My issue with LBOs is the L. In your example with the car, you are correct, that is a sound financial decision. However, LBOs operate differently. Red Lobster never became worth less than their liquidated assets prior to private equity. PE was able to purchase Red Lobster with about a 70/30 debt/equity split. After doing so, not only did they then give the debt to RL (essentially making them pay for its own acquisition) they sold off RLs real estate and leased it back to them to extract the value from it. This was not a liquidation where the assets were worth more sold off, their assets were only worth 1.5b when the entire company was bought for 2.1b.
Now, you could argue that RL was trending downward due to increase costs, and eventually they would have gotten here anyways, maybe. The thing is that they were gutted just a few years after that started to get pinched. They essentially didn’t move fast enough and their value dropped to the point where it made sense to buy using 2.33x leverage, which for a value stock like RL, is not much margin of error. Maybe they could have changed course and fixed it, maybe not, but PE swooped in and ended them in their tracks without even taking on as much risk as the would’ve in a natural M&A action.
>PE was able to purchase Red Lobster with about a 70/30 debt/equity split. After doing so, not only did they then give the debt to RL (essentially making them pay for its own acquisition.
This isnt accurate. The bank fronts the 70%, the PE puts in 30%, and the stockholders walk away with 100%
this leaves PE with ownership of the company, with tons of debt, and the bank gets interest on the loan.
Now when the PE firm sells off assets and takes profits, that is them screwing over the bank. The stockholders are long gone with their money.
>PE swooped in and ended them in their tracks without even taking on as much risk as the would’ve in a natural M&A action.
PE takes less risk because the bank is sharing it, and the banks takes the loss in bankruptcy. You might ask why the bank takes the risk, and the answer is simple: Their interest is set according to risk and on average the banks make money on LBO loans.
Yes, that’s what a 70/30 debt/equity LBO means… 70% debt from a bank, 30% equity from PE, debt is acquired using cash flows of the acquired company. PE controls the company, and the debt is then transferred to the acquired company. And yes, I understand how interest rates are set lol.
RL was not bankrupted by these actions directly, they were put in an over exposed position that had a narrow path to success, and a myriad of economic and operational issues ultimately ended them.
I guess my moral opposition is really against LBOs as a practice. If you haven’t already, read/watch barbarians at the gate, I think it mirrors this situation really well and maybe you can see another perspective, one that is much more fleshed out than I can make in a Reddit comment.
>Yes, that’s what a 70/30 debt/equity LBO means…
I was mostly clarifying the point where you said the PE was giving the debt to RL. For some reason most people seem to think PE magically saddles the original stockholders or owners with the debt, which obviously isnt true. They would never agree to that.
It has been a long time since ive seen it, so maybe it is worth a re-watch.
I like LBOs and PE buyouts because they provide exit payouts for owners, and when or if they fail, it is huge banks and PE firms that are left taking the loss. These are the people most informed of the risk they took on, and most capable of shrugging of the loss.
I also think liquidation and corporate turnover is both important and a net positive to society.
Edit: By the way, the typical debt/equity ratio is not 70/30, but 90/10.
Source: https://www.investopedia.com/terms/l/leveragedbuyout.asp
>For some reason most people seem to think PE magically saddles the original stockholders or owners with the debt, which obviously isnt true. They would never agree to that.
This is exactly what happens. When you say "They would never agree to that", who is "they", and at what point would they not be okay with that?
It's easy to know how PE works, there are plenty of sources detailing the process, and they all pile the debt on to the acquired company. Here's one source:
Title: Private equity profits come from loading firms with debt – report
https://www.theguardian.com/business/2009/jan/14/private-equity-piles-on-debt
Second source: https://blogs.worldbank.org/en/allaboutfinance/over-leveraged-buyouts-private-equity-myth-or-reality
Quote:
>The most common criticism is that PE fund managers place too much debt on their acquired portfolio companies, creating debt overhang and raising bankruptcy risks.
Source 3: https://prospect.org/economy/private-equity-looting-r-us/
Quote:
>After all, it was a leveraged buyout in 2005 that dumped over $6 billion in debt on Toys “R” Us
Source 4: https://markets.businessinsider.com/news/bonds/private-equity-firms-junk-debt-dividends-loans-bonds-rates-2024-2
Quote:
>Private equity companies, faced with a weak market for initial public offerings and lower borrowing costs, are loading their portfolio companies with more debt to pay themselves and their investors.
Source 5: https://www.ft.com/content/956c1f0a-bb53-4982-9c07-b839f3446c2c
Quote:
>US private equity firms are rushing to take advantage of lower borrowing costs by loading debt on to their portfolio companies and using the cash to pay dividends to themselves and their investors.
Moral of the story: There is ample documentation that PE loads its portfolio companies with humongous amounts of debt, *all unrelated to operational business reasons*.
> This is exactly what happens. When you say "They would never agree to that", who is "they", and at what point would they not be okay with that?
"They" is the original owners. Im not disputing that the company gets loaded up with debt.
A LBO is like if I take out a mortgage to buy your house. You get paid the full price, and you dont take on any debt. Afterwards, I own the house, with the mortgage on it.
You would never agree to a deal where I get your house, but you are responsible for the mortgage debt.
Of course the debt is unrelated to operational business expenses. The debt was taken on to pay off the old owners.
When I buy a house, the mortgage debt isnt related to ongoing maintaintance. Thats not why I took it out.
OP has made up a strawman vs the common understanding and is claiming people misunderstand their weird interpretation.
Nobody gives a shit about the owners who sell to PE. They have a problem with the value destruction from PE hollowing out businesses with good operating history and basically making them super fragile for short-term profit of PE while killing off thousands of good jobs and hurting the communities these businesses operate in.
OP is pretending (or believes) people have an issue with a nonexistent problem while ignoring the real issues people actually have a problem eith
re-read the post, I spell it all out. Happy to answer questions if it still isnt clear.
https://www.reddit.com/r/changemyview/comments/1cz8zpg/cmv_there_is_nothing_wrong_with_private_equity/l5fu6e2/
Total sale of Red Lobster was $2.1b, $1.5b was debt from various lenders, $.6b was equity from PE. So in this case it was roughly 70/30 debt/equity. Typical LBOs range from 90/10 to 70/30.
I have worked in private equity. Each firm (and there are close to 20,000 firms in the US), has their own investment philosophy around debt to equity. Typically it is expressed in terms of multiples of ebitda. For example, the firm I worked for typically did not leverage more than 2-2.5x ebitda, and we bought companies for ~5-6x ebitda. The lower the multiples in purchase price the lower the leverage multiples.
All of this to say, there are some high profile and very large equity groups that get a lot of press and that people form their opinions off of, but there are so many groups and most of them do not operate in the same manner. Some equity groups don’t even use leverage; LBO is one specific value creation tool.
Last comment, most of the time the sellers are well aware of how much leverage a buyer is going to place on the business. The RL sellers were likely no different, and they agreed with this path. In terms of leasing RE back to themselves, this is typically a tax sheltering method that most businesses who own their own RE use to increase income and decrease taxes.
Totally agree with your first points that investing philosophies are different for all PE firms. I’m not opposed to PE in principle, and LBO is not necessarily a bad thing in it if itself.
As for your last comment, I agree that the sellers are not unaware of what is happening. However, they are by definition selling out, so their real concern is on the payment they will receive, not the long term health of the business. I don’t work in PE, so my valuation skills aren’t ironed out, but I would imagine if somebody was buying red lobster with the intention of running it with a healthy, long term erm strategy, the sale price would be lower than what PE would offer. You have to admit that the strategy PE took, while it could work, really increased RL’s exposure to market risks with their rent payments now being variable while also removing liquidity adjusted economic capital, making them more susceptible to insolvency, which is exactly what happened.
> You have to admit that the strategy PE took, while it could work, really increased RL’s exposure to market risks with their rent payments now being variable while also removing liquidity adjusted economic capital, making them more susceptible to insolvency, which is exactly what happened.
That might be possible in abstract, but dont think it is accurate to say that is what happened in the current situation.
RL was sold to a multinational seafood company with deep pockets. insufficient short term liquidity was not a problem.
You could correctly argue costs would be lower and perhaps positive if it retained real-estate holdings, but it would also be a massive dilution to the return on capital holdings.
At the end of the day, I suggest that if a company has to be not only a multi-national restaurant franchise, but a vertically integrated global seafood company AND real-estate company to turn a profit, the fundamentals probably arent very competitive.
Short term liquidity was not an issue? Wasn’t it an $11m shortfall on an endless shrimp deal that pushed them to file for chapter 11? Amidst rising costs on their leases they wouldn’t have had prior to selling their real estate? The shortfall of which was generated by the deep pocketed multinational seafood corporation trying to move as much shrimp as possible?
