Private Equity: Your Ears Will Bleed | STUFF YOU SHOULD KNOW

Welcome to Stuff You Should Know, a. production of iHeart Radio. 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. [Music]. >> Oh, wow. Fancy. >> 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 m of well, boredom. Shake it up. a little bit. >> Mhm. >> By the collar, 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. >> I'm glad you feel good about it. >> I do. And I'm going to make you feel. good about it, too. Um because what. we're talking about today is no mere.

typical economics. Um 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 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. >> Yeah, I would agree. >> It's nuts. So, private equity, I guess.

we should probably start out with a. little bit of a definition, Charles. It's um it's an alternative investment. vehicle. And essentially what it is is. it's a fund, a private fund. You have to. basically be in the club to even invest. in this. At least traditionally, they've. kind of opened it up a little more. And. private equity goes around and. essentially either buys huge controlling. interests in companies or just buys the. com the companies 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. >> Yeah, it's uh it's something that's. become much more popular in the past, you know, 20ish years, but really kind. of started in the 70s as we'll see. >> And uh it's an alternative investment. So, it's not like stocks or bonds or. anything. It's generally a little.

riskier. >> Um there's less oversight. Uh there's. less transparency. and they want to keep it that way. >> Yeah. Yeah. They've actually gone to. great lengths to make sure that it's. much less transparent. One reason why. the government who is the in charge of. regulating stuff to make it transparent. like stocks and bonds and disclosures. and all that is that um you or I or. anybody could walk walk along open up a. brokerage account and start buying. stocks and bonds. You don't have to be.

savvy at all to invest in private equity. because of the risk because it's just so. different from traditional stocks and. bonds and normal investments. The the. government says you're on your own. As a. matter of fact, you have to you have to. register as an accredited investor, which says that you either know what. you're doing so much that we don't have. to worry about you losing your shirt, like you're going to just deal with it. if that happens, or you have so much. money, it's not really going to matter. if you lose your investment. Those are.

the people who can um can invest in. private equity, and usually they're. what? Institutional investors, right? Like huge massive like funds or college. endowments or something. Yeah. Uh and. the people who've um really come out on. top are the people that manage these. >> Uh if you're a managing partner, um. there's a formula known as 2 and 20. where the company that you're managing. that you have taken over uh they pay you. 2% of the total assets of that company. plus uh 20% of the profits above.

whatever threshold that you agree on, I. guess. Uh, and then there's all sorts of. other ways that they can make money as. we'll see, like, you know, selling the. land that the business sits on, uh, maybe to yourself and then renting it. back to. >> I know. >> that same company at a higher rate. Um, so yeah, we'll we'll dig into all that, but they're um, the people that are. really getting rich are the people that. are that are um, investing in these, but. really managing these, >> right? So, if you ever hear a news story.

about some guy who ran some great. venerated company into the ground and. they're like, "Yeah, I mean, even I lost. my investment." Do not feel bad for them. because they made probably hundreds of. millions or billions of dollars for. themselves from those fees. And those. fees can't be taken back like because. that company's in bankruptcy, because. you can show that they did a terrible. job of managing this company. Doesn't. matter. They get to keep that money no.

matter what the turnout is, no matter. how many people lose their jobs. And. that is why almost everyone in the world. hates private equity people. >> Yeah. And they generally do this to. private companies. Uh 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. Um and you know, we're. going to go through industries and. different examples of specific companies. in a bit. M um but it's usually almost. always what's called a leverage buyout.

in which the money to buy this company. comes from a a huge loan that that. company is also then responsible for. So, it's uh it's really. whoever came I mean, I guess we'll get. to who basically came up with this. stuff, but um it's a sort of evil. financial genius on a level that is kind. of hard to comprehend that it was ever. allowed to happen. >> Yeah. It's the best analogy I've been.

able to come up with is it's like if if. you went and bought a house, the house. had to go take out a loan and a mortgage. so that you could buy and own it and you. didn't actually care about the house. because you're planning on selling it. down the road. So, you didn't keep it up. and then you just decide to walk away. from the house and the house is. responsible for paying off the loan it. took out so you could buy it. That's the. best I can come up with. >> Yeah. I mean, that's a thing. Um, and. it's a big thing right now. private. equity firms. Uh the companies they own.

