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Private Equity: Your Ears Will Bleed · Stuff You Should Know

0:01
Speaker 1: Welcome to Stuff You Should Know, a production of iHeartRadio.
0:11
Speaker 2: Hey, and welcome to the podcast. I'm Josh, and there's
0:13
Speaker 2: Chuck and Jerry's here too, and this is Stuff you
0:16
Speaker 2: should know the podcast.
0:21
Speaker 1: Oh wow, fancy.
0:23
Speaker 2: Yeah. I wanted to dress it up a little bit
0:25
Speaker 2: because it's our job, Chuck, to yank what could be
0:31
Speaker 2: a bone dry, boring economics lesson from the maw of
0:38
Speaker 2: well boredom. Shake it up a little bit by the caller,
0:43
Speaker 2: look it in the eye, and say you will not
0:45
Speaker 2: be boring today, and then do all that. All right, Okay,
0:51
Speaker 2: we can do it, Chuck. We're professionals.
0:53
Speaker 1: I'm glad you feel good about it.
0:55
Speaker 2: I do, and I'm going to make you feel good
0:57
Speaker 2: about it too, because while we're talking about today is
1:00
Speaker 2: no mere typical economics. And we're famous for having trouble
1:06
Speaker 2: wrapping our heads around economics. This one can be that
1:09
Speaker 2: way too. We're talking about private equity today. We'll explain
1:12
Speaker 2: all about it. The reason it can be hard to
1:14
Speaker 2: wrap your head around is because it's so insanely unfair
1:18
Speaker 2: the structure of it, that it just doesn't make sense.
1:22
Speaker 2: So you just kind of have to accept it on
1:24
Speaker 2: its face that this is actually how it is.
1:27
Speaker 1: Yeah, I would agree, it's nuts.
1:30
Speaker 2: So private equity, I guess we should probably start out
1:32
Speaker 2: with a little bit of a definition, Charles. It's an
1:36
Speaker 2: alternative investment vehicle. And essentially what it is is it's
1:39
Speaker 2: a fund, a private fund. You have to basically be
1:42
Speaker 2: in the club to even invest in this, at least traditionally.
1:45
Speaker 2: That kind of open it up a little more, and
1:48
Speaker 2: private equity goes around and essentially either buys huge controlling
1:53
Speaker 2: interests in companies or just buys the company's outright, trims
1:58
Speaker 2: them down, makes them lean, mean and efficient, and if
2:02
Speaker 2: ideally turns them around for a healthy profit, walks away
2:06
Speaker 2: does it again. Everybody who invested gets even richer than
2:09
Speaker 2: they already were. And that's the basics, the very most
2:13
Speaker 2: basic definition of private equity.
2:15
Speaker 1: Yeah, it's something that has become much more popular in
2:19
Speaker 1: the past, you know, twenty ish years, but really kind
2:21
Speaker 1: of started in the seventies, as we'll see. And it's
2:25
Speaker 1: an alternative investment, so it's not like stocks or bonds
2:28
Speaker 1: or anything. It's generally a little riskier. There's less oversight,
2:32
Speaker 1: there's less transparency, and they want to keep it that way.
2:38
Speaker 2: Yeah, Yeah, they've actually gone to great links to make
2:40
Speaker 2: sure that it's much less transparent. One reason why the government,
2:44
Speaker 2: who is in charge of regulating stuff to make it
2:48
Speaker 2: transparent like stocks and bonds and disclosures and all that,
2:52
Speaker 2: is that you or I or anybody could walk or
2:55
Speaker 2: walk along, open up a brokerage account, start buying stocks
2:58
Speaker 2: and bonds. I don't have to be savvy at all
3:01
Speaker 2: to invest in private equity because of the risk, because
3:05
Speaker 2: it's just so different from traditional stocks and bonds and
3:08
Speaker 2: normal investments. The government says you're on your own. As
3:12
Speaker 2: a matter of fact, you have to register as an
3:15
Speaker 2: accredited investor, which says that you either know what you're
3:20
Speaker 2: doing so much that we don't have to worry about
3:22
Speaker 2: you losing your shirt, like you're going to just deal
3:24
Speaker 2: with it if that happens, or you have so much
3:27
Speaker 2: money it's not really going to matter if you lose
3:29
Speaker 2: your investment. Those are the people who can invest in
3:33
Speaker 2: private equity, and usually they're what institutional investors, right, like
3:37
Speaker 2: huge massive funds or college endowments or something.
3:42
Speaker 1: Yeah, and the people who really come out on top
3:45
Speaker 1: are the people that manage these If you're a managing
3:48
Speaker 1: partner there's a formula known as two and twenty where
3:52
Speaker 1: the company that you're managing that you have taken over,
3:56
Speaker 1: they pay you two percent of the total assets of
3:58
Speaker 1: that company plus twenty percent of the profits above whatever
4:03
Speaker 1: threshold that you agree on, I guess. And then there's
4:07
Speaker 1: all sorts of other ways that they can make money,
4:09
Speaker 1: as we'll see, like you know, selling the land that
4:12
Speaker 1: the business sits on, maybe to yourself and then renting
4:16
Speaker 1: it back to that same company at a higher rate.
4:20
Speaker 1: So yeah, we'll dig into all that. But they're the
4:23
Speaker 1: people that are really getting rich are the people that
4:25
Speaker 1: are investing in these but really managing these.
4:29
Speaker 2: Right, So if you ever hear a news story about
4:32
Speaker 2: some guy who ran some great venerated company into the
4:37
Speaker 2: ground and they're like, yeah, I mean even I lost
4:41
Speaker 2: my investment, do not feel bad for them because they
4:44
Speaker 2: made probably hundreds of millions or billions of dollars for
4:48
Speaker 2: themselves from those fees, and those fees can't be taken back,
4:52
Speaker 2: like because that company's in bankruptcy. Because you can show
4:56
Speaker 2: that they did a terrible job of managing this company,
4:58
Speaker 2: doesn't matter. They get to keep that money no matter
5:01
Speaker 2: what the turnout is. No matter how many people lose
5:03
Speaker 2: their jobs. That is why almost everyone in the world
5:07
Speaker 2: hates private equity people.
5:10
Speaker 1: Yeah, and they generally do this to private companies. Sometimes
5:13
Speaker 1: it'll be a controlling interest in a much larger publicly
5:17
Speaker 1: traded company, but you know, generally we're talking about private
5:20
Speaker 1: companies here, and you know, we're going to go through
5:23
Speaker 1: industries and different examples of specific companies in a bit,
5:27
Speaker 1: but it's usually almost always what's called a leverage buyout,
5:31
Speaker 1: in which the money to buy this company comes from
5:36
Speaker 1: a huge loan that that company is also then responsible for.
5:42
Speaker 1: So it's it's really whoever came I mean, I guess
5:47
Speaker 1: we'll get to who basically came up with this stuff,
5:50
Speaker 1: But it's a sort of evil financial genius on a
5:55
Speaker 1: level that is kind of hard to comprehend that it
5:58
Speaker 1: was ever allowed to happen.
5:59
Speaker 2: Yeah, It's the best analogy I've been able to come
6:02
Speaker 2: up with is it's like if you went and bought
6:05
Speaker 2: a house. The house had to go take out a
6:07
Speaker 2: loan in a mortgage so that you could buy and
6:10
Speaker 2: own it, and you didn't actually care about the house
6:12
Speaker 2: because you're planning on selling it down the road, so
6:15
Speaker 2: you didn't keep it up and then you just decided
6:17
Speaker 2: to walk away from the house, and the house is
6:19
Speaker 2: responsible for paying off the loan it took out so
6:22
Speaker 2: you could buy it. That's the best that I can
6:24
Speaker 2: come up with.