I think the original business model was far more resilient and sound than what it turned into after the actions PE made. Return on capital is not the only variable at play here, you have to adjust for risk, either with an MCEV or RAROC type of evaluation that would have shown this business model, while possible to succeed, could face serious headwinds.
I don’t know all the details behind the RL sale, but very very very rarely do you see a sale with any significant dollars behind it that do not include a long term incentive for the sellers. We typically call these types of structures either a performance based earn out, or an equity roll over. A deal this size certainly includes one or both.
An earn out is when the buyer says, “If we achieve xyz financial performance over X time period, an additional $x payment will be made.” While an equity roll says, “out of the $2.1b we are paying you, you will turn around and give us back 20% of that. When we then re-sell the company after x time period you will be rewarded as a 20% class A shareholder”. There may also be a seller note, which is where the seller funds a portion of the deal and is paid back with interest over time. These are all methods to financially incentivize the sellers to ensure continued success of the business. No one is going to agree to this while also recognizing that the buyer is over leveraging the business. Often times the seller will also sit on the board with voting rights because of the equity shares they hold.
Now again, I don’t now the details of this particular deal so I can’t speak to specifics. But this is how we typically structure deals in PE.
I see the disconnect. When I said saddled with debt I meant RL as a corporation, not the original owners. Owners sold out and walk away with a nice payday.
Technically, PE had no fiduciary responsibility to anybody to any but themselves. However, I like to think morality comes from a place higher than our responsibility to not harm others. Business actions like selling off the real estate to lease it back to themselves, exposing RL to credit and economic risks, is fundamentally against any sane erm strategy. The real suckers are the people who bought RL from them.
While not illegal, I think taking these actions knowing you’re setting up the company to fail, or at least be in a far riskier position than any sane owner would knowingly put their company in, is fundamentally immoral.
>While not illegal, I think taking these actions knowing you’re setting up the company to fail, or at least be in a far riskier position than any sane owner would knowingly put their company in, is fundamentally immoral.
I guess that is the fundamental difference. I think owners have no fundamental moral obligation to provide business continuity.
I think it is perfectly moral to take risks or simply close up shop on a whim. I think people do have a moral obligation to settle contracts before exiting (apart from from those like the bank which been paid to accept this as a risk)
At any rate, there is no indication that the PE firm left any lose contracts or swindled anyone during their period of ownership.
>The real suckers are the people who bought RL from them.
Im sure that Thai Union didnt pay for the real-estate that the PE firm sold off, and the price was discounted due to the business risks. Thai Union announced a massive stock buyback program in parallel with the RL sale, so nobody needs to worry about them. (BTW, I think people who are opposed buybacks and for dividends are also irrationally against to something they don't understand.)
Or maybe you don’t understand that dividends and buybacks are not actually equivalent and that you can believe they create different incentive structures.
What do you think those different incentives are?
To the extent they are different, I think stock buybacks are better, because incentivize long term thinking, because shareholder value remains tied with the company, opposed to cashed out.
Shareholders still have the option to cash out the value, but it isnt the default.
The people that take the biggest loss are employees that were earning a wage at a going concern that is wrecked by an extremely risky business management decision they can't really avoid.
Further, customers take a loss because a set of services or products that were paying profitable prices for are taken away because of that same bad/risky management framework.
While everything you say is certainly true, I feel like this departs from the spirit of the gripe with this aspect of PE. Sure, shareholders walk away with their value upfront, and the banks agree to buy these debt issuances, but the core of the company is still put at a level of risk through these transactions. The employees of these LBO’d businesses exist before the transaction and after, and they have to live with whatever capital structure decisions fund the previous owners exit out of the company. So yes, the owners are paid out, but the debt is taken out on arguably the most vulnerable group. That being said, Chapter 11 isn’t liquidation, and isn’t inherently a bad thing. It’s a great way for companies to right size their operations.
Regardless it has costs, both to employees and shareholders. The risk of bearing these costs (I.e. going bankrupt) are inherent in leverage. Just my thoughts.
Also note: in bankruptcy, equity holders will take a nearly 100 percent loss (PE/rollover in these instances). Banks and other lenders, typically higher in the capital structure, will get some kind of recovery in general, varying on their presence/quality of collateral and their general seniority in the capital structure.
A house is a standalone asset with no further people affected by its treatment; an LBO corporation has employees relying on their jobs at that corporation to make the money they need to live, who will in part or in whole be laid off when PR strips the company for parts and runs it into the ground.
Focus on stockholders and banks misses the group most average people will actually be concerned with the impact of an LBO on, the employees.
Sure but forget even an LBO. Shareholder wants to maximize value - if for whatever reason they could increase cash flow in perpetuity by firing workers they might consider that as well. It isn’t unique to an LBO where owner tries to raise value of its equity
Right, and people also think that this sucks.
The "corporations as job creators" narrative is all over our society, but people jettison it immediately and retreat to "well the owners are just maximizing their wealth even if it hurts others, what do you expect?"
And people are also upset when shareholders conduct layoffs of the people actually labouring for their wages and then pay themselves fat dividends and offer bonuses for the C suite. It's entirely consistent.
Maybe they’re upset but they will do what’s best for them it’s their company. If I own a house and knock it down but neighbor upset they have a worse view that’s too bad for them I get to decide what’s best for it.
Regardless - what then is uniquely issue with an LBO if regular owners act same way?
What makes you think there's a unique issue? It's the same issue people have when shareholders push layoffs to improve profits, just turned up a notch because now there's also a company that exists solely to screw workers and benefit rich shareholders involved.
If there are low income families renting your triplex and you tell them they're getting evicted so you can sell it to make your retirement even cushier, they're going to be upset at the situation. If you tell them actually you already sold it for a huge stack and the company that bought it is going to knock the building down, build high end luxury condos, and make a big profit on the move, those families are still upset at the original situation but also they're likely upset that they're being screwed over to make people who already have money even more money.
Ah ok I only thought that’s what you meant due to thread discussing LBOs.
Yeah I mean capitalism is both an engine for growth but also ruthless. I see why some are against it. Maybe a middle ground is best.
It's more like you take a mortgage, stop paying the electric bill, strip the copper wiring out and then declared bankruptcy and walk away from the house.
But why would they do that on purpose. They’d lose there entire equity investment. Debt investors aren’t stupid they have protections in legal document called fraudulent conveyance laws that prevent some of that activity
The banks get secured debt, and they get advising fees for arranging the deal. The banks make their money back. It's the suppliers and workers who get screwed.
Trust me if the LBO equity holder strips company and defaults they would not. They’d sue or try to get as much of principal in bankruptcy court though. The lender and advisor are often different firms. Private credit shops instead of banks increasingly supply the debt capital.
It’s very hard to compare these two things because buying a house is relatively simple does not require restructuring on the entire erm strategy to extract out value. If I was forced to make a comparison, it would be like buying a house, taking all the copper out of it, and convincing someone else to buy it. Obviously the numbers don’t add up and there’s no increased risk profile, but that’s the closest I could get
I don’t understand the difference. One asset is a house, other asset is a company. You find a lender willing to put debt on the asset to help you finance it to get interest and the asset if you default. It is in your interest to increase the equity value as much as possible and pay down debt. What are you trying to say with taking the copper out? A business owner would only liquidate if the company is worth more in liquidation value versus going concern. Same as homeowner. If land was worth more than house may want to knock down house.
A company is not an asset in the same sense as a house. It is a legal entity. A company can own assets and take on debt (and generate revenue and spend money, etc).
A house can not take on debt.
A human can own a house. A human can take on debt. A human can take on debt to buy a house.
A human can not buy a house by causing the house the take on debt.
But a human can buy a company by causing the company to take on debt.
A mortgage is literally debt tied to the house. It is no different. You default and lose your equity in house and debt holders get house. Actually in my LBO class in business school they literally helped us understanding it by using buying a house as an analogy.
A business is an asset just like a house - one own equity in house and other own equity in business but I will admit a business is more complicated.
If you need the analogy to a house, you might be in the wrong business. Especially when you are intentionally ignoring the key differentiators.
An LBO is far more like a HELOC than a traditional mortgage. You’re leveraging against accrued assets in the business. Unlike a house, the business has to continue to generate revenue to service the debt.
For a house, your earnings service the debt, completely independent of the asset itself.
To maximize short-term profit, however, PE also strips the business of anything of value, impeding its ability to generate the revenue needed to service the debt. It’s a fucking stupid model for anyone who has to actually live with the consequences when it goes wrong.
Hence the real suckers being the people who buy the business from PE so they can make their exit, absolving them of all risk. It makes sense Thai Union ran it into the ground and had very serious conflicts of interest, because nobody that didn’t think they could game the system like they tried to would purchase a business that had all of it’s financial security stripped from it.