in the United States employ more than 13. million people. >> And they account for about two trillion. of uh which is about 7% of the GDP. Uh, and like I said, it all started out in. the 70s with a guy named Milton. Freriedman from the University of. Chicago who was I mean it seems very um. sort of old hat now to hear, but he was. kind of one of the first people to step. forward and say the only thing any. corporation should ever worry about is. their shareholders. uh the the the.

people don't matter the product don't. matter uh doesn't matter rather uh. English grammar doesn't matter and the. only thing that matters is the profits. that we turn for our shareholders and. once somebody kind of said the quiet. part out loud everybody's like oh well. he said it so that's what we're gonna. all try and do now. >> yeah one of the worst ideas in the. history of the world and it's it just. took off so yeah Freriedman that was.

step one. Step two was laid um well step. two through 10 I would say is was laid. out by a guy named Michael Jensen uh who. is an economist with Harvard Business. School in the 70s and 80s and he. basically said traditional companies. that have you know you've got a CEO and. you have employees and the CEO is paid a. certain salary a year and everything's. great. um that that doesn't work because. the CEO, the person making the decisions. and what what moves the company makes, they might be in conflict with the. shareholders. They might be spending a.

bunch of money and they don't care. They. don't care about the shareholders, the. investors who again, as Milton Friedman. said, the entire purpose of the. corporation is to enrich the. shareholders. So, how can you bring a. CEO in line? And he said a couple of. things. One, you can pay 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? That's. number one. Then 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 um so that it can keep. afloat and pay off of those debts. So. like immediately managers have to trim. the fat and it just gets more efficient. and outperforms just a traditional. company, traditionally run company. That.

was Michael Jensen's contributions. >> Yeah. And you know, we're going to talk. about the different ways this happens. Um, obviously, uh, firing people is a. big way to to trim the fat, to pay back. those huge loans that someone took out. on your behalf that you're now. responsible for. Once again, um, so, you. know, mass layoffs is one way to make. that happen. That's one way to trim the. fat. >> Um, even if it, you know, makes the. company not function as well, it doesn't. matter, >> right? >> Um, you know, sometimes there is fat.

that can be trimmed. So, we're not. saying like no one should ever be laid. off or anything like that. >> Like, we're realistic people. Um, but. we're talking about, you know, leverage, um, buyouts and kind of how they work. So, uh, another thing they can do is. break them apart. And if you've ever. seen the movie Wall Street, >> Mhm. >> with the great Michael Douglas, I just. watched that again for the billionth. time recently. >> Oh, really? >> Yeah. Very, very good. 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 uh when. he bought Charlie Sheen's father's.

airline. >> Mhm. >> Just for the sole purpose of breaking it. apart and and you know, driving it into. the ground to get rich, >> right? >> Uh but um you know, selling off assets. is another way to do it. Like I. mentioned, like selling off the land. that the business sits on. >> Um sometimes that equity firm um owns uh. the real estate company as well. Yeah. >> That buys the the land that the company. sits on. and then leases it back to that. company uh sometimes against their best. interest at like higher rental rates. >> Yeah. I I'll give you an example. We'll.

we'll talk a little more about Red. Lobster, but they got um they got taken. over in a leverage buyout and the. company did exactly that. They sold off. all of their assets, all of their. restaurants, just sold them off and then. they sold them to a company who turned. around and leased them to Red Lobster. Right. The Red Lobster was paying an. estimated $16 million a year for just a. 1% property tax on its locations. All of. them. $16 million. Now, their leases. amount to $158 million.

Right? So, these are just terrible, terrible business decisions. And the. reason why is because anytime a big. influx of cash comes in, it gets divided. up 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 and get a return on their. investment is they'll take out more. loans from the company after the. company's been bought and has all this. extra debt, they'll take out even more.

loans and when that money comes in, rather than spending it on the company, they'll divide some or all of it up. among the investors. So, it's like a. vampire process at at its worst. I feel. like we really should say something to. be fair. There is a lot of well-run, wellthoughtout private equity firms that. know what they're doing, that actually. have saved companies from going under. It happens. It's just when it's bad, it's so bad that it almost it almost. makes it seem like there shouldn't be.

this this this type of of business. model. >> Yeah, for sure. Uh sometimes it's a real. a quick thing. Like in the case of Wall. Street, like there was no long-term plan. for Gordon Gecko, >> right, >> and Blueest Star Air. Uh it was like a. house flip. Um you you you buy this. company, sort of a smaller company, and. you want to make it look good for maybe. another private equity firm to come. along and buy. So you're going to if. you're a manager of that firm, you're. going to make a lot of very short-term. decisions that um 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 going to do the same thing. probably. >> Yeah. And like you said, one of the big. things that happens is including. layoffs, including just sucking the the. company dry of its money is the customer. suffers as well. Um, usually the product. or the service takes a really big hit. because you're trying to figure out how. to put that same thing out and charge as. much as you can for it by putting as. little as you can into it because the.

people who bought the company don't. really care about the company or what it. does. >> Good time for a break, >> I think. So, and then we'll come back. and talk some more about the history of. this whole thing. Huh. >> All right. I need to go get some uh. pomade and grease my hair back real. quick. I'll be right back. >> Okay. [Music].