6:25
Speaker 1: Yeah, I mean, that's a thing, and it's a big
6:28
Speaker 1: thing right now. Private equity firms, the companies they own
6:31
Speaker 1: in the United States employee more than thirteen million people
6:35
Speaker 1: and they account for about two trillion of which is
6:38
Speaker 1: about seven percent of the GDP. And like I said,
6:41
Speaker 1: it all started out in the seventies with a guy
6:45
Speaker 1: named Milton Friedman from the University of Chicago, who was
6:49
Speaker 1: I mean, it seems very sort of old hat now
6:52
Speaker 1: to hear, but he was kind of one of the
6:54
Speaker 1: first people to step forward and say the only thing
6:57
Speaker 1: any corporation should ever worry about is their share holders.
7:02
Speaker 1: The people don't matter, the product don't matter, doesn't matter,
7:05
Speaker 1: rather English grammar doesn't matter, and the only thing that
7:10
Speaker 1: matters is the profits that we turn for our shareholders.
7:13
Speaker 1: And once somebody kind of said the quiet part out loud,
7:18
Speaker 1: everybody's like, oh, well, he said it, So that's what
7:21
Speaker 1: we're going to all try and do now.
7:23
Speaker 2: Yeah, one of the worst ideas in the history of
7:25
Speaker 2: the world, and it just took off. So, yeah, Friedman,
7:29
Speaker 2: that was step one. Step two was laid well. Step
7:33
Speaker 2: two through ten, I would say, is was laid out
7:36
Speaker 2: by a guy named Michael Jensen, who was an economist
7:39
Speaker 2: with Harvard Business School in the seventies and eighties, and
7:42
Speaker 2: he basically said, traditional companies that have you know, you've
7:46
Speaker 2: got a CEO, and you have employees, and the CEO
7:48
Speaker 2: has paid a certain salary a year and everything's great.
7:52
Speaker 2: That doesn't work because the CEO, the person making the
7:55
Speaker 2: decisions and what moves the company makes, they might be
7:58
Speaker 2: in conflict with the share they might be spending a
8:01
Speaker 2: bunch of money, and they don't care. They don't care
8:03
Speaker 2: about the shareholders, the investors, who, again, as Melton Friedman said,
8:07
Speaker 2: the entire purpose of the corporation is to enrich the shareholders.
8:11
Speaker 2: So how can you bring a CEO in line? And
8:14
Speaker 2: you said a couple of things. One, you can pay
8:16
Speaker 2: them in stock. So that whole thing about how CEOs
8:19
Speaker 2: get huge stock packages, now that came from Michael Jensen.
8:23
Speaker 2: And the reason why is because now suddenly they're a shareholder,
8:26
Speaker 2: so they care about what the shareholders are getting right,
8:29
Speaker 2: that's number one. The number two if you buy a
8:32
Speaker 2: company using that leverage buyout technique where you make the
8:36
Speaker 2: company take out tons of loans so that you can
8:39
Speaker 2: buy that company, it's saddled with so much debt that
8:42
Speaker 2: it immediately has to figure out how to get lean
8:45
Speaker 2: and mean, emphasis on mean, so that it can keep
8:49
Speaker 2: afloat and pay off of those debts. So like, immediately
8:52
Speaker 2: managers have to trim the fat and it just gets
8:55
Speaker 2: more efficient and outperforms just a traditional company, traditionally run company.
9:01
Speaker 2: That was Michael Jensen's contributions.
9:03
Speaker 1: Yeah, and you know we're going to talk about the
9:05
Speaker 1: different ways this happens. Obviously, firing people is a big
9:10
Speaker 1: way to trim the fat, to pay back those huge
9:13
Speaker 1: loans that someone took out on your behalf that you're
9:16
Speaker 1: now responsible for once again. So you know, mass layoffs
9:20
Speaker 1: is one way to make that happen. That's one way
9:22
Speaker 1: to trim the fat. Even if it, you know, makes
9:24
Speaker 1: the company not function as well, it doesn't matter. You know,
9:29
Speaker 1: sometimes there is fat that can be trim. So we're
9:31
Speaker 1: not saying like no one should ever be laid off
9:33
Speaker 1: or anything like that, like we're realistic people, but we're
9:36
Speaker 1: talking about, you know, leverage buyouts and kind of how
9:40
Speaker 1: they work. So another thing they can do is break
9:43
Speaker 1: them apart. And if you've ever seen the movie Wall
9:46
Speaker 1: Street with the great Michael Douglass, I just watched that
9:49
Speaker 1: again for the billion time recently. Really, Yeah, very very
9:53
Speaker 1: good example. It's one of my favorite movies, but very
9:55
Speaker 1: very good examples of all this stuff in there as
9:57
Speaker 1: far as like buying in his case, when he bought
10:00
Speaker 1: arlichenes father's airline just for the sole purpose of breaking
10:03
Speaker 1: it apart and you know, driving it into the ground
10:06
Speaker 1: to get rich.
10:07
Speaker 2: Right.
10:08
Speaker 1: But you know, selling off assets is another way to
10:11
Speaker 1: do it, like I mentioned, like selling off the land
10:13
Speaker 1: that the business sits on. Sometimes that equity firm owns
10:19
Speaker 1: the real estate company as well. Yeah, that buys the
10:22
Speaker 1: land that the company sits on and then leases it
10:24
Speaker 1: back to that company, sometimes against their best interest at
10:27
Speaker 1: like higher rental rates.
10:28
Speaker 2: Yeah, I'll give you an example. We'll talk a little
10:31
Speaker 2: more about Red Lobster. But they got they got taken
10:33
Speaker 2: over in a leveraged buyout, and the company did exactly that.
10:37
Speaker 2: They sold off all of their assets, all of their
10:39
Speaker 2: restaurants to sold them off and then they sold them
10:42
Speaker 2: to a company who turned around and leased them to
10:45
Speaker 2: Red Lobster. Right, the Red Lobster was paying an estimated
10:50
Speaker 2: sixteen million dollars a year for just a one percent
10:53
Speaker 2: property tax on its locations, all of them sixteen million dollars.
10:58
Speaker 2: Now their leases amount to one hundred and fifty eight
11:00
Speaker 2: million dollars. Right. So these are just terrible, terrible business decisions.
11:07
Speaker 2: And the reason why is because anytime a big influx
11:10
Speaker 2: of cash comes in, it gets divided up among the investors.
11:15
Speaker 2: They get tons of money, and it's not just like
11:17
Speaker 2: from selling properties, Chuck. One of the other ways that
11:20
Speaker 2: investors get their money back, they get return on their
11:23
Speaker 2: investment is they'll take out more loans from the company.
11:27
Speaker 2: After the company's been bought and has all this extra debt,
11:30
Speaker 2: they'll take out even more loans, and when that money
11:33
Speaker 2: comes in, rather than spending on the company, they'll divide
11:36
Speaker 2: some or all of it up among the investors. So
11:39
Speaker 2: it's like a vampire process at its worst. I feel
11:43
Speaker 2: like we really should say something to be fair. There
11:45
Speaker 2: is a lot of well run, well thought out private
11:48
Speaker 2: equity firms that know what they're doing that actually have
11:51
Speaker 2: saved companies from going under. It happens. It's just when
11:55
Speaker 2: it's bad, it's so bad that it almost it almost
11:59
Speaker 2: makes it seem like there shouldn't be this type of
12:02
Speaker 2: business model.