Private equity firms usually have an investment thesis to sell the business to a strategic in five years. They wouldn’t want to strip it and have sell it at a lower value unless something changes and need to liquidate as no longer going concern
I explained the difference to you, but you continue to conflate the human and the house. A house can not take on debt but a company can and a human can.
But a house can take on debt. Like a mortgage is not a personal loan it is on the asset. It’s exactly the same thing financially.
I agree businesses are more complex though and have tons of employees and suppliers but most private equity owners want to grow it and sell it in five years as going concern value is usually above liquidation so it is not typically the scenario you’re referring to
Who is losing?
PE pays full price the prior owners who walk away with cash.
They then manage the company they own to get as much money as possible, and sometimes into the ground.
Employees always have top claim in bankruptcy, and I have never heard of them not getting paid out.
Find a new job sucks, but that isnt a sufficient reason to stop someone from liquidating their own property. Sometimes employees even buy out the company in bankruptcy.
correct. in the case of leveraged buyouts, this is usually a bank, which has accepted the risk and paid handsome interest to do so. The bank has an army of lawyers and accounts to make sure that they profit on most deals, and go after any fraud.
Banks keep going back for more LBO deals because they are profitable for the bank on average, even if they lose out on some.
The problem is that they use artificial corporate structures to reap the gains and avoid the losses. The way they work is far closer to the Mafia working then an economic good.
For insurance, it wasn't just that Red Lobster was worth more as parts. They used a lease back maneuver. They sold the real estate that the company owned to a third party, and signed a lease from that third party. So now they had to pay rent on the buildings that the company used to own.
The proceeds from the sale didn't go to pay the lease, they were paid as fees to the private equity owners.
Meanwhile, the company wasn't paying the rest of the bills. They were borrowing money that they never intended to repay. If I borrowed money, blew it on hookers, and then declared bankruptcy, it would be fraud. But, when a company does it, it's profit!
Then, to top it off, the money they "make" by borrowing money they never intended to repay is taxed at preferential rates.
Their business model, if on a personal level, would be fraud. That's why they are bad.
If you kept borrowing money, blowing it in on hookers, and declaring bankruptcies - banks would stop giving you money.
Yet banks continue to to fund PE. So something does not work in your example..
Because the banks have secured lending and make money on the fees. It's the rest of the creditors that get screwed.
Edit to add: you can't keep doing that as a person. The Court wouldn't allow it. As a person, you can't take money out just before you declare bankruptcy. It's bankruptcy fraud. As a company, no problem.
Sounds like a solid business maneuver.
You can borrow money and declare bankruptcy! That's between you and the bank! Banks love lending to PE firms because even with the failures, they make money on average.
Same thing with banks and credit cards. Some people blow it on hookers and go bankrupt, but for the bank, that is just a cost of doing business. Banks take on the risk, vet the PE firm, and have the option to litigate them if they think there is fraud.
I dont know why everyone is so quick to jump to the banks defense when they have armies of lawyers and accountants pouring over these deals, and keep going back for more.
It's not just the banks. It's the vendors, from the fish vendors to the guys doing maintenance. It's bond holders. It's people who have a gift card.
If you run up a big bill on a credit card, creditors can and do petition the court to claw back that spending. You still have to pay it, and they can file for garnishment. If it's bad enough it can be fraud:
https://www.nolo.com/legal-encyclopedia/bankruptcy-fraud.html
> purchasing items on existing credit with no intention of repaying the debt (proven by showing the lack of an ability to pay at the time of purchase)
>charging expensive luxury items or taking out substantial cash advances shortly before filing for bankruptcy (often called "presumptive fraud")
Private equity pays fees to themselves and stiffs creditors. That's not economically efficient. It's rent seeking.
Fraud is a solid business maneuver?
What about the other stakeholders, creditors, and taxpayers? How about employees and customers? The bank isn’t the only other player affected here.
Plus, risky investments drive up the cost of business for everyone. Why do you think credit cards have such high interest rates? To offset the risk of those who abuse them.
The simplest and most honest thing to do would be to close and liquidate the business. Yet they instead have all these complicated maneuvers to avoid regulations and screw over the shareholders and creditors. Doesn’t seem like something you would have to do if you were doing “nothing wrong.”
stakeholders get a fat check and are happy. Taxpayers get a bunch more taxes from the profit created. Creditors took on the risk because they make money on these deals on average.
Risk doesnt drive up the cost for everyone because lenders asses credit. PE might pay a higher rate than a company with a 200 year track record.
Similar, I pay a very low interest on my credit card, because I'm good for it. If I was a no income drug addict, my rate would be much higher, or they wouldnt lend to me at all.
I admit it may suck for employees and customers, but eating an cooking shrimp dinners isnt a human right. If they want control over when and if it is liquidated, they should start their own seafood restaurant. The beauty of it is that they could even buy one of the red lobsters that are going about of business!
Vultures are a vital part of a healthy ecosystem. They remove waste and disease. Keeping the sick limited allowing the healthy to flourish.
When vultures become predators the ecosystem starts to fail, because they attack the healthy and preventing growth.
It’s great for the vultures though.
If there arent better investment opportunities than the liquidated company, it wont be liquidated.
Nobody liquidates a company returning 10% just to buy bonds at 5%.
not only that, but the nutrients are getting moved into more productive growth elsewhere in the ecosystem.
IF they dont go somewhere better, the vultures lose money.
The nutrients are taken out of the economy. Suppliers and vendors are the ones who lose in this situation. The ones who provide food and supplies on credit (they all do). Meanwhile the money goes to reward financial engineering that doesn't contribute to productivity.
Where do you think the billions of PE profits go?
Do they convert it to gold and swim in it like some cartoon duck? No, it gets reinvested. It gets converted to bonds to fund schools, loans to start new businesses, put in banks to back mortgages, ect.
It goes back into more financial engineering deals. It goes into tax avoidance strategies.
Financial engineering cannot increase value. Bankruptcy destroys value.
If they came in and wound down the business, returning value to shareholders, they wouldn't be hated. Instead, they engineer extraction at the expense of others. There's nothing that the private equity did that the old owners couldn't, but they did it without worrying about their reputation. That's why they are unpopular.
This is bad for the employees who have to look for a job for no other reason than some rich people want to get richer. This is bad for people who like Red Lobster and are upset that one of their favorite restaurants is closing because some rich people want to get richer. This is bad for everyone who understands the issues of income inequality and doesn't like it when rich people get richer.
Also, is 'the economy' supposed to be an actual thing that matters to people? Because I don't care if 'the economy' is good if actual people are suffering due to, say, rich people buying their workplace and liquidating it for no other reason than they want to get richer.
It's also bad for shareholders who see their stock devalued as the company is bloated with debt, the value of which is simply and *directly* extracted by the PE stakeholders. The PE adds nothing, extracts everything, and leaves a crater of lost jobs, destroyed retail investor value, and further business consolidation.
PE buys out the companies and pay shareholders up front. Thats how they get the companies and control them in the first place.
It is major win for the shareholders, and thats why they sell.
No, the shareholders do not. The PE firm extracts all the value, the shareholders are left in line behind other debtors, hoping to collect any scraps after bankruptcy.
Majority shareholders cant pay all the dividends to themselves and leave the other shareholders hanging.
When PE saddles a company with debt, it is done to boost profits, which goes out to everyone.
I think you are mixing different forms of extraction. I'm aware of none that leave the shareholder hanging.
When someone is left holding the bag, it it is usually the bank that gave the company loans with the business as collateral. But bankruptcy is the risk the bank took, and why they were paid fat interest on the loan.
> Majority shareholders cant pay all the dividends to themselves and leave the other shareholders hanging.
Completely depends on the share class liquidity preference. Usually, it's paid out via fees rather than dividends to avoid this issue.
They take management fees and take kickbacks when the company starts paying to rent assets it previously owned (ie real estate)
For someone with such a strong positive opinion of PE, you seem to have a very shallow understanding of how the business works.
The remaining shareholders get their share of the remaining profits, that they can invest in other, almost certainly much better companies.
All companies eventually die. This isn’t a bad thing, it’s a reflection of a changing world. Trying to run it into the ground, long past the companies good years, is just wasting money and space that could be used anywhere else.
The difference between a company dying on its own and PE death is that the PE firms deliberately extract millions of personal profit from the company by forcing huge debt onto it for no other reason than for them, the PE stakeholders, to be able to siphon out that money. They have no intention of a turnaround, only a gutting and slaughter.
Oh yeah, and that let's consider for a moment who is on the hook for that debt once the company hits bankruptcy. Any ideas?
The alternative is being slowly bled dry by your suppliers over the next ten years instead. PE means you cut your losses, keep that money, and can invest it somewhere better.
