons.
Speaker 2 (29:45):
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 found.
Speaker 1 (29:53):
Yeah, I was pretty good at it.
Speaker 2 (29:54):
I believe that.
Speaker 1 (29:55):
You know. Also glad those days are behind me. Yeah,
I think my retirement job is going to be uh,
stadium worker. I want to like that before I want
to like sell beer at a base at Brays game.
Speaker 2 (30:07):
Let's hear what you got cold? Bea I ha cold,
that's pretty good. You gotta you gotta grow one of
those Walrus mustaches.
Speaker 1 (30:17):
Two for one and they're like, you can't do that,
you can't make deals.
Speaker 2 (30:20):
The one I always remember is popcorn, peanuts, cararalcorn hair.
Speaker 1 (30:24):
Is that it the price you got to finish it
up with?
Speaker 2 (30:26):
Here? Yeah, that's how you get people's attention. So oh yeah,
back to Red Lobster.
Speaker 1 (30:32):
Yeah, I can smell the cheesy biscuits.
Speaker 2 (30:34):
They're so good man, and they're ranch dressing is world
class as well. It's just unlike any other ranch. It's
really good. Oh all right, I'm glad that Red Lobster
are still around as far as I know, despite all
these different companies trying their best to run it into
the ground. COVID dip definitely didn't help. Yeah, twenty twenty hit,
Covid hit and Red Lobster, which was already This is
what I was talking about. When a company is saddled
(30:57):
with a bunch of debt and new lost, 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, Tie Union Group, stepped in and was like, hey,
we'll buy Red Lobster. We have a really good idea.
So this is their seafood supplier. They became the exclusive
(31:19):
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 twenty 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. And they lost like
(31:43):
eleven million dollars in just three months of trying that
because they grossly underestimated how much shrimp people would eat
if there was no bottom to it.
Speaker 1 (31:53):
Yeah. I mean, if you're talking to you know, medium
sized shrimp, I can eat, you know, if I'm really
trying thirty wow meal.
Speaker 2 (32:06):
Wow. That's a lot of shrimp, dude, not the huge ones.
Speaker 1 (32:09):
No, I got it's if it's endless and it's solved
for a very set rate. Uh. And I'm, you know,
maybe trying to impress my date.
Speaker 2 (32:18):
Right, surely not fried though, right, you're just talking like
peel and.
Speaker 1 (32:23):
E oh, that's more like forty.
Speaker 2 (32:25):
Oh my god, you could eat thirty fried.
Speaker 1 (32:28):
I probably I probably could not eat forty eight peel
and eat. I don't know if I could eat forty
I mean, if I'm not eating cheesy biscuits and French
fries and cole salaw and so you're being serious, then
I could probably eat thirty fried shrimp for sure.
Speaker 2 (32:40):
Okay, I'm going to be your date for that one.
Speaker 1 (32:43):
Not well, I hope to impress you.
Speaker 2 (32:46):
Oh what else? Oh, I've got one. One of the
things 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.
(33:07):
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 fifteen dollars federal minimum wage taken out of
the stimulus package, which is exactly what Rourke Capital managed
(33:30):
to do several years back.
Speaker 1 (33:32):
That's right. And if you're wondering, is that named after
you know, mister Rourke from Fantasy Island. No, it's named
like seriously named for Howard Rourke ein rand Hero. And
do with that what you.
Speaker 2 (33:47):
Will yeah, from the fountain.
Speaker 1 (33:49):
That's right, all right. I guess we could talk a
little bit about newspapers and physical print media because I mean,
they have been in trouble anyway. So not all of
the losses of the print media industry are due to
private equity equity firms, but private equity ownership of newspapers
rose from five percent in twentyd and one to twenty
(34:11):
three percent in twenty nineteen. 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 and editorial staff, like
(34:32):
massive cuts and staff, which means cuts in things like
local government. And they've shown that results in a decline
and participation in local elections.
Speaker 2 (34:40):
Oh yeah, 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 going
to do a whole episode on that right after this. Okay, Great,
we'll make it up as we go along. Great is
another one. They were sitting pretty I think they were
(35:03):
worth almost six billion dollars in twenty seventeen, got bought
out and by twenty twenty three they were worth three
hundred and fifty million dollars 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.
Speaker 1 (35:25):
For sure, I think we should take a second break, okay,
and we'll be back right after this.
Speaker 2 (35:54):
Definitely should.
Speaker 1 (36:00):
Childs of each.
Speaker 2 (36:02):
Ysk kid 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 twenty first century in
the United States too.
Speaker 1 (36:22):
Yeah, there's in twenty twenty four a loan by one
count at least there were one hundred and sixty six
leverage buyouts in healthcare just in that one year, and
seven of the eight biggest healthcare bankruptcies that year were
from companies owned by private equity firms or hospitals in
healthcare organizations right.
Speaker 2 (36:43):
The private equity firm dental practices rose drew dramatically from
the teens to the twenty twenties, and that results in
things like companies push I read an article about the
Dental Express in Ohio telling a mom that her three
year old needed seven in root canals.
Speaker 1 (37:01):
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 twenty five percent rise in hospital
acquired complications like something you got while you were there.
Speaker 2 (37:19):
Right, And I think thirty eight percent 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
(37:41):
eleven percent just because pe'es 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.
Speaker 1 (37:57):
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.