12:04
Speaker 1: Yeah, for sure. Sometimes it's a real quick thing, like
12:07
Speaker 1: in the case of Wall Street, like there was no
12:09
Speaker 1: long term plan for Gordon Gecko and Blue Star Air.
12:13
Speaker 1: It was like a house flip. You buy this company
12:17
Speaker 1: sort of a smaller company, and you want to make
12:19
Speaker 1: it look good for maybe another private equity firm to
12:22
Speaker 1: come along and buy. So you're gonna, if you're a
12:24
Speaker 1: manager of that firm, you're gonna make a lot of
12:26
Speaker 1: very short term decisions that make it appear much healthier
12:30
Speaker 1: than it really is on paper. So they can just
12:32
Speaker 1: kind of turn it and flip it and get a
12:35
Speaker 1: big payoff, and then it's someone else's problem where they're
12:37
Speaker 1: gonna do the same thing. Probably.
12:39
Speaker 2: Yeah, And like you said, one of the big things
12:41
Speaker 2: that happens is including layoffs, including just sucking the company
12:45
Speaker 2: dry of its money, is the customer suffers as well.
12:50
Speaker 2: Usually the product or the service takes a really big
12:52
Speaker 2: hit because you're trying to figure out how to put
12:55
Speaker 2: that same thing out and charge as much as you
12:57
Speaker 2: can for it by putting as little as you can
12:59
Speaker 2: into it, because the people who bought the company don't
13:02
Speaker 2: really care about the company or what it does.
13:06
Speaker 1: Good time for a break, I think so, and.
13:08
Speaker 2: Then we'll come back and talk some more about the
13:10
Speaker 2: history of this whole thing. Huh.
13:11
Speaker 1: All right, I need to go get some palmade and
13:14
Speaker 1: grease my hairback real quick. I'll be right back.
13:15
Speaker 2: Okay, definitely should I'm not large childs of each my ski.
13:51
Speaker 1: I should mention real quick that I I love Wall
13:55
Speaker 1: Street so much that I was watching it again and
13:58
Speaker 1: I was like, I wonder if there's a t that
14:00
Speaker 1: says Anacott Steel. It's just one of the companies that they,
14:04
Speaker 1: you know, one of the fictional companies at Oliver Stone
14:06
Speaker 1: wrote it to the movie, and sure enough there's an
14:09
Speaker 1: Anacot Steel T shirt. I bought it. I love it.
14:13
Speaker 1: I hate the message of the movie and Gordon Geko.
14:15
Speaker 1: I don't think he's the hero or anything like that, right,
14:18
Speaker 1: But it's just a movie I've always loved and now
14:20
Speaker 1: I got my Annacott Steel shirt. It just kind of
14:22
Speaker 1: as a movie crusher type. So when people see me
14:25
Speaker 1: that know that movie, they'll be like, oh Wall Street.
14:27
Speaker 2: Right, No, I get it, I get it. I used
14:29
Speaker 2: to have a sweatshirt that was like the print of
14:32
Speaker 2: Danny's sweater, the Apollo Latin sweater. I love that thing.
14:36
Speaker 2: That was one of my more beloved pieces of clothing.
14:39
Speaker 1: You know, I met the guy who owns that sweater.
14:41
Speaker 1: Oh really, Dan Johnson No Lee Ownkrik I think is
14:46
Speaker 1: his name. He's a big animation guy. I think he
14:49
Speaker 1: did Coco and a bunch of other big, oh cool
14:53
Speaker 1: animated films, and he was such a fan of the
14:56
Speaker 1: Shining that he bought that real sweater at auction.
14:58
Speaker 2: Good for him. I hope he's never tried it on
15:00
Speaker 2: because that's a tiny sweater.
15:02
Speaker 1: Well you wouldn't a big guy.
15:04
Speaker 2: It doesn't matter. That is still a very Danny was
15:06
Speaker 2: not a he was a tiny guy.
15:09
Speaker 1: Yeah. Should we talk about history?
15:12
Speaker 2: Yeah? I think we should chuck. So this whole thing
15:15
Speaker 2: is kind of newish, right, I Mean we usually associated
15:18
Speaker 2: with the eighties, and it's pretty accurate, but it goes
15:21
Speaker 2: back a little further. It's just the eighties or when
15:23
Speaker 2: it really took shape and got off the rails the
15:25
Speaker 2: first time.
15:27
Speaker 1: Yeah, for sure, the first leverage buyouts that came after
15:30
Speaker 1: World War Two. There were some dudes from Bear Stearns,
15:34
Speaker 1: Jerome Cohlberg, Henry Kravis with a K, and George Roberts,
15:38
Speaker 1: so they were KKR. They got together they started, you know,
15:43
Speaker 1: with this idea of leverage buyouts for small companies, like
15:47
Speaker 1: you know, family owned businesses. This is in the nineteen
15:49
Speaker 1: sixties and in the mid seventies they formed Colberg, Cravis
15:54
Speaker 1: and Roberts the KKR business and their first big success
15:59
Speaker 1: story for them is making a ton of money doing
16:01
Speaker 1: One of these was a machine tooling company or a
16:04
Speaker 1: tool company rather called is that Holdale Whodale? Whodale maybe
16:09
Speaker 1: who dat hou Dai La Industries. This was in nineteen
16:13
Speaker 1: seventy nine. They bought it for three hundred and eighty
16:15
Speaker 1: million bucks, of which they paid about a million bucks.
16:20
Speaker 1: Once again, as we've already learned, the company was saddled
16:24
Speaker 1: with debt immediately covering the remainder of that money, and
16:28
Speaker 1: they got a new CEO. They said, hey, we're going
16:30
Speaker 1: to pay a double what the previous CEO got and
16:33
Speaker 1: we're going to start raking in these fees as the
16:36
Speaker 1: fund manager.
16:37
Speaker 2: Yeah, and so Wodale, which at the time of this
16:40
Speaker 2: purchase was doing really well. It had been around since
16:43
Speaker 2: I think the nineteen teens. It was, it was fat
16:47
Speaker 2: with cash, the employees were happy, and these guys just
16:50
Speaker 2: ran it into the ground and sucked as much money
16:53
Speaker 2: as they could out of it. And the what usually
16:56
Speaker 2: gets companies in this case is they're so settled with
16:59
Speaker 2: that that a recession comes along or things shift like
17:03
Speaker 2: we go from brick and mortar stores to online, and
17:05
Speaker 2: they don't have the cash to keep up because they're
17:08
Speaker 2: spending too much of it either giving it back to
17:10
Speaker 2: investors why you can't even say back, just giving it
17:14
Speaker 2: away to investors, or keeping up with their interest payments
17:18
Speaker 2: on these loans that they eventually just sink and end
17:22
Speaker 2: up in bankruptcy and their debt gets restructured and if
17:25
Speaker 2: they're lucky, they can come back out of it and
17:28
Speaker 2: try the whole thing again.
17:30
Speaker 1: Yeah, for sure. About ten years after that, one of
17:33
Speaker 1: the big, big ones, early ones, took place, such that
17:37
Speaker 1: they wrote a book about it and made a movie
17:39
Speaker 1: about it. If you've seen the movie Barbarians at the
17:41
Speaker 1: Gate with James Garner.