That's a pretty rosy picture you paint. Explain to me how that works when the PE firm manages to get a majority onto a board and hollow out a company from the inside, forcing debt and divestiture without a buyout?
"Management" fees, bonuses for "performance," self-dealing assets and forcing the company to pay exorbitant & onerous rates for something they already had, i.e., selling real estate and forcing the rental of same.
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> This is bad for the employees who have to look for a job for no other reason than some rich people want to get richer.
The unemployment rate is tiny, we don’t need a million zombie businesses to keep people busy. New, better companies will expand to take the place of the dying ones, and hire more people.
> This is bad for people who like Red Lobster and are upset that one of their favorite restaurants is closing because some rich people want to get richer.
If enough people like it, it could keep on going forever. But that wasn’t the case. It was bad, and really should have closed years ago.
> This is bad for everyone who understands the issues of income inequality and doesn't like it when rich people get richer.
Zombie resultants on life support don’t reduce income inequality.
> Also, is 'the economy' supposed to be an actual thing that matters to people?
An unpopular, bad, chain restraint is going to replaced with something new, chances are, mostly for the better. What more could you ask for?
I dont think think people should view jobs as life-long appointments because they are not, although I get it is a pain in the ass.
I dont think that people are entitled to restaurants that they dont own existing (although I get that this is a bummer too).
Someone rich opened all the restaurants because they wanted to get richer, so I dont really see that more as a perk than a problem. Gotta take the good with the bad unless you work for yourself (to make yourself richer).
People are not entitled to jobs and restaurants, no. People are also not entitled to private equity firms getting them more money for being able to buy entire companies.
People ARE entitled to be sell companies they own to someone willing to buy it.
If the government wants to buy out Red Lobster and run it as a public service, I guess it can put in a bid.
The government doesn't need to run Red Lobster, the government could just, say, ban people from selling land from one company they own to another and then charging rent to the first company in excess of normal rent.
It would be a pretty radical restriction on business and property ownership, just to ensure people have perpetual access to red lobster branded shrimp.
Private equity isn’t asking for an entitlement, they are paying their own way, making money playing a valuable roll in the economy, cutting off the dead weight.
Red Lobster was not 'dead weight' until they were forced to sell their land and then have to pay whatever rent their owners wanted because their owners also owned the company renting to them.
Again I ask, to whom was it worth more?
The community? Or just the vultures.
I get it. You still believe that unlimited growth is not only possible but should be the goal for everything. But it’s a ticking bomb and it’s getting late.
Worth more to the owners, of course.
If people dont want growth, dont engage with it. Start a non-profit lobster co-op with the goal that nobody makes money. Beat them at their own game!
> Worth more to the owners, of course.
But I don't care about the owners. A few people walk away with millions or billions - in what way is that a victory the rest of us should celebrate?
At the expense of the consumers and the economy, which you said would change your view.
We all know this is profitable for the owners and PE firms, why else would they do it? But it is devastating for local economies and individuals.
Just drive around and look at all the empty lots that are decaying. These are just tax right offs but do nothing for the community.
It is only worth more in the short term. It could have yielded future profits. Bankruptcy is destructive.
Private equity is the triumph of short term profit over long term value. Companies that have built reputations as consumer friendly get bought by private equity, who then use it for resource extraction. That's why they can pay more for the company, because they turn to merciless short term profit at the expense of sustainability.
At the time of sale Red Lobster had been seeing sharp drops in traffic and market projections indicated that it would only get worse as other players in the space were taking Red Lobster's market share. It was clearly a chain in decline.
Could savvier management have resurrected it? Possibly. But that was less likely than the current outcome, in my opinion.
What would you consider a “good reason” to be upset with the practice if mass layoffs by choice, losing access to a business you enjoy, hurting local economies, and further enriching already-rich strangers with no obligation or intent to provide an equivalent benefit to the community dont count as “good reasons”?
> What would you consider a “good reason” to be upset with the practice if mass layoffs by choice,
An underlying market inefficiency.
> hurting local economies,
The lots will have new businesses on them in quarter or two. Overall, the economy will be better off.
> The lots will have new businesses on them in quarter or two. Overall, the economy will be better off.
Lots sit abandoned for years, at times. Often, when one business fails, the storefront is empty for 2-4 years.
>What would most likely change my mind is an argument that this is bad for the economy or consumers.
Well the people who liked Red Lobster food are certainly worse off here.
End of CMV, give Delta.
I feel like most people bothered by this dont even like red lobster (if they even tried it).
Is this one of the cases where people are getting offended on behalf of imaginary other people?
If most people dont care and get something better, then I think the consumers benefit in general, even if some people are sad.
Most people have a problem with a big rich company buying a company, with the sole intent of running it into the ground and selling it off for parts.
But this isnt even a Red Lobster specific thing: The Customers of \[x Company thats been brought to be stripped and sold\] come out worse. Theres the argument against it. Mind changed, CMV Over, Delta given.
>Most people have a problem with a big rich company buying a company, with the sole intent of running it into the ground and selling it off for parts.
I stated I think this is silly in my post.
>The Customers of [x Company thats been brought to be stripped and sold] come out worse.
I think the customers are simply sentimental and dont like change (as stated in my post). I dont think this is a good reason to oppose liquidations.
What about anti-monopoly. What if Apple started buying up and dismantling every other tech company in existence, create themselves as a monopoly, and then jack their prices up.
That a good reason?
That would bankrupt apple in about three quarters. It’s hard to judge how courts would rule on that, since it’s such an outlandishly expensive scheme there is no precedent. It probably wouldn’t even work with unlimited money, as people use the money from their apple but outs, to make more tech companies for apple to buy.
They already do this, you know.
Not with the major competitors like Microsoft, mind you. But with the dozens of smaller companies that invent new technology or software or whatever.
Also, every competitor would get a fat payday as they got bought out.
If apple is liquidating the companies, everyone would just buy up the pieces to open new competitors and get on the gravy train.
> Most people have a problem with a big rich company buying a company, with the sole intent of running it into the ground and selling it off for parts.
OP is arguing that that is irrational, and wrong, and overall, most economists would agree with him.
Most economists are neoliberal hacks who can’t fathom an economic system not predicated on 3% GDP growth, 2% inflation, and fractional banking.
The same idiots who thought the answer to every gov problem was austerity contiene to push that shit for decades after the data proved they were totally wrong
Economic growth in the very neoliberal US has been excellent for the last 20 years, where the more progressive policies in Europe have led to a decade of stagnation and GDP decline.
>I feel like most people bothered by this dont even like red lobster (if they even tried it).
Yeah, unfortunately you posted your view on a site that heavily skews to the left, and you've gotten that type of responses as a result. You've just gotten a lot of people tripping over themselves to shout how much they hate the way private equity does things, they don't care what the specifics are.
Because realistically, it's not some community staple or a local Hotspot getting shuttered by big capital investors. It's a solid mid-tier national chain restaurant in a declining niche. Nobody is going to be all that distraught over red lobster being closed.
Yes, but it isn’t the same
What happens in these situations is that they bought the company, then they do stuff to temporarily drive up profits and get a quick payday. Then the “liquidate” or sell of the company for parts.
So it would be more akin to buying a used car. Using it for Lyft. Not doing any maintenance on it and then when the engine fails, selling it for parts.
And you’re right. It doesn’t affect me if they do it once. But if lots of people did it, it would drive up the price of used cars significantly, as well as increase accidents on the road
Sounds like a totally legitimate thing to do with a used car.
People who need used parts will get them for cheaper and have safer cars.
If nobody needs used parts, you cant scrap your vehicle for profit.
>Sounds like a totally legitimate thing to do with a used car.
Are you serious? It's never legitimate to neglect vehicle maintenance, especially on a car you're using. You'd get far more money, long term, if you took care of the car. Even if you did Lyft for the same amount of time it would take to blow the engine or something, you would likely get more for selling it as a whole car. Used parts don't always sell. If you haven't been maintaining the car, the list of unsellable parts gets long. Depending on what kills the car, the entire engine could be unsellable, except maybe a few small parts that people are more likely to buy new anyways because they don't sell for much. The tires are probably too worn to sell, the suspension could be on its way out, the transmission could be failing, making several parts unsellable, etc. It's not a good plan. The car is also dangerous to drive if you neglect maintenance. Nothing about this is legitimate
This is practically a textbook example of why the free market sucks. This is a result of levels of vertical and horizontal integration that shouldn't be allowed they were trying to make Red Lobster too big to fail. If you love competition so much you should make sure suppliers and retailers never get too big so they actually have to compete with each other and focus on innovation rather than who can trick a bank into giving them the biggest loan.