Speaker 2 (38:14):
Yeah, and housing too is another big deal. I think Blackstone,
which we mentioned, was founded back in the eighties. They're
known as the United States's largest landlord. They owned three
hundred thousand units of rental housing in the US as
of twenty twenty three. And as you would expect, when
private equity comes along, rents go up. The maintenance people
(38:35):
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 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 down hill. But that's how
(38:58):
it happens a lot.
Speaker 1 (38:59):
Yeah, I mean, sometimes it does happen for the better.
Like one great example is Hilton, the hotel chain. There
was a leveraged buy out from Blackstone in two thousand
and seven of Hilton and the great procession you know, Hit.
I guess it was like the next year in two
thousand and eight, and obviously it's going to really affect
the tourism industry. But they brought in a CEO from Blackstone,
(39:24):
a guy named Christopher Nesstta, 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 shuddering things like actually investing, reinvesting in the company, right,
(39:45):
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
twenty thirteen and sold out of their stake in twenty eighteen.
Made a ton of profit fourteen billion dollars over eleven years.
But the company itself, Hilton, was doing great and continues
(40:07):
to do great.
Speaker 2 (40:08):
Yeah, they doubled the number of rooms today that they
had in two thousand and seven 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 three G Capital,
and they just they just made some really good moves
in a lot of voice. Again, this is from an
(40:30):
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, three G made something
like twenty eight billion dollars over fourteen years and it
only invested one billion, So that's a pretty good return
on investment.
Speaker 1 (40:48):
Private equity coming in.
Speaker 2 (40:53):
Why'd you do that?
Speaker 1 (40:54):
Oh?
Speaker 2 (40:55):
Just because hate you got me.
Speaker 1 (40:59):
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 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
(41:21):
mentioned earlier that like pension funds like four to one
k's or where a lot of this money comes from.
And like, do you have a choice whether or not
the four one k that you invest in ends up
being a part of this thing.
Speaker 2 (41:34):
Yeah, I think you can also invest your four to
one k, 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.
Speaker 1 (41:53):
Again, well, eighty nine percent of public pension funds have
some of their money in private equity. I think thirteen
percent average of thirteen percent of their assets is the average,
Sometimes more than twenty five percent. But that's that's almost
ninety percent of public mention funds. It's a lot.
Speaker 2 (42:10):
Yeah, and then I guess one of the other big things.
So 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 make made that one
point four billion dollars by running a huge venerated company
into the ground. He paid at most twenty percent on
(42:32):
those profits, even though it was personal income for him.
He didn't pay the personal income tax of like thirty
seven percent. Instead, he paid twenty percent in capital gains
tax because the fis that he charged are treated like
gains from an investment rather than personal income, even though
anyone would call those fees personal income. So not only
(42:56):
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.
Speaker 1 (43:18):
Yeah. This is the kind of thing where in the
movie version where this is firstborn as an idea, yeah,
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.
Speaker 2 (43:34):
Right exactly. It just keeps going like.
Speaker 1 (43:36):
That, yeah, and they're like, no, no, no, but what
about this, No, no, that's the best part yep. So
there's a lot of best parts.
Speaker 2 (43:42):
And one of the guys finally puts his fork down
and stands up, hits the table and goes Bam.
Speaker 1 (43:47):
That's right. But you were talking about the carried interest loophole, right,
that's what it's called.
Speaker 2 (43:51):
Yeah, Or your personal income is magically treated as returns
on an investment in text at twenty percent rather than
thirty seven per or whatever. So if you make one
hundred million dollars, you pay seventeen million dollars less taxes
on that one hundred million dollars, and at that point,
really who cares anyway? Right, Yeah, you would think, so
(44:14):
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.
Speaker 1 (44:22):
Yeah, I mean it's not the sole cause of the
housing crisis, but it's a major player.
Speaker 2 (44:28):
Yeah, and all the other crises that we're facing too,
economically and socially and politically and probably religiously too. If
I gave it some.
Speaker 1 (44:38):
Real thought, yeah, personally.
Speaker 2 (44:40):
Yep, since Chuck said personally, I was waiting for it.
It got you there, because now we just unlocked listener mail.
Speaker 1 (44:51):
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 gets to
pay for dinner. It reminded me of my grandmother, Sheila.
She always likes to pay for 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
(45:13):
that's a good trick. I've done that before. Yeah, that
wasn't her best trick, though, as even Josh mentioned that
very trick. The best part did you mention that?
Speaker 2 (45:23):
Yeah? I mentioned that. I remember that. I've done that
for sure.
Speaker 1 (45:26):
Yeah, Yeah, that's what you gotta do. The best was
when part of the family was in upstate New York
for a triathlon. Sheila wasn't even there. She lives in Massachusetts.
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
(45:48):
moment they all threw up their hands crying.
Speaker 2 (45:50):
Sheila all the way over in Massachusetts. Sheila went bam
that's right.
Speaker 1 (45:57):
My aunt had made the mistake of telling Sheila on
the phone that where we were going to have dinner,
and our grandmother called the restaurant and gave her the
credit card number.
Speaker 2 (46:04):
Beautiful.
Speaker 1 (46:06):
Thanks for all the pods. That is from James. James.
That's wonderful. Sheila sounds great. I just hope she tips well.
Speaker 2 (46:12):
Oh good point, Chuck, nicely done. If you want to
be like James. Thank you. By the way, James, that
was a great email. You can send us an email too.
Send it off to Stuff Podcasts at iHeartRadio dot com.
Speaker 1 (46:26):
Stuff you Should Know is a production of iHeartRadio. For
more podcasts my heart Radio, visit the iHeartRadio app, Apple Podcasts,
or wherever you listen to your favorite shows.
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