[Music]. Y. >> uh I should mention real quick that I uh. I love Wall Street so much that I uh was. watching it again and I was like I. wonder if there's a t-shirt that says.

Anakott steel. It's just one of the. companies that they, you know, one of. the fictional companies that Oliver. Stone wrote into the movie. >> And sure enough, there's an Anakott. Steel t-shirt. I bought it. I love it. Um, I hate the message of the movie and. Gordon Gecko, 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 Anakott Steel shirt. just kind of as a movie crusher type. So. when people see me that know that movie, they'll be like, "Ah, Wall Street, >> right?" No, I get it. I get it. I I used. to have that sweatshirt that was like.

the print of um Danny's sweater, the. Apollo 11 sweater. I love that thing. That was one of my more beloved pieces. of clothing. >> You know, I met the guy who owns that. sweater. >> Oh, really? >> Johnson. >> Uh no, Lee Unrick, I think, is his name. He's a big uh animation guy. I think he. did Coco and a bunch of other big uh. >> Oh, cool. >> uh animated films. and he was such a fan. of The Shining that he he bought that. real sweater at auction. >> Good for him. I hope he's never tried it.

on cuz that's a tiny sweater. >> Well, he wasn't a big guy. >> It doesn't matter. That is a still a. very Danny was not a He was He was a. tiny guy. >> Yeah. Uh should we talk about history? >> Uh yeah, I think we should, Chuck. Um so. this whole thing is kind of newish, right? I mean, we usually associate with. the 80s and it's pretty accurate, but it. goes back a little further. It's just. the 80s are when it really took shape. and got off the rails the first time. >> Yeah, for sure. Um, the first leverage. buyouts though came after World War II.

Um, there were some dudes from Bear. Sterns, uh, Jerome Colberg, Henry Krabus. with a K and George Roberts. So, they. were KKR. They got together, they. started, um, you know, with this idea of. leverage buyouts for, um, small. companies like, um, you know, family-owned businesses. This was in the. 1960s. And in the mid70s they formed uh. Colberg, Kravis and Roberts, the KKR. business. And their first big um success. story for them as far as making a ton of.

money doing one of these was a machine. tooling company or a tool company rather. called uh is that Holdale? >> Hudale. >> Hudale maybe. >> Hudet. >> H O U D A I L E Industries. It was in. 1979. They bought it for 380 million. bucks of which they paid about a million. bucks. Um once again uh as as we've. already learned uh the company was. saddled with debt uh immediately. covering the remainder of that money and. they got a new CEO. They said hey we're.

going to pay you double what the. previous CEO got and we're going to. start raking in these fees as the as the. fund manager. >> Yeah. And so Hudale, which at the time. of this purchase was doing really well. It had been around since I think the. 19s. Uh 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 the what usually gets companies in. this case is they're so settled with. debt that that a recession comes along.

or things shift like we go from. brickandmortar 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. um well, you can't even say back, just giving it. away to investors or um keeping up with. their interest payments on these loans. that they eventually just sink and end. up in bankruptcy and their debt gets. restructured and if they're lucky, they. can come back out of it and try the. whole thing again.

>> Yeah, for sure. Uh about 10 years after. that, one of the big big ones uh early. ones took place uh 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. >> I haven't. Have you? >> Uh, no. >> I've always wanted to. >> Hey, it's out there, buddy. >> Okay. That's not a That's not a Tom Wolf. book. I'm thinking of a man in full, aren't I? >> Yeah, I think so. I can't remember who. wrote the book, but the book was called. Barbarians at the Gate: The Fall of RJR.