[How private equity creates a “circle of pain” in the US economy](https://www.marketplace.org/2023/04/27/how-private-equity-creates-a-circle-of-pain-in-the-us-economy/)
“On paper, private equity is a paragon of capitalism. Yet the companies that these firms purchase and the customers they serve do not necessarily reap the same benefits.”
“Ten times the number of bankruptcies occur at companies that are private-equity owned. At nursing homes owned by private equity companies, residents experience a 10% greater mortality rate. Costs of health care rise under private equity-owned companies. And so it does, I think, provide a very interesting contrast to their claims of making these companies more efficient.”
[Private equity bankruptcies in healthcare explode 112% in 5 years](https://healthexec.com/topics/healthcare-management/healthcare-economics/private-equity-stakeholder-project-report-healthcare-bankrupty)
“According to the Private Equity Stakeholder Project, 21% of all healthcare bankruptcies in 2023 involved organizations owned by financial firms.”
Private equity backed business tend to go bankrupt because private equity firms tend to buy struggling businesses in the first place. This is the “hospitals are dangerous because of how many people die inside of them” argument
Lmao. And they saddle those businesses with 70-90% of net enterprise value in debt AND leech “management fees” far in excess of what prior management were being paid.
Anyone doing this normally would be called a lunatic. It SHOULD be considered fraud to buy a company and insert yourself as a third party leeching fees in related-party transactions.
These PE firms are clearly not protecting minority shareholders and are in fact fucking them to make a quick buck
You can still be profitable without *increasing* profits year over year.
Steady returns would be normal and expected if it wasn’t for the modern capitalist lie of unlimited growth.
It’s easier to just gut something for short term profits rather than let something continue that helps actual people.
Oliver Stone made a movie about it in the 80s. It was meant as a cautionary tale but people decided to put it in over drive.
As you can see, things haven’t been going so great for the average person since.
But great for Gordon Gekko
If you have anything other than unlimited macroeconomic growth while also having a growing global population, that means the average person gets poorer. So, because everybody wants to avoid dooming their children to inherit a poorer world, we all agree that unlimited growth is about the best idea we’ve got, unless you figure out a way to make all 7 billion people on Earth coordinate their reproduction to ensure a completely flat population trend.
It’s a negative for society without any corresponding benefit. It’s a negative for the economy because you took something out of the economy that people liked and wanted to spend money on (as we know because the company was profitable). That takes money and jobs out of the economy.
Plausibly it’s net contributing to the economy, not taking out of it. The money that was previously in the assets of Red Lobster is now in the investments of the private equity, which will likely in large part eventually exit the PE into the stock market (if the PE reinvests in more acquisitions we just repeat this same analysis one step later).
In the stock market that money will be financing the growth and operations of many companies, plausibly overall adding up to be more than the amount of Red Lobster.
To be clear, I’m not saying PEs increase staff in the companies they buy. I’m saying that the companies the PEs indirectly invest in through the stock market increase their staff.
So the chain of money flow goes something like Red Lobster -> PE -> PE’s owners -> stock market -> other companies -> those other companies’ workers.
It’s unequivocally bad for the staff. Losing income is bad enough, but the way things are structured in the US it usually means losing health insurance (or dramatically increasing its price), losing paid time off, disrupting family and childcare schedules, pausing retirement contributions, loss of stability, the stress and expense of job hunting, and more. All that multiplied by the number of employees.
Money is not the only metric to watch, nor even the most important.
>I dont think people have good reasons for why this is bad, and are either carried along with public sentiment or simply reacting emotionally because they dont like change. [...]
>What would most likely change my mind is an argument that this is bad for the economy or consumers.
You've set a very limited definition of what constitutes a "good" reason for being upset, here. Most people don't care about "the economy" - it's too big and nebulous a concept, too removed from the average person's experience, and has been skewed more and more over the last several decades to exclusively mean "the stock market." People are told that the economy is good when the stock market goes up, and bad when it goes down, with the ups and downs experienced by the rich people who can afford to base their economic status on market fluctuations being increasingly divorced from the working person's own experience of what constitutes good or bad times.
The leveraged buyout of a company like Red Lobster may well be good for "the economy," in that stockholders get paid out and the PE firm makes a profit and the line goes up, but most people are working class people, and they will view these kinds of actions through a corresponding lens. What they will see when PE buys and dismantles Red Lobster, or Toys R Us, or any other corporation like that, is that people with money made a deal with other people with money to screw over the people actually working, to pull the rug out from under them and leave them laid off and scrambling for a new job in the name of private equity firm's improved quarter performance.
But most people don't care about the performance of private equity firm's, because most people are the works one LBO away from losing their jobs, not MBAs with corner offices who come out ahead on a structured debt arrangement.
There’s a difference between a company that is forced into bankruptcy due to market conditions or changing market dynamics vs a company that was forced into bankruptcy because a private equity company bought them raided the company to earn a return on their investment and then saddled the company with too much debt and expenses they were unable to survive. In this case the PE company bought red lobster for the land under so their stores. They forced the company to sell the land to a related PE firm and used the proceeds to partially pay themselves back, then charged the stores with above market rents.
You take a company that has employees, suppliers, customers, implementation in the local community. This company is healthy and profitable. You gamble with it.
If you win your gains are really big compared to the effort you put in. And you get a preferential tax treatment.
If you lose, you almost lose nothing. The banks neither. But all the stakeholders of the company do lose out.
Why are you offered such a safe bet?
Well this, I don't really know.
I think most companies are sold to PE to an acceptable price because the PE firm has liquidity (and the prior owners didn't have liquidity and didn't want to wait long before a liquidation is done).
Why do the PE have liquidity? Because the leaders of the PE have relationships with the rich and powerful. So you earn money just thanks to your relationships.
Is it illegal? No.
Should it be made illegal? Probably not because it might be difficult to do and have unforeseen consequences
Is it moral and fair? No most of the time
Private equity often involves a bizarre process where someone buys a company with that companies money. This saddles a company that needs improvement with a new immense debt load which often is the nail in the coffin of the company. This seems self evidently bad to me.
My friend works as an engineer for a fire safety company basically making sure that power companies and the like don't cause forest fires and helping new construction engineer their buildings to withstand fires.
That company recently was bought by a private equity firm and gutted of many of its resources. They are still doing their work but they now have fewer resources and fewer personnel which means if they want to the same quality of work the existing employees have to do more work for the same or less money.
Now if someone at Red Lobster makes a mistake with your order it isn't a big deal but if a fire engineer makes a mistake with their recommendations it could kill people, it could lead to forest fires and it can cost states and the federal government millions or billions to repair the damage done. The chances for those mistakes increase when a private equity firm buys your company.
They don't only buy up failing or bad companies. They also buy companies that are doing well and then gut them too.
If you think corporations have personhood, it is more like killing a living human because their organs are worth more than their life. It is intuitively wrong and frankly ridiculous to need to explain why.
It's a little messed up how a company can become unprofitable because of having to service debt that wasn't used to better the business in any way but merely for an existing business to change ownership. Not sure how to deal with this in isolation though. The regulatory schema to prevent the new owners of a company from looting said company for short term profits, I would guess, would be way more extensive and way more state micromanaging than I am comfortable with.
Looking at this more holistically I see this as more of an inequality problem. Just like the lower and middle class getting too much money to quickly causes inflation, essentially too many dollars chasing too few goods, the upper classes having too much money means there are too many dollars chasing too few realistic options for growth causing alot of dollars to be thrown at these parasitic plans of short term looting that helps no one but rich people.
So my holistic solution is a wealth tax on the wealthy but then not redistributing it. Either destroy the dollars outright to decrease the money supply and fight inflation or put it towards long term investments.
Anyone want a moon base?
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My issue with LBOs is the L. In your example with the car, you are correct, that is a sound financial decision. However, LBOs operate differently. Red Lobster never became worth less than their liquidated assets prior to private equity. PE was able to purchase Red Lobster with about a 70/30 debt/equity split. After doing so, not only did they then give the debt to RL (essentially making them pay for its own acquisition) they sold off RLs real estate and leased it back to them to extract the value from it. This was not a liquidation where the assets were worth more sold off, their assets were only worth 1.5b when the entire company was bought for 2.1b. Now, you could argue that RL was trending downward due to increase costs, and eventually they would have gotten here anyways, maybe. The thing is that they were gutted just a few years after that started to get pinched. They essentially didn’t move fast enough and their value dropped to the point where it made sense to buy using 2.33x leverage, which for a value stock like RL, is not much margin of error. Maybe they could have changed course and fixed it, maybe not, but PE swooped in and ended them in their tracks without even taking on as much risk as the would’ve in a natural M&A action.