17:42
Speaker 2: I haven't, have you, No, I've always wanted to.
17:46
Speaker 1: Hey, it's out there, buddy.
17:47
Speaker 2: Okay, that's not a Tom Wolf book. I'm thinking of
17:51
Speaker 2: a man in full, aren't I?
17:53
Speaker 1: Yeah, I think so. I can't remember who wrote the book,
17:56
Speaker 1: but the book was called Barbarians at the Gate colon
17:59
Speaker 1: the Fall of RGR Nibisco because it's about RJR Nibisco
18:02
Speaker 1: and there is no more RJR Nibisco. There's RJR and
18:06
Speaker 1: there's Nibisco. But that company ceased to exist after that
18:10
Speaker 1: leverage buyout.
18:11
Speaker 2: Yeah, and I think two thousand people lost their jobs
18:14
Speaker 2: as the company was sold off in pieces and then finally,
18:17
Speaker 2: like you said, the whole thing went down. And at
18:20
Speaker 2: the time, this is nineteen eighty nine, I think you
18:22
Speaker 2: said two thousand people losing their job because some corporate
18:26
Speaker 2: raiders came in and screwed up a good thing that was.
18:30
Speaker 2: That was enormous news, and that really kind of put
18:33
Speaker 2: a period on the end of what had become almost
18:37
Speaker 2: like the wild West, Like these people were in some
18:41
Speaker 2: cases like outlaw folk heroes who were just coming into
18:44
Speaker 2: corporates and taking everything. People getting laid off and then
18:47
Speaker 2: they go off fifty times richer than they were and
18:50
Speaker 2: do the whole thing again. Right, So, they got a
18:53
Speaker 2: bad name in the eighties, and by the time the
18:55
Speaker 2: nineties rolled around, things got a little more legit, a
18:58
Speaker 2: little more structured. Some of the players involved got a
19:02
Speaker 2: little more I don't know, it was more legitimate players
19:06
Speaker 2: than just some maverick guy who worked at bear Stearns
19:09
Speaker 2: or you know, goldn Sachs for a little while. And
19:11
Speaker 2: then additionally some other firms whose names we know because
19:15
Speaker 2: this stuff is just so nuts that it makes the news.
19:18
Speaker 2: Bain Capital was founded in the eighties, Blackstone founded in
19:23
Speaker 2: the eighties. Carlisle Group founded in the eighties. So the
19:25
Speaker 2: eighties were a big deal. The nineties everybody kind of
19:28
Speaker 2: kept a low profile, and then the two thousands of
19:31
Speaker 2: booms started to come back again.
19:33
Speaker 1: Yeah, big boom, you know everything crash. We've done a
19:38
Speaker 1: couple of episodes kind of around the two thousand and
19:40
Speaker 1: eight crash. But a lot of private private equity firms
19:44
Speaker 1: did okay. It's not like they were completely unscathed or
19:47
Speaker 1: anything like that, but they were better off than a
19:50
Speaker 1: lot of financial institutions after the crash, And after that,
19:53
Speaker 1: Congress was like, hey, maybe we should have some some
19:57
Speaker 1: more you know, guardrails and reporting requirement it's on this
20:00
Speaker 1: private equity business, because that's a term that kind of
20:03
Speaker 1: just came around in the twenty first century. Even though
20:05
Speaker 1: it was happening. Private equity as a term came around,
20:08
Speaker 1: I think in the early two thousands, and even though
20:11
Speaker 1: they put some more reporting requirements around, it still way
20:15
Speaker 1: less transparent and way fewer requirements than you know, the
20:21
Speaker 1: publicly traded companies and the stock market and banks and
20:24
Speaker 1: stuff like that. Right, But there's been a real boom
20:27
Speaker 1: since that time. The number of companies publicly traded has
20:30
Speaker 1: dropped about half since nineteen ninety six where it was
20:34
Speaker 1: at its peak, and a couple of years ago, in
20:36
Speaker 1: twenty twenty three, there were five times as many private
20:39
Speaker 1: equity backfirms as publicly held companies.
20:42
Speaker 2: Yeah, because it's you don't have to worry about the
20:45
Speaker 2: government meddling with your stuff. It's crazy. So some of
20:50
Speaker 2: the some of these deals make headlines, and usually when
20:55
Speaker 2: it makes headlines is because it's gotten so bad that
20:58
Speaker 2: the average person wants their blood to boil reading about it.
21:01
Speaker 2: So the news says, here, read this. One of the
21:04
Speaker 2: big ones that I remember was Toys r US.
21:08
Speaker 1: Yeah, one of this.
21:09
Speaker 2: And this is another thing it will also make news
21:11
Speaker 2: if like a beloved nostalgic brand just gets torn apart
21:16
Speaker 2: by corporators. And Toys r Us definitely fit that bill.
21:21
Speaker 2: You know, most people our age have memories of going
21:23
Speaker 2: to Toys r Us and it being like, how does
21:25
Speaker 2: this place exist? This is the most amazing place on
21:28
Speaker 2: the planet. In addition to that, I mean, even more
21:31
Speaker 2: importantly than that loss of nostalgia is that thirty thousand
21:35
Speaker 2: people lost their jobs because of a private equity takeover
21:39
Speaker 2: Toys Rus that eventually ran it into the ground.
21:42
Speaker 1: Yeah. I mean it makes some of those earlier ones
21:45
Speaker 1: where you know, on Thy twelve hundred people lose their
21:47
Speaker 1: job seemed quaint.
21:48
Speaker 2: Yeah, thirty thousand people just sorry, you don't have a
21:52
Speaker 2: job anymore.
21:53
Speaker 1: Yeah, there's this guy. I mean, we got to talk
21:55
Speaker 1: about Seers because that's another one iconic brand, iconic brick
21:59
Speaker 1: and order store. I would say there's some nostalgia tied
22:03
Speaker 1: up in Sears for sure.
22:05
Speaker 2: Sure.
22:05
Speaker 1: And a guy named Edward Lampert is someone who may
22:08
Speaker 1: not be on your radar unless you follow this stuff
22:10
Speaker 1: a little more closely. Kmart files for bankruptcy in two
22:14
Speaker 1: thousand and two, and Ed Lampert comes in he was
22:16
Speaker 1: a goldman sax guy and he I think former by
22:19
Speaker 1: this time. But he buys up a bunch of the
22:22
Speaker 1: debt from Kmart they come out of bankruptcy, and then
22:25
Speaker 1: he has a hedge fund e SL Investments, and they
22:28
Speaker 1: were the largest shareholder, and so thus he becomes the
22:32
Speaker 1: chairman and can then run the show.
22:33
Speaker 2: Right, and he says, Kmart, I think we should buy Sears,
22:37
Speaker 2: And he had a pretty big stake in Sears too,
22:39
Speaker 2: so much so that he was later accused of devaluing
22:43
Speaker 2: Sears so that he could buy it through Kmart for cheaper. Regardless,
22:48
Speaker 2: Kmart bought Sears and they formed the Sears Holding Company,
22:51
Speaker 2: which was this huge, massive retailer. Kmart was not doing
22:56
Speaker 2: very good. Sears was doing amazing tens and tens of
22:59
Speaker 2: billionions of dollars in sales every year, and for the
23:02
Speaker 2: first couple of years things were going pretty well. But
23:06
Speaker 2: Edward Lampert, being a corporate rating private equity guy, again,
23:10
Speaker 2: he's this is his firm, so he is directly taking
23:14
Speaker 2: hundreds of millions of dollars that two percent of the
23:18
Speaker 2: assets every year, plus that twenty percent when he gets
23:22
Speaker 2: above performance goals. So by juicing this company and like
23:27
Speaker 2: boosting the stock price and the value of all this stuff.