Nabiscoco because it's about RJR. Nabiscoco, and there is no more RJR. Nabiscoco. No. Um there's RJR and. there's Nabiscoco, but uh that company. ceased to exist after that leverage. buyout. >> Yeah. And I think 2,000 people lost. their jobs as the company was sold off. in pieces and then finally, like you. said, the whole thing went down. Um and. at the time, this is 1989, I think you. said, 2,000 people losing their job. because some corporate raiders came in. and screwed up a good thing. That was.

that that was enormous news. And that. really kind of put a period on the end. of what had become um almost like the. the wild west. Like these people were in. some cases like outlaw folk heroes who. were just coming into corporates and. taking everything. People getting laid. off and then they go off 50 times richer. than they were and do the whole thing. again. Right? So they got a bad name in. the 80s and by the time the '9s rolled. around, uh things got a little more. legit, a little more structured. some of.

the players involved got a little more. um uh I don't know it was more. legitimate players than just some. maverick guy who worked at Bear Sterns. or you know Goldman Sachs for a little. while and then additionally some other. firms whose names we know because this. stuff is just so nuts that it makes the. news. Bane Capital um was founded in the. 80s, Blackstone founded in the 80s. Carile Group founded in the 80s. So the. 80s were a big deal. the 90s everybody. kind of kept a low profile and then the.

2000s a boom started to come back again. >> Yeah, a big boom. Um, you know, every. everything crashed. We've done a couple. of episodes kind of around the 2008 uh. crash. >> Um, but a lot of private private equity. firms did okay. Um, 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, uh, maybe we should have some some. more, you know, guard rails and. reporting requirements on this private.

equity business because that's a term. that kind of just came around in the. 21st century even though it was. happening. Private equity as a term came. around I think in the early 2000s. And. uh even though they put some more. reporting requirements around it, still. way less transparent and way fewer. requirements than you know the publicly. traded companies and the stock market. and banks and stuff like that, >> right? >> But there's been a real boom uh since. that time. The number of companies. publicly traded has dropped about half.

uh since 1996 where it was at its peak. And a couple years ago in 2023, there. were five times as many private equity. back firms as publicly held companies. >> Yeah. Because it's just you don't have. to worry about the government meddling. with your stuff. It's crazy. Um so some. of the uh some of these like 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. Um, one of. the big ones that I remember was Toys R. Us. >> Yeah. >> One of this, 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. Um, 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. Um, in addition to that, even.

more importantly than that loss of. nostalgia is that 30,000 people lost. their jobs because of a private equity. takeover of Toys R Us that eventually. ran it into the ground. >> Yeah. I mean, it makes some of those. earlier ones where, you know, 1,00200. people lose their job seem quaint. Yeah. You know, >> 30,000 people just Sorry, you don't have. a job anymore. >> Yeah. There's this guy uh I mean, we got. to talk about Sears because that's. another one. Um, iconic brand, uh, iconic brick-and-mortar store. Uh, I.

would say there's some nostalgia tied up. in Sears, for sure. >> Sure. >> And a guy named Edward Lampert is. someone who may not be on your radar. unless you follow his stuff a little. more closely. Um, Kmart files for. bankruptcy in 2002 and Ed Lampert comes. in. He was a Goldman Sachs guy and he I. think former by this time, right? >> But he buys up a bunch of the debt from. Kmart. They come out of bankruptcy and. then he has a hedge fund. ESL. Investments and they were the largest.

shareholder and so thus he becomes the. chairman and can then run the show, >> 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. Um Kmart was not doing very. good. Sears was doing amazing. Tens and. tens of billions of dollars in sales.

every year. And for the first couple of. years, things were going pretty well. But Edward Lampert being a corporate. rating private equity guy again he's. this is his firm. So he is directly. taking hundreds of millions of dollars. that 2% of the assets every year plus. that 20% when he gets above performance. goals. So by juicing this company and. like boosting the stock price and the. value of all this stuff, he's getting.

huge percentages of that every year, right? The problem is is these bad. management decisions. This is when it. goes bad and this is when you end up. reading about it. One of the big things. they did was a stock buyback, right? And. if you have a bunch of stock out there, a bunch of shares out there on the. market, the just by like the laws of. supply and 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, your share price can increase,

right? So if you're holding shares in. the company, your share price goes up. and you make the company buy the stocks. back. It's not like you're out there. doing it yourself, right? The better. thing to do traditionally for if you. want your business to keep running is to. use that money to keep your business. running. but instead they took $6. billion dollar and bought stock back to. raise the share price. >> Um, and they only spent, I think this is. over a couple years, they only spent. half of that on capital expenditures.