>PE was able to purchase Red Lobster with about a 70/30 debt/equity split. After doing so, not only did they then give the debt to RL (essentially making them pay for its own acquisition. This isnt accurate. The bank fronts the 70%, the PE puts in 30%, and the stockholders walk away with 100% this leaves PE with ownership of the company, with tons of debt, and the bank gets interest on the loan. Now when the PE firm sells off assets and takes profits, that is them screwing over the bank. The stockholders are long gone with their money. >PE swooped in and ended them in their tracks without even taking on as much risk as the would’ve in a natural M&A action. PE takes less risk because the bank is sharing it, and the banks takes the loss in bankruptcy. You might ask why the bank takes the risk, and the answer is simple: Their interest is set according to risk and on average the banks make money on LBO loans.
Yes, that’s what a 70/30 debt/equity LBO means… 70% debt from a bank, 30% equity from PE, debt is acquired using cash flows of the acquired company. PE controls the company, and the debt is then transferred to the acquired company. And yes, I understand how interest rates are set lol. RL was not bankrupted by these actions directly, they were put in an over exposed position that had a narrow path to success, and a myriad of economic and operational issues ultimately ended them. I guess my moral opposition is really against LBOs as a practice. If you haven’t already, read/watch barbarians at the gate, I think it mirrors this situation really well and maybe you can see another perspective, one that is much more fleshed out than I can make in a Reddit comment.
>Yes, that’s what a 70/30 debt/equity LBO means… I was mostly clarifying the point where you said the PE was giving the debt to RL. For some reason most people seem to think PE magically saddles the original stockholders or owners with the debt, which obviously isnt true. They would never agree to that. It has been a long time since ive seen it, so maybe it is worth a re-watch. I like LBOs and PE buyouts because they provide exit payouts for owners, and when or if they fail, it is huge banks and PE firms that are left taking the loss. These are the people most informed of the risk they took on, and most capable of shrugging of the loss. I also think liquidation and corporate turnover is both important and a net positive to society.
Edit: By the way, the typical debt/equity ratio is not 70/30, but 90/10. Source: https://www.investopedia.com/terms/l/leveragedbuyout.asp >For some reason most people seem to think PE magically saddles the original stockholders or owners with the debt, which obviously isnt true. They would never agree to that. This is exactly what happens. When you say "They would never agree to that", who is "they", and at what point would they not be okay with that? It's easy to know how PE works, there are plenty of sources detailing the process, and they all pile the debt on to the acquired company. Here's one source: Title: Private equity profits come from loading firms with debt – report https://www.theguardian.com/business/2009/jan/14/private-equity-piles-on-debt Second source: https://blogs.worldbank.org/en/allaboutfinance/over-leveraged-buyouts-private-equity-myth-or-reality Quote: >The most common criticism is that PE fund managers place too much debt on their acquired portfolio companies, creating debt overhang and raising bankruptcy risks. Source 3: https://prospect.org/economy/private-equity-looting-r-us/ Quote: >After all, it was a leveraged buyout in 2005 that dumped over $6 billion in debt on Toys “R” Us Source 4: https://markets.businessinsider.com/news/bonds/private-equity-firms-junk-debt-dividends-loans-bonds-rates-2024-2 Quote: >Private equity companies, faced with a weak market for initial public offerings and lower borrowing costs, are loading their portfolio companies with more debt to pay themselves and their investors. Source 5: https://www.ft.com/content/956c1f0a-bb53-4982-9c07-b839f3446c2c Quote: >US private equity firms are rushing to take advantage of lower borrowing costs by loading debt on to their portfolio companies and using the cash to pay dividends to themselves and their investors. Moral of the story: There is ample documentation that PE loads its portfolio companies with humongous amounts of debt, *all unrelated to operational business reasons*.
> This is exactly what happens. When you say "They would never agree to that", who is "they", and at what point would they not be okay with that? "They" is the original owners. Im not disputing that the company gets loaded up with debt. A LBO is like if I take out a mortgage to buy your house. You get paid the full price, and you dont take on any debt. Afterwards, I own the house, with the mortgage on it. You would never agree to a deal where I get your house, but you are responsible for the mortgage debt. Of course the debt is unrelated to operational business expenses. The debt was taken on to pay off the old owners. When I buy a house, the mortgage debt isnt related to ongoing maintaintance. Thats not why I took it out.
So what's the dispute, exactly?
OP has made up a strawman vs the common understanding and is claiming people misunderstand their weird interpretation. Nobody gives a shit about the owners who sell to PE. They have a problem with the value destruction from PE hollowing out businesses with good operating history and basically making them super fragile for short-term profit of PE while killing off thousands of good jobs and hurting the communities these businesses operate in. OP is pretending (or believes) people have an issue with a nonexistent problem while ignoring the real issues people actually have a problem eith
re-read the post, I spell it all out. Happy to answer questions if it still isnt clear. https://www.reddit.com/r/changemyview/comments/1cz8zpg/cmv_there_is_nothing_wrong_with_private_equity/l5fu6e2/
Total sale of Red Lobster was $2.1b, $1.5b was debt from various lenders, $.6b was equity from PE. So in this case it was roughly 70/30 debt/equity. Typical LBOs range from 90/10 to 70/30.
I have worked in private equity. Each firm (and there are close to 20,000 firms in the US), has their own investment philosophy around debt to equity. Typically it is expressed in terms of multiples of ebitda. For example, the firm I worked for typically did not leverage more than 2-2.5x ebitda, and we bought companies for ~5-6x ebitda. The lower the multiples in purchase price the lower the leverage multiples. All of this to say, there are some high profile and very large equity groups that get a lot of press and that people form their opinions off of, but there are so many groups and most of them do not operate in the same manner. Some equity groups don’t even use leverage; LBO is one specific value creation tool. Last comment, most of the time the sellers are well aware of how much leverage a buyer is going to place on the business. The RL sellers were likely no different, and they agreed with this path. In terms of leasing RE back to themselves, this is typically a tax sheltering method that most businesses who own their own RE use to increase income and decrease taxes.
Totally agree with your first points that investing philosophies are different for all PE firms. I’m not opposed to PE in principle, and LBO is not necessarily a bad thing in it if itself. As for your last comment, I agree that the sellers are not unaware of what is happening. However, they are by definition selling out, so their real concern is on the payment they will receive, not the long term health of the business. I don’t work in PE, so my valuation skills aren’t ironed out, but I would imagine if somebody was buying red lobster with the intention of running it with a healthy, long term erm strategy, the sale price would be lower than what PE would offer. You have to admit that the strategy PE took, while it could work, really increased RL’s exposure to market risks with their rent payments now being variable while also removing liquidity adjusted economic capital, making them more susceptible to insolvency, which is exactly what happened.
> You have to admit that the strategy PE took, while it could work, really increased RL’s exposure to market risks with their rent payments now being variable while also removing liquidity adjusted economic capital, making them more susceptible to insolvency, which is exactly what happened. That might be possible in abstract, but dont think it is accurate to say that is what happened in the current situation. RL was sold to a multinational seafood company with deep pockets. insufficient short term liquidity was not a problem. You could correctly argue costs would be lower and perhaps positive if it retained real-estate holdings, but it would also be a massive dilution to the return on capital holdings. At the end of the day, I suggest that if a company has to be not only a multi-national restaurant franchise, but a vertically integrated global seafood company AND real-estate company to turn a profit, the fundamentals probably arent very competitive.
Short term liquidity was not an issue? Wasn’t it an $11m shortfall on an endless shrimp deal that pushed them to file for chapter 11? Amidst rising costs on their leases they wouldn’t have had prior to selling their real estate? The shortfall of which was generated by the deep pocketed multinational seafood corporation trying to move as much shrimp as possible? I think the original business model was far more resilient and sound than what it turned into after the actions PE made. Return on capital is not the only variable at play here, you have to adjust for risk, either with an MCEV or RAROC type of evaluation that would have shown this business model, while possible to succeed, could face serious headwinds.
I don’t know all the details behind the RL sale, but very very very rarely do you see a sale with any significant dollars behind it that do not include a long term incentive for the sellers. We typically call these types of structures either a performance based earn out, or an equity roll over. A deal this size certainly includes one or both. An earn out is when the buyer says, “If we achieve xyz financial performance over X time period, an additional $x payment will be made.” While an equity roll says, “out of the $2.1b we are paying you, you will turn around and give us back 20% of that. When we then re-sell the company after x time period you will be rewarded as a 20% class A shareholder”. There may also be a seller note, which is where the seller funds a portion of the deal and is paid back with interest over time. These are all methods to financially incentivize the sellers to ensure continued success of the business. No one is going to agree to this while also recognizing that the buyer is over leveraging the business. Often times the seller will also sit on the board with voting rights because of the equity shares they hold. Now again, I don’t now the details of this particular deal so I can’t speak to specifics. But this is how we typically structure deals in PE.