23:29
Speaker 2: He's getting huge percentages of that every year. Right. The
23:34
Speaker 2: problem is these bad management decisions. This is when it
23:37
Speaker 2: goes bad, and this is when you end up reading
23:38
Speaker 2: about it. One of the big things they did was
23:41
Speaker 2: a stock buy back. Right. And if you have a
23:43
Speaker 2: bunch of stock out there, a bunch of shares out
23:46
Speaker 2: there on the market, just by like the laws of
23:49
Speaker 2: supplying demand, they're they're worth less than if they're scarcer.
23:53
Speaker 2: So you go as the company and buy those shares back.
23:58
Speaker 2: And because there's fewer shares on the market, share price
24:00
Speaker 2: can increase. Right, So if you're holding shares in the company,
24:03
Speaker 2: your share price goes up and you make the company
24:06
Speaker 2: buy the stocksback. It's not like you're out there doing
24:09
Speaker 2: it yourself. Right. The better thing to do traditionally, for
24:13
Speaker 2: if you want your business to keep running, is to
24:15
Speaker 2: use that money to keep your business running. But instead
24:19
Speaker 2: they took six billion dollars and bought stockback to raise
24:23
Speaker 2: the share price, and they only spent I think this
24:26
Speaker 2: is over a couple of years. They only spent half
24:28
Speaker 2: of that on capital expenditures like keeping up your properties
24:33
Speaker 2: maintaining your buildings, stuff like that, and so the company
24:38
Speaker 2: just almost immediately started to just falter.
24:41
Speaker 1: Yeah, so things start faltering. This is around two thousand
24:45
Speaker 1: and seven or so, and ESL, which again was at
24:49
Speaker 1: Lampert's company, They and some other firms then loan money
24:55
Speaker 1: to themselves almost two point six billion dollars and so
24:59
Speaker 1: they're now also collecting interests and fees on that. So
25:03
Speaker 1: about four hundred million in interests in fees to the
25:05
Speaker 1: big loan that they gave themselves, and Sears continues to
25:10
Speaker 1: sort of tank, or the Sears Holding Company continues to tank.
25:13
Speaker 1: That's when they break it up. They spun off, they
25:15
Speaker 1: start spinning off different divisions. ESL is buying shares in
25:20
Speaker 1: most of those smaller divisions as well once they break
25:22
Speaker 1: it apart. And then in twenty fifteen, Ed Lampert founded
25:27
Speaker 1: a real estate company called Sarritage Growth Properties. They bought
25:32
Speaker 1: two hundred and sixty six seers and Kmart buildings and
25:35
Speaker 1: then rented them back to themselves.
25:38
Speaker 2: It's like robbing Peter to pay Peter.
25:40
Speaker 1: Yeah, it's just sounds like such an obvious policing.
25:45
Speaker 2: It is and grift and it's totally legal. That's the thing.
25:49
Speaker 2: They're not breaking any laws. All of this is completely legal.
25:53
Speaker 2: It's just despicably unfair. So obviously, after a fairly short
26:00
Speaker 2: time seven years, this company, Seers Holding, filed for bankruptcy.
26:05
Speaker 2: And again, bankruptcy doesn't mean like, oh that's it amount
26:08
Speaker 2: of money. It means like, hey, I can't pay my
26:10
Speaker 2: debts back. So I'm going to negotiate with all these
26:13
Speaker 2: people and hopefully reduce it by two thirds and then
26:17
Speaker 2: I can manage that. So I'm going to come back
26:19
Speaker 2: out of bankruptcy and try to continue on. That's what
26:22
Speaker 2: that's that was the result for Sears Holding. But part
26:26
Speaker 2: of this restructuring was that they started slashing costs. And
26:32
Speaker 2: the first thing you do to slash costs of fear
26:34
Speaker 2: corporators fire people. They closed stores, chuck. They had thirty
26:38
Speaker 2: five hundred Seers and Kmart stores when those two companies merged. Okay,
26:43
Speaker 2: by seven years later they were down to seven hundred,
26:49
Speaker 2: and today there's eight eight eighty eight, eight hundred zero eight.
26:58
Speaker 1: Yeah, there's eight of those left. It was, you know, again,
27:02
Speaker 1: tens of thousands of jobs and eleven billion dollars in
27:07
Speaker 1: unpaid debt to creditors. And Ed Lampert ends up making
27:11
Speaker 1: about one point for personally personing about one point four
27:14
Speaker 1: billion dollars from managing that fund.
27:17
Speaker 2: Two things I saw. The Wall Street Journal estimated that
27:20
Speaker 2: under Lampert's watch of this, I think seven years, two
27:25
Speaker 2: hundred thousand people lost their jobs from Sears and k martin. Yeah,
27:31
Speaker 2: that's got to be a record, man. And then also
27:34
Speaker 2: he was quoted as saying like, yeah, I'm really bummed
27:37
Speaker 2: about this whole thing. It was a real loss. It
27:40
Speaker 2: was a real opportunity cost for me, meaning he could
27:44
Speaker 2: have done this with a different company and maybe made
27:46
Speaker 2: out even better than he did.
27:50
Speaker 1: So you mentioned Red Lobster, and this was very much
27:53
Speaker 1: in the news. It feels like it was more recent. Well,
27:56
Speaker 1: I guess some of this stuff was a little more recent.
27:57
Speaker 1: But in twenty fourteen, Golden Gate Cap Capital San Francisco
28:01
Speaker 1: company bought Red Lobster two point one billion dollars. They
28:05
Speaker 1: said it was quote an exceptionally strong brand with an
28:07
Speaker 1: unparalleled market position, and in order to pay for that deal,
28:11
Speaker 1: they sold, As you mentioned, they sold the real estate
28:14
Speaker 1: of five hundred restaurants for about one point five billion bucks,
28:18
Speaker 1: and a company called American Realty Capital partners bought that
28:22
Speaker 1: land and then once again leased it back at a
28:25
Speaker 1: higher rate, like above market rates.
28:27
Speaker 2: Yeah, and again that one point five billion. I'm a
28:30
Speaker 2: significant portion of it just went right to investors. I'm
28:33
Speaker 2: not sure how much, but that was that's the playbook, right.
28:37
Speaker 2: I also have to say I worked at Red Lobster
28:39
Speaker 2: as a server for a little bit.
28:41
Speaker 1: Oh, you and I have dined at Red Lobster before
28:46
Speaker 1: one time. It's probably the only time I've been there
28:48
Speaker 1: in the past forty years. And you never, I don't think,
28:52
Speaker 1: disclosed to meet that.
28:54
Speaker 2: Did I not.
28:56
Speaker 1: No, All you talked about was how much you love
28:57
Speaker 1: those what are they? Little cheesy biscuits, the cheddar bay bisis.
29:00
Speaker 2: That is why I worked at Red Lobster so it
29:02
Speaker 2: could be closer to them. It was only for a
29:04
Speaker 2: couple of weeks, so I was like, I gotta stop
29:06
Speaker 2: eating these.
29:07
Speaker 1: I didn't know you ever waited tables at all.