like keeping up your properties, um, maintaining your your buildings, stuff. like that. Um, and so the company just. almost immediately started to just. falter. >> Yeah. So things start faltering. Uh, this is around 2007 or so. and ESL, which again was Ed Lampard's um company, they and some other firms then loan. money to themselves, uh almost $2.6. billion. And so they're now also.

collecting uh interest and fees on that. So about $400 million in interest and. fees to the big loan that they gave. themselves. >> And Sears continues to sort of tank or. the Sears holding company continues to. tank. That's when they break it up. they. spun off uh they start spinning off. different divisions. Um ESL is buying. shares in most of those smaller. divisions as well once they break it. apart. >> Right. >> And then in 2015 uh Ed Lampert um. founded a real estate company called. Seritage Growth Properties. They bought.

266 Sears and Kmart buildings and then. rented them back to themselves. >> Right. It's like robbing Peter to pay. Peter. >> Yeah. It's just sounds like such a. obvious fleecing. >> It is. >> And 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. Um so obviously. after a fairly short time, seven years,

um this company, Sears Holding, filed. for bankruptcy. And again, bankruptcy. doesn't mean like, oh, that's it. I'm. out of money. It means like, hey, I. can't pay my debts back, so I'm going to. negotiate with all these people and. hopefully reduce it by 2/3 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 um that. was the result for Sears Holding. But. part of this restructuring was that they. started slashing costs. And the first.

thing you do to slash cost if you're a. corporator is fire people. They close. stores, Chuck. They had 3,500 Sears and. Kmart stores when those two companies. merged. Okay. By seven years later, um. they were down to 700. And today there's eight eight. >> eight00. Yeah, there's eight of those left. Um it.

was, you know, again, tens of thousands. of jobs and 11 billion in unpaid debt to. creditors and Ed Lampert uh ends up. making about 1.4 personally making about. $1.4 billion. >> uh from managing that fund. >> Two two things. I saw the Wall Street. Journal estimated that under Lampbert's. watch of this I think seven years um. 200,000 people lost their jobs from. Sears and Kmart.

>> Yeah. >> Uh that's got to be a record, man. Um. and then also he was quoted as saying. like, "Yeah, I'm really bummed about. this whole thing. Um it was a real uh. loss. It was a real opportunity cost for. me." meaning he could have done this. with a a different company and maybe. made out even better than he did. >> Uh so you mentioned Red Lobster and this. was very much in the news. It it feels. like it was more recent. Uh well I guess. some of the stuff was a little more. recent but in 2014 uh Golden Gate.

Capital San Francisco company bought Red. Lobster. >> $2.1 billion. Uh they said it was quote. an exceptionally strong brand with an. unparalleled market position. And in. order to pay for that deal, they sold uh. as you mentioned, they sold the real. estate of 500 restaurants for about 1.5. billion bucks. And a company called. American Realy Capital Partners uh. bought that land and then once again. leased it back at a higher rate, like. above market rates. >> Yeah. And again, that 1.5 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? Um, I also have to say I worked. at Red Lobster as a server for a little. bit. Um, >> Whoa. Whoa. You and I have dined at Red. Lobster before one time. >> Mhm. >> It's probably the only time I've been. there in the past 40 years. >> Okay. >> Uh, and you never I don't think. disclosed to me that. >> Did I not? >> No. All you talked about was how much. you love those uh what are they? Little. cheesy biscuits. >> The Cheddar Bay biscuits. That is why I.

worked at Red Lobster so I could be. closer to them. It was only for a couple. of weeks. I was like, I got to stop. eating these. >> I didn't know you ever waited tables at. all. >> So, the reason why I don't talk about. that that much is because that I'm one. of the worst servers of all time. Something happens to me between walking. from, you know, the kitchen to your. table and my personality just drops out. of me somehow and I forget stuff and I'm. just terrible. Like the kind of waiter.

where you're like, you just you ruined. our dining experience. You're so bad. That was the kind of waiter I was. So I. learned after probably six or seven. places to just stop trying to be a. server. >> Yeah. You and Emily Emily was uh waited. tables for a very very short time for. similar reasons. >> Yeah. It's just it's it Yeah. You have. to be in the right kind of mindset to. pull it off. It's it's not as easy as it. looks. I found. >> Yeah, I was pretty good at it. I believe. that, >> 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. >> said that before. >> I want to like sell beer at a base at. Braves games. >> Let's see what you got. >> Gold beer. Cold beer. >> That's pretty good. You got to um you. got to grow one of those walrus. mustaches. >> Two for one. And they're like, "Wait, you can't do that. You can't make. deals.". >> The one I always remember is popcorn, peanuts, caramel corn, hair. Is that at. the place? >> You always got to finish it up with. here. >> Yeah. That's how you get people's. attention.