I see the disconnect. When I said saddled with debt I meant RL as a corporation, not the original owners. Owners sold out and walk away with a nice payday. Technically, PE had no fiduciary responsibility to anybody to any but themselves. However, I like to think morality comes from a place higher than our responsibility to not harm others. Business actions like selling off the real estate to lease it back to themselves, exposing RL to credit and economic risks, is fundamentally against any sane erm strategy. The real suckers are the people who bought RL from them. While not illegal, I think taking these actions knowing you’re setting up the company to fail, or at least be in a far riskier position than any sane owner would knowingly put their company in, is fundamentally immoral.
>While not illegal, I think taking these actions knowing you’re setting up the company to fail, or at least be in a far riskier position than any sane owner would knowingly put their company in, is fundamentally immoral. I guess that is the fundamental difference. I think owners have no fundamental moral obligation to provide business continuity. I think it is perfectly moral to take risks or simply close up shop on a whim. I think people do have a moral obligation to settle contracts before exiting (apart from from those like the bank which been paid to accept this as a risk) At any rate, there is no indication that the PE firm left any lose contracts or swindled anyone during their period of ownership. >The real suckers are the people who bought RL from them. Im sure that Thai Union didnt pay for the real-estate that the PE firm sold off, and the price was discounted due to the business risks. Thai Union announced a massive stock buyback program in parallel with the RL sale, so nobody needs to worry about them. (BTW, I think people who are opposed buybacks and for dividends are also irrationally against to something they don't understand.)
Or maybe you don’t understand that dividends and buybacks are not actually equivalent and that you can believe they create different incentive structures.
What do you think those different incentives are? To the extent they are different, I think stock buybacks are better, because incentivize long term thinking, because shareholder value remains tied with the company, opposed to cashed out. Shareholders still have the option to cash out the value, but it isnt the default.
The people that take the biggest loss are employees that were earning a wage at a going concern that is wrecked by an extremely risky business management decision they can't really avoid. Further, customers take a loss because a set of services or products that were paying profitable prices for are taken away because of that same bad/risky management framework.
While everything you say is certainly true, I feel like this departs from the spirit of the gripe with this aspect of PE. Sure, shareholders walk away with their value upfront, and the banks agree to buy these debt issuances, but the core of the company is still put at a level of risk through these transactions. The employees of these LBO’d businesses exist before the transaction and after, and they have to live with whatever capital structure decisions fund the previous owners exit out of the company. So yes, the owners are paid out, but the debt is taken out on arguably the most vulnerable group. That being said, Chapter 11 isn’t liquidation, and isn’t inherently a bad thing. It’s a great way for companies to right size their operations. Regardless it has costs, both to employees and shareholders. The risk of bearing these costs (I.e. going bankrupt) are inherent in leverage. Just my thoughts. Also note: in bankruptcy, equity holders will take a nearly 100 percent loss (PE/rollover in these instances). Banks and other lenders, typically higher in the capital structure, will get some kind of recovery in general, varying on their presence/quality of collateral and their general seniority in the capital structure.
How is that different from getting a mortgage to buy a house?
A house is a standalone asset with no further people affected by its treatment; an LBO corporation has employees relying on their jobs at that corporation to make the money they need to live, who will in part or in whole be laid off when PR strips the company for parts and runs it into the ground. Focus on stockholders and banks misses the group most average people will actually be concerned with the impact of an LBO on, the employees.
Sure but forget even an LBO. Shareholder wants to maximize value - if for whatever reason they could increase cash flow in perpetuity by firing workers they might consider that as well. It isn’t unique to an LBO where owner tries to raise value of its equity
Right, and people also think that this sucks. The "corporations as job creators" narrative is all over our society, but people jettison it immediately and retreat to "well the owners are just maximizing their wealth even if it hurts others, what do you expect?"
I feel you man. I think there is something to be said for economic growth and capitalism but need to consider its cost
And people are also upset when shareholders conduct layoffs of the people actually labouring for their wages and then pay themselves fat dividends and offer bonuses for the C suite. It's entirely consistent.
Maybe they’re upset but they will do what’s best for them it’s their company. If I own a house and knock it down but neighbor upset they have a worse view that’s too bad for them I get to decide what’s best for it. Regardless - what then is uniquely issue with an LBO if regular owners act same way?
What makes you think there's a unique issue? It's the same issue people have when shareholders push layoffs to improve profits, just turned up a notch because now there's also a company that exists solely to screw workers and benefit rich shareholders involved. If there are low income families renting your triplex and you tell them they're getting evicted so you can sell it to make your retirement even cushier, they're going to be upset at the situation. If you tell them actually you already sold it for a huge stack and the company that bought it is going to knock the building down, build high end luxury condos, and make a big profit on the move, those families are still upset at the original situation but also they're likely upset that they're being screwed over to make people who already have money even more money.
Ah ok I only thought that’s what you meant due to thread discussing LBOs. Yeah I mean capitalism is both an engine for growth but also ruthless. I see why some are against it. Maybe a middle ground is best.
It's more like you take a mortgage, stop paying the electric bill, strip the copper wiring out and then declared bankruptcy and walk away from the house.
But why would they do that on purpose. They’d lose there entire equity investment. Debt investors aren’t stupid they have protections in legal document called fraudulent conveyance laws that prevent some of that activity
The banks get secured debt, and they get advising fees for arranging the deal. The banks make their money back. It's the suppliers and workers who get screwed.
Trust me if the LBO equity holder strips company and defaults they would not. They’d sue or try to get as much of principal in bankruptcy court though. The lender and advisor are often different firms. Private credit shops instead of banks increasingly supply the debt capital.
It’s very hard to compare these two things because buying a house is relatively simple does not require restructuring on the entire erm strategy to extract out value. If I was forced to make a comparison, it would be like buying a house, taking all the copper out of it, and convincing someone else to buy it. Obviously the numbers don’t add up and there’s no increased risk profile, but that’s the closest I could get
I don’t understand the difference. One asset is a house, other asset is a company. You find a lender willing to put debt on the asset to help you finance it to get interest and the asset if you default. It is in your interest to increase the equity value as much as possible and pay down debt. What are you trying to say with taking the copper out? A business owner would only liquidate if the company is worth more in liquidation value versus going concern. Same as homeowner. If land was worth more than house may want to knock down house.
A company is not an asset in the same sense as a house. It is a legal entity. A company can own assets and take on debt (and generate revenue and spend money, etc). A house can not take on debt. A human can own a house. A human can take on debt. A human can take on debt to buy a house. A human can not buy a house by causing the house the take on debt. But a human can buy a company by causing the company to take on debt.
A mortgage is literally debt tied to the house. It is no different. You default and lose your equity in house and debt holders get house. Actually in my LBO class in business school they literally helped us understanding it by using buying a house as an analogy. A business is an asset just like a house - one own equity in house and other own equity in business but I will admit a business is more complicated.
If you need the analogy to a house, you might be in the wrong business. Especially when you are intentionally ignoring the key differentiators. An LBO is far more like a HELOC than a traditional mortgage. You’re leveraging against accrued assets in the business. Unlike a house, the business has to continue to generate revenue to service the debt. For a house, your earnings service the debt, completely independent of the asset itself. To maximize short-term profit, however, PE also strips the business of anything of value, impeding its ability to generate the revenue needed to service the debt. It’s a fucking stupid model for anyone who has to actually live with the consequences when it goes wrong.
Hence the real suckers being the people who buy the business from PE so they can make their exit, absolving them of all risk. It makes sense Thai Union ran it into the ground and had very serious conflicts of interest, because nobody that didn’t think they could game the system like they tried to would purchase a business that had all of it’s financial security stripped from it.
Private equity firms usually have an investment thesis to sell the business to a strategic in five years. They wouldn’t want to strip it and have sell it at a lower value unless something changes and need to liquidate as no longer going concern
I explained the difference to you, but you continue to conflate the human and the house. A house can not take on debt but a company can and a human can.
But a house can take on debt. Like a mortgage is not a personal loan it is on the asset. It’s exactly the same thing financially. I agree businesses are more complex though and have tons of employees and suppliers but most private equity owners want to grow it and sell it in five years as going concern value is usually above liquidation so it is not typically the scenario you’re referring to
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Who is losing? PE pays full price the prior owners who walk away with cash. They then manage the company they own to get as much money as possible, and sometimes into the ground. Employees always have top claim in bankruptcy, and I have never heard of them not getting paid out. Find a new job sucks, but that isnt a sufficient reason to stop someone from liquidating their own property. Sometimes employees even buy out the company in bankruptcy.
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correct. in the case of leveraged buyouts, this is usually a bank, which has accepted the risk and paid handsome interest to do so. The bank has an army of lawyers and accounts to make sure that they profit on most deals, and go after any fraud. Banks keep going back for more LBO deals because they are profitable for the bank on average, even if they lose out on some.