29:08
Speaker 2: So the reason why I don't talk about that that
29:11
Speaker 2: much is because that I'm one of the worst servers
29:15
Speaker 2: of all time. Something happens to me between walking from
29:20
Speaker 2: you know, the kitchen to your table, and my personality
29:23
Speaker 2: just drops out of me somehow, and I forget stuff
29:27
Speaker 2: and I'm just terrible, Like the kind of waiter where
29:30
Speaker 2: you're like, you just you ruined our dining experience, are
29:33
Speaker 2: so bad. That was the kind of waiter I was.
29:35
Speaker 2: So I learned after probably six or seven places to
29:38
Speaker 2: just stop trying to be a server.
29:40
Speaker 1: Yeah, you and Emily. Emily was waited tables for a
29:44
Speaker 1: very very short time for similar reasons.
29:45
Speaker 2: Yeah, it's just it's Yeah, you have to be in
29:48
Speaker 2: the right kind of mindset to pull it off. It's
29:51
Speaker 2: not as easy as it looks. I found.
29:53
Speaker 1: Yeah, I was pretty good at it.
29:54
Speaker 2: I believe that.
29:55
Speaker 1: You know. Also glad those days are behind me. Yeah,
29:58
Speaker 1: I think my retirement job is going to be uh,
30:00
Speaker 1: stadium worker. I want to like that before I want
30:04
Speaker 1: to like sell beer at a base at Brays game.
30:07
Speaker 2: Let's hear what you got cold? Bea I ha cold,
30:11
Speaker 2: that's pretty good. You gotta you gotta grow one of
30:14
Speaker 2: those Walrus mustaches.
30:17
Speaker 1: Two for one and they're like, you can't do that,
30:19
Speaker 1: you can't make deals.
30:20
Speaker 2: The one I always remember is popcorn, peanuts, cararalcorn hair.
30:24
Speaker 1: Is that it the price you got to finish it
30:26
Speaker 1: up with?
30:26
Speaker 2: Here? Yeah, that's how you get people's attention. So oh yeah,
30:30
Speaker 2: back to Red Lobster.
30:32
Speaker 1: Yeah, I can smell the cheesy biscuits.
30:34
Speaker 2: They're so good man, and they're ranch dressing is world
30:37
Speaker 2: class as well. It's just unlike any other ranch. It's
30:39
Speaker 2: really good. Oh all right, I'm glad that Red Lobster
30:42
Speaker 2: are still around as far as I know, despite all
30:45
Speaker 2: these different companies trying their best to run it into
30:47
Speaker 2: the ground. COVID dip definitely didn't help. Yeah, twenty twenty hit,
30:51
Speaker 2: Covid hit and Red Lobster, which was already This is
30:54
Speaker 2: what I was talking about. When a company is saddled
30:57
Speaker 2: with a bunch of debt and new lost, that's hard
31:01
Speaker 2: to keep up through through rough times or changes. Right,
31:05
Speaker 2: same thing with Red Lobster. And I guess one of
31:08
Speaker 2: its seafood suppliers, Tie Union Group, stepped in and was like, hey,
31:12
Speaker 2: we'll buy Red Lobster. We have a really good idea.
31:15
Speaker 2: So this is their seafood supplier. They became the exclusive
31:19
Speaker 2: shrimp supplier to Red Lobster the company that owned it
31:22
Speaker 2: that now owned Red Lobster, and the CEO is like,
31:25
Speaker 2: you guys get this. You know, the endless shrimp promotion
31:28
Speaker 2: for twenty bucks. We're going to make it a permanent
31:31
Speaker 2: menu item, and we're going to sell them so much
31:34
Speaker 2: shrimp because we're their exclusive supplier of shrimp. Bam. And
31:39
Speaker 2: he said, bam, that's a quote. And they lost like
31:43
Speaker 2: eleven million dollars in just three months of trying that
31:45
Speaker 2: because they grossly underestimated how much shrimp people would eat
31:49
Speaker 2: if there was no bottom to it.
31:53
Speaker 1: Yeah. I mean, if you're talking to you know, medium
31:57
Speaker 1: sized shrimp, I can eat, you know, if I'm really
32:00
Speaker 1: trying thirty wow meal.
32:06
Speaker 2: Wow. That's a lot of shrimp, dude, not the huge ones.
32:09
Speaker 1: No, I got it's if it's endless and it's solved
32:12
Speaker 1: for a very set rate. Uh. And I'm, you know,
32:16
Speaker 1: maybe trying to impress my date.
32:18
Speaker 2: Right, surely not fried though, right, you're just talking like
32:22
Speaker 2: peel and.
32:23
Speaker 1: E oh, that's more like forty.
32:25
Speaker 2: Oh my god, you could eat thirty fried.
32:28
Speaker 1: I probably I probably could not eat forty eight peel
32:30
Speaker 1: and eat. I don't know if I could eat forty
32:32
Speaker 1: I mean, if I'm not eating cheesy biscuits and French
32:35
Speaker 1: fries and cole salaw and so you're being serious, then
32:38
Speaker 1: I could probably eat thirty fried shrimp for sure.
32:40
Speaker 2: Okay, I'm going to be your date for that one.
32:43
Speaker 1: Not well, I hope to impress you.
32:46
Speaker 2: Oh what else? Oh, I've got one. One of the
32:48
Speaker 2: things that a lot of these companies do is they
32:51
Speaker 2: take over and buy a business that they just don't
32:53
Speaker 2: understand the business of, and that's how they run it
32:55
Speaker 2: into the ground. That'll happen a lot. We'll talk about
32:58
Speaker 2: that here or there. But there are some niche private
33:01
Speaker 2: equity firms that focus on specific kinds of businesses. They
33:04
Speaker 2: know what they're doing, and one of them is Rourke Capital.
33:07
Speaker 2: They're big on fast food industry. And when you have
33:12
Speaker 2: a very powerful, wealthy firm like that that's zeroed in
33:17
Speaker 2: on the ups and downs of their particular industry, you
33:20
Speaker 2: have the kind of people who will lobby successfully to
33:23
Speaker 2: get the fifteen dollars federal minimum wage taken out of
33:26
Speaker 2: the stimulus package, which is exactly what Rourke Capital managed
33:30
Speaker 2: to do several years back.
33:32
Speaker 1: That's right. And if you're wondering, is that named after
33:36
Speaker 1: you know, mister Rourke from Fantasy Island. No, it's named
33:40
Speaker 1: like seriously named for Howard Rourke ein rand Hero. And
33:46
Speaker 1: do with that what you.
33:47
Speaker 2: Will yeah, from the fountain.
33:49
Speaker 1: That's right, all right. I guess we could talk a
33:52
Speaker 1: little bit about newspapers and physical print media because I mean,
33:57
Speaker 1: they have been in trouble anyway. So not all of
33:59
Speaker 1: the losses of the print media industry are due to
34:03
Speaker 1: private equity equity firms, but private equity ownership of newspapers
34:08
Speaker 1: rose from five percent in twentyd and one to twenty
34:11
Speaker 1: three percent in twenty nineteen. And you know, there have
34:16
Speaker 1: been supposedly analyses done that show that ownership of print
34:22
Speaker 1: media by a private equity firm can improve circulation, but
34:27
Speaker 1: it also will lead to reduction and editorial staff, like
34:32
Speaker 1: massive cuts and staff, which means cuts in things like
34:35
Speaker 1: local government. And they've shown that results in a decline
34:39
Speaker 1: and participation in local elections.