So, Oh, yeah. Back to Red Lobster. Yeah, I can smell the cheesy biscuits. >> They're so good, man. And their ranch. dressing is world class as well. It's. just unlike any other ranch. It's really. good. >> Oh, all right. >> I'm glad that Red Lobster's still. around, as far as I know. Um, despite. all these different companies trying. their best to run it into the ground. Co. definitely didn't help. Um, yeah, >> 2020 hit, COVID hit, and Red Lobster, which is already, this is what I was. talking about, when a company is saddled. with a bunch of debt, >> um, and new costs, that's hard to keep.

up through through rough times or. changes, right? >> Same thing with Red Lobster. Um, and I. guess, uh, one of its seafood suppliers, Thai Union Group, stepped in and was. like, "Hey, we'll we'll buy Red Lobster. We have a really good idea." So, this is. their seafood supplier. They became the. exclusive shrimp supplier to Red. Lobster, the company that owned it, that. now owned Red Lobster. And the CEO is. like, "You guys get this. You know, the. endless shrimp promotion for 20 bucks.

We're going to make it a permanent menu. item and we're going to sell them so. much shrimp because we're their. exclusive supplier of shrimp." Bam. And. he said, "Bam." That's a quote. Um, and. they lost like $11 million in just three. months of trying that because they. grossly underestimated how much shrimp. people would eat if there was no no. bottom to it. >> Yeah. I mean, if you're talking a, you know, mediumsized shrimp, I can eat,

you know, if I'm really trying, 30. >> Wow. In a meal. >> Wow. That's a lot of shrimp, dude. >> Not the huge ones. >> I know what you mean. I got it. >> If it's if it's endless and it's all for. a very set rate. Uh and I'm Yeah. You. know, maybe trying to impress my date, >> right? Surely not fried though, right? You're just talking like peel and eat. >> Oh, that's more like 40. >> Oh my god. You could eat 30 fried. chicken. >> No, I I probably I probably could not.

eat 40 peel and eat. I don't know if I. could eat 40. I mean, if if I'm not. eating cheesy biscuits and French fries. and klelaw and stuff. >> No, you're being serious. Then I could. probably eat 30 fried shrimp for sure. >> Okay. I I'm going to be your date for. that one. >> Not Well, I hope to impress you. >> Oh, what else? Oh, I've got one. Uh, one. of the things that that a lot of these. companies do is they take over and buy a. business that they just don't understand. the business of, and that's how they run. it into the ground. That'll happen a. lot. We'll talk about that here or. there. But there are some niche private.

equity firms that focus on specific. kinds of businesses. They know what. they're doing. And one of them is Ror. Capital. They're big on fast food. industry. >> And when you have a a very powerful, wealthy firm like that that's zeroed in. on the ups and downs of their particular. industry, you have the kind of people. who will lobby successfully to get the. $15 federal minimum wage taken out of. the stimulus package, which is exactly. what Ror Capital managed to do several.

years back. >> That's right. And if you're wondering, uh, is that named after, you know, Mr. Ror from Fantasy Island? >> No, it's named like seriously named for, uh, Howard Ror, uh, Ein Rand hero. And. do with that what you will. >> Yeah. From the Fountain Head. >> That's right. Uh, all right. I guess we. could talk a little bit about newspapers. and physical print media because, uh, I. mean, they're they have been in trouble. anyway. So not all of the losses of of.

the print media industry are due to. private equity equity firms, but. >> um private equity uh ownership of. newspapers rose from 5% in 2001 to 23%. in 2019. >> Mhm. >> And uh you know there have been. supposedly uh analyses done that show. that um ownership of print media by a. private equity firm can improve. circulation. But um it also will lead to. uh reduction in editorial staff like.

massive cuts in staff uh which means. cuts in things like local government and. they've shown that results in a decline. in participation in local elections. >> Oh yeah like like the loss of local. government news reporting has had an. enormous effect on the United States. It's just crazy. It like the cascading. effect it had. We're 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. >> Vice is another one. Um, they were.

sitting pretty. I think they were worth. almost $6 billion in 2017, got bought. out, and by 2023 they were worth $350. million because it just got run into the. ground. That's a good example of a. company that didn't know what they were. doing, buying a business that they. didn't know anything about that and then. they just made terrible decisions. >> For sure. Uh I think we should take a. second break. >> Okay. >> And we'll be back right after this.