34:40
Speaker 2: Oh yeah, like the loss of local government news reporting
34:45
Speaker 2: has had an enormous effect on the United States. It's
34:49
Speaker 2: just crazy, like the cascading effect it had. We're going
34:53
Speaker 2: to do a whole episode on that right after this. Okay, Great,
34:57
Speaker 2: we'll make it up as we go along. Great is
35:00
Speaker 2: another one. They were sitting pretty I think they were
35:03
Speaker 2: worth almost six billion dollars in twenty seventeen, got bought
35:07
Speaker 2: out and by twenty twenty three they were worth three
35:10
Speaker 2: hundred and fifty million dollars because it just got run
35:13
Speaker 2: into the ground. That's a good example of a company
35:17
Speaker 2: that didn't know what they were doing, buying a business
35:19
Speaker 2: that they didn't know anything about that and then they
35:23
Speaker 2: just made terrible decisions.
35:25
Speaker 1: For sure, I think we should take a second break, okay,
35:28
Speaker 1: and we'll be back right after this.
35:54
Speaker 2: Definitely should.
36:00
Speaker 1: Childs of each.
36:02
Speaker 2: Ysk kid Okay, Chuck, we're back. And here's where we
36:08
Speaker 2: really get into the problems. I mean, aside from people
36:11
Speaker 2: getting laid off, people being neglected in the hospitals they
36:14
Speaker 2: go to because they're owned by private equity firms. That's
36:17
Speaker 2: become a big problem in the twenty first century in
36:21
Speaker 2: the United States too.
36:22
Speaker 1: Yeah, there's in twenty twenty four a loan by one
36:26
Speaker 1: count at least there were one hundred and sixty six
36:29
Speaker 1: leverage buyouts in healthcare just in that one year, and
36:34
Speaker 1: seven of the eight biggest healthcare bankruptcies that year were
36:37
Speaker 1: from companies owned by private equity firms or hospitals in
36:40
Speaker 1: healthcare organizations right.
36:43
Speaker 2: The private equity firm dental practices rose drew dramatically from
36:47
Speaker 2: the teens to the twenty twenties, and that results in
36:51
Speaker 2: things like companies push I read an article about the
36:55
Speaker 2: Dental Express in Ohio telling a mom that her three
36:59
Speaker 2: year old needed seven in root canals.
37:01
Speaker 1: Yeah, for sure. And the same goes with hospitals. Hospitals,
37:06
Speaker 1: if they're owned by a private equity firm, they result
37:08
Speaker 1: in higher charges, more safety issues. There's one study that
37:13
Speaker 1: said there was a twenty five percent rise in hospital
37:15
Speaker 1: acquired complications like something you got while you were there.
37:19
Speaker 2: Right, And I think thirty eight percent more blood infections
37:21
Speaker 2: from IV ports. That's just from not having enough staff
37:24
Speaker 2: or inexperienced staff. It's just not good and it gets
37:28
Speaker 2: even worse. They're also into hospices, nursing homes, and it
37:35
Speaker 2: just follows the same pattern that you would expect. A
37:37
Speaker 2: study found that private equity ownership increases mortality rates by
37:41
Speaker 2: eleven percent just because pe'es cutting corners to save costs.
37:46
Speaker 2: So that's a huge, huge issue. I think that that
37:50
Speaker 2: one needs regulation where it's like you can't sorry, you guys,
37:53
Speaker 2: can't own healthcare stuff that's just off limits for you.
37:57
Speaker 1: Yeah, I mean, anyone who's been through the trauma of
38:00
Speaker 1: a loved one and having to go to a nursing
38:03
Speaker 1: home in the past. I mean, I don't know when
38:05
Speaker 1: it was good, but we had to go through that
38:07
Speaker 1: with Emily's grandmother, and just the state of that industry
38:10
Speaker 1: is horrific. It's the opposite of what it should be
38:13
Speaker 1: in almost every way.
38:14
Speaker 2: Yeah, and housing too is another big deal. I think Blackstone,
38:18
Speaker 2: which we mentioned, was founded back in the eighties. They're
38:20
Speaker 2: known as the United States's largest landlord. They owned three
38:24
Speaker 2: hundred thousand units of rental housing in the US as
38:27
Speaker 2: of twenty twenty three. And as you would expect, when
38:31
Speaker 2: private equity comes along, rents go up. The maintenance people
38:35
Speaker 2: are slower to respond because they've been laid off, and
38:38
Speaker 2: just things kind of go downhill rather than get better
38:42
Speaker 2: like they're supposed to. That's the reason private equity is
38:44
Speaker 2: supposed to exist. It's supposed to take kind of slow
38:49
Speaker 2: lumbering companies that are in a position to do better
38:53
Speaker 2: than they are and make them do better. It's not
38:55
Speaker 2: supposed to make everything go down hill. But that's how
38:58
Speaker 2: it happens a lot.
38:59
Speaker 1: Yeah, I mean, sometimes it does happen for the better.
39:03
Speaker 1: Like one great example is Hilton, the hotel chain. There
39:07
Speaker 1: was a leveraged buy out from Blackstone in two thousand
39:09
Speaker 1: and seven of Hilton and the great procession you know, Hit.
39:15
Speaker 1: I guess it was like the next year in two
39:16
Speaker 1: thousand and eight, and obviously it's going to really affect
39:19
Speaker 1: the tourism industry. But they brought in a CEO from Blackstone,
39:24
Speaker 1: a guy named Christopher Nesstta, who actually made things better.
39:27
Speaker 1: He said, hey, let's invest in emerging markets, let's invest
39:32
Speaker 1: in the future, and like digital strategies like apps where
39:37
Speaker 1: you can check in and get your hotel key through
39:39
Speaker 1: an app and things like that, just you know, instead
39:41
Speaker 1: of just shuddering things like actually investing, reinvesting in the company, right,
39:45
Speaker 1: And it turned out to be really you know, all
39:47
Speaker 1: these things were really popular moves, and Blackstone sold Hilton
39:50
Speaker 1: back to the public market after it had been yanked
39:53
Speaker 1: out of the public market. They sold it back in
39:55
Speaker 1: twenty thirteen and sold out of their stake in twenty eighteen.
40:00
Speaker 1: Made a ton of profit fourteen billion dollars over eleven years.
40:03
Speaker 1: But the company itself, Hilton, was doing great and continues
40:07
Speaker 1: to do great.
40:08
Speaker 2: Yeah, they doubled the number of rooms today that they
40:10
Speaker 2: had in two thousand and seven when they took over,
40:12
Speaker 2: when Blackstone took over. So yeah, that's a big success story.
40:15
Speaker 2: It wasn't like a pump and dump. Hilton's still doing well,
40:18
Speaker 2: like you were saying. Burger King's another one too. They
40:20
Speaker 2: got bought by a Brazilian firm called three G Capital,
40:24
Speaker 2: and they just they just made some really good moves
40:28
Speaker 2: in a lot of voice. Again, this is from an
40:30
Speaker 2: investor standpoint, not necessarily from the standpoint of the people
40:34
Speaker 2: at corporate who were laid off or anything like that.
40:36
Speaker 2: But as far as firms go, three G made something
40:39
Speaker 2: like twenty eight billion dollars over fourteen years and it
40:43
Speaker 2: only invested one billion, So that's a pretty good return
40:46
Speaker 2: on investment.
40:48
Speaker 1: Private equity coming in.
40:53
Speaker 2: Why'd you do that?
40:54
Speaker 1: Oh?
40:55
Speaker 2: Just because hate you got me.
40:59
Speaker 1: So here's the thing. Alternative investments make a lot of money.
41:06
Speaker 1: We've seen that there's less oversight, So you know, one
41:09
Speaker 1: of the ways that they make a lot of money
41:11
Speaker 1: is that they're just allowed to do things that you
41:14
Speaker 1: can't do in traditional sort of slow growth investments like
41:18
Speaker 1: stocks and bonds and things like that. But you also
41:21
Speaker 1: mentioned earlier that like pension funds like four to one
41:23
Speaker 1: k's or where a lot of this money comes from.
41:27
Speaker 1: And like, do you have a choice whether or not
41:30
Speaker 1: the four one k that you invest in ends up
41:33
Speaker 1: being a part of this thing.
41:34
Speaker 2: Yeah, I think you can also invest your four to
41:37
Speaker 2: one k, now, which for a long time was off
41:39
Speaker 2: limits because that's your You the non accredited investor who
41:44
Speaker 2: doesn't know what they're doing with private equity. That was
41:46
Speaker 2: off limits. But now you can if you want, although
41:50
Speaker 2: they say that's probably not a good idea unless you
41:52
Speaker 2: know what you're doing.
41:53
Speaker 1: Again, well, eighty nine percent of public pension funds have
41:57
Speaker 1: some of their money in private equity. I think thirteen
42:01
Speaker 1: percent average of thirteen percent of their assets is the average,
42:06
Speaker 1: Sometimes more than twenty five percent. But that's that's almost
42:08
Speaker 1: ninety percent of public mention funds. It's a lot.
42:10
Speaker 2: Yeah, and then I guess one of the other big things.
42:14
Speaker 2: So the reason why, well, another reason why people are
42:18
Speaker 2: like this is so not right. All of that money
42:21
Speaker 2: that those people like Edward Lampert make made that one
42:24
Speaker 2: point four billion dollars by running a huge venerated company
42:27
Speaker 2: into the ground. He paid at most twenty percent on
42:32
Speaker 2: those profits, even though it was personal income for him.
42:36
Speaker 2: He didn't pay the personal income tax of like thirty
42:39
Speaker 2: seven percent. Instead, he paid twenty percent in capital gains
42:43
Speaker 2: tax because the fis that he charged are treated like
42:47
Speaker 2: gains from an investment rather than personal income, even though
42:52
Speaker 2: anyone would call those fees personal income. So not only
42:56
Speaker 2: are the pe firms robbing companies for their own personal
43:00
Speaker 2: enrichment getting people laid off, they're not even paying their
43:04
Speaker 2: full share of income taxes on it too. So not
43:08
Speaker 2: only are they robbing companies for their own personal enrichment
43:12
Speaker 2: getting people laid off, they're not even paying their full
43:15
Speaker 2: share of income taxes on it too.
43:18
Speaker 1: Yeah. This is the kind of thing where in the
43:20
Speaker 1: movie version where this is firstborn as an idea, yeah,
43:24
Speaker 1: and the person is explaining it to like the people
43:26
Speaker 1: at dinner, they keep asking questions that start with yeah,
43:30
Speaker 1: but what about and then the answer always starts with oh, no,
43:33
Speaker 1: that's the best part.
43:34
Speaker 2: Right exactly. It just keeps going like.
43:36
Speaker 1: That, yeah, and they're like, no, no, no, but what
43:38
Speaker 1: about this, No, no, that's the best part yep. So
43:40
Speaker 1: there's a lot of best parts.
43:42
Speaker 2: And one of the guys finally puts his fork down
43:44
Speaker 2: and stands up, hits the table and goes Bam.
43:47
Speaker 1: That's right. But you were talking about the carried interest loophole, right,
43:50
Speaker 1: that's what it's called.
43:51
Speaker 2: Yeah, Or your personal income is magically treated as returns
43:55
Speaker 2: on an investment in text at twenty percent rather than
43:59
Speaker 2: thirty seven per or whatever. So if you make one
44:02
Speaker 2: hundred million dollars, you pay seventeen million dollars less taxes
44:06
Speaker 2: on that one hundred million dollars, and at that point,
44:09
Speaker 2: really who cares anyway? Right, Yeah, you would think, so
44:14
Speaker 2: that's private equity. I feel like we kind of showed
44:17
Speaker 2: our bias a little bit, but it's really tough not
44:19
Speaker 2: to be when you really dig into this stuff, you know.
44:22
Speaker 1: Yeah, I mean it's not the sole cause of the
44:25
Speaker 1: housing crisis, but it's a major player.
44:28
Speaker 2: Yeah, and all the other crises that we're facing too,
44:32
Speaker 2: economically and socially and politically and probably religiously too. If
44:38
Speaker 2: I gave it some.
44:38
Speaker 1: Real thought, yeah, personally.
44:40
Speaker 2: Yep, since Chuck said personally, I was waiting for it.
44:44
Speaker 2: It got you there, because now we just unlocked listener mail.
44:51
Speaker 1: Hey guys, this is in response to a tangent that
44:53
Speaker 1: you went on during this Saturday's Classic episode when Chuck
44:58
Speaker 1: was talking about arguing with his mother about gets to
45:00
Speaker 1: pay for dinner. It reminded me of my grandmother, Sheila.
45:03
Speaker 1: She always likes to pay for big family dinners and
45:05
Speaker 1: has engaged in tricks in the past. For a graduation
45:09
Speaker 1: dinner for my brother, my father knew what she was
45:11
Speaker 1: doing when she took her purse to the bathroom. So
45:13
Speaker 1: that's a good trick. I've done that before. Yeah, that
45:16
Speaker 1: wasn't her best trick, though, as even Josh mentioned that
45:19
Speaker 1: very trick. The best part did you mention that?
45:23
Speaker 2: Yeah? I mentioned that. I remember that. I've done that
45:26
Speaker 2: for sure.
45:26
Speaker 1: Yeah, Yeah, that's what you gotta do. The best was
45:29
Speaker 1: when part of the family was in upstate New York
45:31
Speaker 1: for a triathlon. Sheila wasn't even there. She lives in Massachusetts.
45:35
Speaker 1: The bill came when dinner was over the night before
45:38
Speaker 1: the race. My father and my aunt reached for their
45:41
Speaker 1: card and the waitress said it had been taken care of.
45:44
Speaker 1: All the adults looked in accusation at each other and
45:46
Speaker 1: there was a long silence, and at the exact same
45:48
Speaker 1: moment they all threw up their hands crying.
45:50
Speaker 2: Sheila all the way over in Massachusetts. Sheila went bam
45:55
Speaker 2: that's right.
45:57
Speaker 1: My aunt had made the mistake of telling Sheila on
45:59
Speaker 1: the phone that where we were going to have dinner,
46:01
Speaker 1: and our grandmother called the restaurant and gave her the
46:03
Speaker 1: credit card number.
46:04
Speaker 2: Beautiful.
46:06
Speaker 1: Thanks for all the pods. That is from James. James.
46:09
Speaker 1: That's wonderful. Sheila sounds great. I just hope she tips well.
46:12
Speaker 2: Oh good point, Chuck, nicely done. If you want to
46:15
Speaker 2: be like James. Thank you. By the way, James, that
46:17
Speaker 2: was a great email. You can send us an email too.
46:20
Speaker 2: Send it off to Stuff Podcasts at iHeartRadio dot com.
46:26
Speaker 1: Stuff you Should Know is a production of iHeartRadio. For
46:29
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46:33
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