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Y. >> Okay, Chuck, we're back. And here's. where we really get into the problems. I. mean, aside from people getting laid. off, people being neglected in the. hospitals they go to because they're. owned by private equity firms, that's. become a big problem in the 21st century. and in the United States, too. >> Yeah, there's um in 2024 alone, uh by. one count at least, there were 166. leverage buyouts in healthcare uh just.

in that one one year. And uh seven of. the eight biggest healthcare. bankruptcies that year were from uh. companies owned by private equity firms. or hospitals and healthcare. organizations, >> right? Um the private equity firm dental. practices rose dramatically from the. teens to the 2020s. Um and that results. in things like companies push I read an. article about a dental express in Ohio. telling a mom that her three-year-old. needed seven root canals. Yeah, for.

sure. Uh, and the same goes with. hospitals. Uh, hospitals, if they're. owned by a private equity firm, they. result in higher charges, uh, more. safety issues. Uh, there's one study. that said there was a 25% rise in. hospitalacquired complications, like. something you got while you were there, >> right? And I think 38% more blood. infections from IV ports. That's just. from not having enough staff or uh, inexperienced staff. It's just not good. And it gets even worse. They're also.

into hospices, nursing homes, and it's. it just follows the same pattern that. you would expect. A study found that. private equity ownership increases. mortality rates by 11%. Just because PE's cutting corners to. save costs. So, um 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 healthc care. stuff. That's just off limits for you. >> 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. uh we had to go through that with. Emily's grandmother. And just the state. of that industry is horrific. >> Yeah. >> It's the opposite of what it should be. in almost every way. >> Yeah. And housing, too, is another big. deal. Um I think Blackstone, which we. mentioned, was founded back in the 80s. They're known as the United States's. largest landlord. They own 300,000 units. of rental housing in the US as of 2023. And as you would expect when private.

equity comes along, rents go up. The. maintenance people are slower to respond. because they've been laid off um and. just things kind of go downhill uh. rather than get better like they're. supposed to. That's the reason private. equity is supposed to exist. It's. supposed to take um kind of slow. lumbering companies that are in a. position to do better than they are and. make them do better. It's not supposed. to make everything go downhill, but. that's how it happens a lot. >> Yeah. I mean, sometimes it does happen.

uh for the better. Like one great. example is Hilton uh the hotel chain. Um. there was a leverage buyout from. Blackstone in 2007 of Hilton and the. great recession, you know, hit uh I. guess it was like the next year in 2008. and obviously it's going to really. affect the tourism industry. Uh but they. brought in uh a CEO from Blackstone, a. guy named Christopher Netta who actually. made things better. He um said, "Hey, let's invest in emerging markets. uh.

let's invest in the future and like. digital uh strategies like um apps where. you can check in and get your hotel key. through an app and things like that just. you know instead of just shuttering. things like actually investing. reinvesting in the company. >> right. >> and it turned out to be really you know. all these things were really popular. moves and Blackstone sold Hilton back uh. to the public market after it had been. yanked out of the public market um they. sold it back in 2013 and sold out of. their stake in 2018 made a ton of profit.

uh $14 billion over 11 years, but the. company itself, Hilton, was doing great. and continues to do great. >> Yeah, they doubled the number of rooms. today that they had in 2007 when they. took over, when Blackstone took over. So, yeah, that's a big success story. It. wasn't like a pump and dump. Hilton's. still doing well, like you were saying. Burger King's another one, too. They got. bought by a Brazilian um firm called 3G. Capital, and they um just they just made. some really good moves in a lot of ways. Again, this is from an investor.

standpoint, not necessarily from the. standpoint of the people at corporate. who were laid off or anything like that, but as far as firms go, 3G made. something like 28 billion over 14 years, and it had only invested 1 billion. So, that's a pretty good return on. investment. >> Private equity coming in. >> Why'd you do that? >> Oh, just because I know you hate it. >> You got me. Uh so here's the thing. Um alternative.

investments make a lot of money. Um. we've seen that there's less oversight. So you know, one of the ways that they. make can make a lot of money is that. they're just allowed to do things that. you can't do in traditional sort of slow. growth um investments like stocks and. bonds and things like that. Um, but you. also mentioned earlier that like pension. funds, like 401ks are where a lot of. this money comes from and like do you. have a choice whether or not the 401k.

that you invest in ends up uh being a. part of this thing? >> Yeah, I think you can also invest your. 401k now, which for a long time was off. limits because that's your you the. nonacredited investor who doesn't know. what they're doing with private equity. That was off limits. But now you can if. you want. Um although they say that's. probably not a good idea unless you know. what you're doing. Again, >> well 89% of public pension funds have. some of their money in private equity.

Uh I think 13% average of uh 13% of. their assets is the average. >> Uh sometimes more than 25% but that's. that's almost 90% of public pension. funds. It's a lot. >> Yeah. Um, and then I guess one of the. other big things, so the the reason why, well, another reason why people are. like, "This is so not right." All of. that money that those people like Edward. Lampert make, he made that $1.4 billion. by running a huge venerated company into. the ground, he paid at most 20% on those.

profits. Even though it was personal. income for him, he didn't pay the. personal income tax of like 37%. Instead, he paid 20% in capital gains. tax because the fees that he charged are. treated like gains from an investment. rather than personal income, even though. anyone would call those fees personal. income. So, not only are the PE firms. robbing companies for their own personal.

enrichment, getting people laid off, they're not even paying their full share. of income taxes on it, too. So, not only are they robbing companies. for their own personal enrichment, getting people laid off, they're not. even paying their full share of income. taxes on it, too. >> Yeah. This is the kind of thing where in. the movie version where this is first. born 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.". >> Right. Exactly. It just keeps going like. that. >> Yeah. And they were like, "No, no, no. But what about this?" "No, no, that's. the best part.". >> Yeah. >> So, there's a lot of best parts. >> And one of the guys finally puts his. fork down and stands up, hits the table, and goes bam. >> That's right. But you were talking about. the carried interest loophole, right? That's what it's called. >> Yeah. Where your personal income is. magically treated as returns on an. investment and taxed at 20% rather than. 37% or whatever. So if you make a $100.

million, you pay $17 million less taxes. on that $und00 million. And at that. point, really, who cares anyway, right? >> Yeah, >> you would think. >> So that's private equity. I feel like we. kind of showed our bias a little bit, but it's really tough not to be when you. really dig into this stuff, you know? >> Yeah. I mean, it's not the sole cause of. the housing crisis, but it's a major. player. >> Yeah. uh and all the other crises that we're.

facing too, economically. >> uh and socially and politically uh and. probably religiously too if I gave it. some real thought. >> Yeah, personally. >> Yep. Uh since Chuck said personally, I. was waiting for it. It got you there. because now we just unlocked listener. mail. >> Uh hey guys, this is in response to a. tangent that you went on during this. Saturday's classic episode. Uh, when. Chuck was talking about arguing with his. mother about who gets to pay for dinner,

>> it reminded me of my grandmother Sheila. She always likes to pay for big family. dinners and has engaged in tricks in the. past. Uh, for graduation dinner for my. brother. My father knew what she was. doing when she took her purse to the. bathroom. So, that's a good trick. I've. done that before. >> Yeah. >> Uh, that wasn't her best trick, though. Uh, as even Josh mentioned that very. trick. Uh, the best part Did you mention. that? >> Yeah, I mentioned that. I remember that. >> I've done that for sure. >> Yeah. Yeah, that's what you got to do. Uh, 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 uh aunt reached for their. card and the waitress said it had been. taken care of. All the adults looked in. accusation at each other and there was a. long silence and at the exact same. moment they all threw up their hands. crying, "Sheila.". >> And all the way over in Massachusetts, Sheila went bam. >> That's right. Uh my aunt had made the. mistake of telling Sheil on the phone. that uh where we were going to have.

dinner and her grandmother called the. restaurant and gave her the credit card. number. >> Beautiful. >> Uh thanks for all the pods. That is from. James. Uh James, that's wonderful. Sheila sounds great. I just hope she. tips well. >> Oh, good point, Chuck. Nicely done. Uh. if you want to be like James, thank you. by the way, James. That was a great. email. Uh you can send us an email, too. Send it off to stuffodcast.com. Stuff You Should Know is a production of. iHeart Radio. For more podcasts, iHeart.

Radio, visit the iHeart Radio app, Apple. Podcasts, or wherever you listen to your. favorite shows. [Music].