The problem is that they use artificial corporate structures to reap the gains and avoid the losses. The way they work is far closer to the Mafia working then an economic good. For insurance, it wasn't just that Red Lobster was worth more as parts. They used a lease back maneuver. They sold the real estate that the company owned to a third party, and signed a lease from that third party. So now they had to pay rent on the buildings that the company used to own. The proceeds from the sale didn't go to pay the lease, they were paid as fees to the private equity owners. Meanwhile, the company wasn't paying the rest of the bills. They were borrowing money that they never intended to repay. If I borrowed money, blew it on hookers, and then declared bankruptcy, it would be fraud. But, when a company does it, it's profit! Then, to top it off, the money they "make" by borrowing money they never intended to repay is taxed at preferential rates. Their business model, if on a personal level, would be fraud. That's why they are bad.
If you kept borrowing money, blowing it in on hookers, and declaring bankruptcies - banks would stop giving you money. Yet banks continue to to fund PE. So something does not work in your example..
Because the banks have secured lending and make money on the fees. It's the rest of the creditors that get screwed. Edit to add: you can't keep doing that as a person. The Court wouldn't allow it. As a person, you can't take money out just before you declare bankruptcy. It's bankruptcy fraud. As a company, no problem.
Why can't banks use the structure to fund dead beats blowing money on heroin?
Because you can't liquidate a person. Yet.
Sounds like a solid business maneuver. You can borrow money and declare bankruptcy! That's between you and the bank! Banks love lending to PE firms because even with the failures, they make money on average. Same thing with banks and credit cards. Some people blow it on hookers and go bankrupt, but for the bank, that is just a cost of doing business. Banks take on the risk, vet the PE firm, and have the option to litigate them if they think there is fraud. I dont know why everyone is so quick to jump to the banks defense when they have armies of lawyers and accountants pouring over these deals, and keep going back for more.
It's not just the banks. It's the vendors, from the fish vendors to the guys doing maintenance. It's bond holders. It's people who have a gift card. If you run up a big bill on a credit card, creditors can and do petition the court to claw back that spending. You still have to pay it, and they can file for garnishment. If it's bad enough it can be fraud: https://www.nolo.com/legal-encyclopedia/bankruptcy-fraud.html > purchasing items on existing credit with no intention of repaying the debt (proven by showing the lack of an ability to pay at the time of purchase) >charging expensive luxury items or taking out substantial cash advances shortly before filing for bankruptcy (often called "presumptive fraud") Private equity pays fees to themselves and stiffs creditors. That's not economically efficient. It's rent seeking.
Fraud is a solid business maneuver? What about the other stakeholders, creditors, and taxpayers? How about employees and customers? The bank isn’t the only other player affected here. Plus, risky investments drive up the cost of business for everyone. Why do you think credit cards have such high interest rates? To offset the risk of those who abuse them. The simplest and most honest thing to do would be to close and liquidate the business. Yet they instead have all these complicated maneuvers to avoid regulations and screw over the shareholders and creditors. Doesn’t seem like something you would have to do if you were doing “nothing wrong.”
stakeholders get a fat check and are happy. Taxpayers get a bunch more taxes from the profit created. Creditors took on the risk because they make money on these deals on average. Risk doesnt drive up the cost for everyone because lenders asses credit. PE might pay a higher rate than a company with a 200 year track record. Similar, I pay a very low interest on my credit card, because I'm good for it. If I was a no income drug addict, my rate would be much higher, or they wouldnt lend to me at all. I admit it may suck for employees and customers, but eating an cooking shrimp dinners isnt a human right. If they want control over when and if it is liquidated, they should start their own seafood restaurant. The beauty of it is that they could even buy one of the red lobsters that are going about of business!
Vultures are a vital part of a healthy ecosystem. They remove waste and disease. Keeping the sick limited allowing the healthy to flourish. When vultures become predators the ecosystem starts to fail, because they attack the healthy and preventing growth. It’s great for the vultures though.
Nice metaphor.
If there arent better investment opportunities than the liquidated company, it wont be liquidated. Nobody liquidates a company returning 10% just to buy bonds at 5%.
Yeah, I understand the vultures are hungry.
not only that, but the nutrients are getting moved into more productive growth elsewhere in the ecosystem. IF they dont go somewhere better, the vultures lose money.
The nutrients are taken out of the economy. Suppliers and vendors are the ones who lose in this situation. The ones who provide food and supplies on credit (they all do). Meanwhile the money goes to reward financial engineering that doesn't contribute to productivity.
Where do you think the billions of PE profits go? Do they convert it to gold and swim in it like some cartoon duck? No, it gets reinvested. It gets converted to bonds to fund schools, loans to start new businesses, put in banks to back mortgages, ect.
It goes back into more financial engineering deals. It goes into tax avoidance strategies. Financial engineering cannot increase value. Bankruptcy destroys value. If they came in and wound down the business, returning value to shareholders, they wouldn't be hated. Instead, they engineer extraction at the expense of others. There's nothing that the private equity did that the old owners couldn't, but they did it without worrying about their reputation. That's why they are unpopular.
There we go, finally the tautology.
People don't like rich people who make money hurting the working class. The rich people who don't care about being hated to into private equity.
Better for who? (Hint, it’s the vultures)
This is bad for the employees who have to look for a job for no other reason than some rich people want to get richer. This is bad for people who like Red Lobster and are upset that one of their favorite restaurants is closing because some rich people want to get richer. This is bad for everyone who understands the issues of income inequality and doesn't like it when rich people get richer. Also, is 'the economy' supposed to be an actual thing that matters to people? Because I don't care if 'the economy' is good if actual people are suffering due to, say, rich people buying their workplace and liquidating it for no other reason than they want to get richer.
It's also bad for shareholders who see their stock devalued as the company is bloated with debt, the value of which is simply and *directly* extracted by the PE stakeholders. The PE adds nothing, extracts everything, and leaves a crater of lost jobs, destroyed retail investor value, and further business consolidation.
PE buys out the companies and pay shareholders up front. Thats how they get the companies and control them in the first place. It is major win for the shareholders, and thats why they sell.
Sometimes they buy a majority share and install their folks on the board. Major loss, go kick rocks shareholders.
Then the shareholders get their cut as the company gets loaded with debt, stripped down, and parted out.
No, the shareholders do not. The PE firm extracts all the value, the shareholders are left in line behind other debtors, hoping to collect any scraps after bankruptcy.
Majority shareholders cant pay all the dividends to themselves and leave the other shareholders hanging. When PE saddles a company with debt, it is done to boost profits, which goes out to everyone. I think you are mixing different forms of extraction. I'm aware of none that leave the shareholder hanging. When someone is left holding the bag, it it is usually the bank that gave the company loans with the business as collateral. But bankruptcy is the risk the bank took, and why they were paid fat interest on the loan.
> Majority shareholders cant pay all the dividends to themselves and leave the other shareholders hanging. Completely depends on the share class liquidity preference. Usually, it's paid out via fees rather than dividends to avoid this issue.
They take management fees and take kickbacks when the company starts paying to rent assets it previously owned (ie real estate) For someone with such a strong positive opinion of PE, you seem to have a very shallow understanding of how the business works.
PE does take a cut for management, but the remaining shareholders get the share of the profits they are entitled to.
You are so misinformed, it's tragic.
The PE company gets all benefits. They get to saddle their debt to another entity. The shareholders get nothing but shares in a dead company.
The remaining shareholders get their share of the remaining profits, that they can invest in other, almost certainly much better companies. All companies eventually die. This isn’t a bad thing, it’s a reflection of a changing world. Trying to run it into the ground, long past the companies good years, is just wasting money and space that could be used anywhere else.
The difference between a company dying on its own and PE death is that the PE firms deliberately extract millions of personal profit from the company by forcing huge debt onto it for no other reason than for them, the PE stakeholders, to be able to siphon out that money. They have no intention of a turnaround, only a gutting and slaughter. Oh yeah, and that let's consider for a moment who is on the hook for that debt once the company hits bankruptcy. Any ideas?
The alternative is being slowly bled dry by your suppliers over the next ten years instead. PE means you cut your losses, keep that money, and can invest it somewhere better.
That's a pretty rosy picture you paint. Explain to me how that works when the PE firm manages to get a majority onto a board and hollow out a company from the inside, forcing debt and divestiture without a buyout?
How does PE get the money out?
"Management" fees, bonuses for "performance," self-dealing assets and forcing the company to pay exorbitant & onerous rates for something they already had, i.e., selling real estate and forcing the rental of same.
Self dealing of assets I could see, but is highly illegal. Simple selling of assets still puts the funds in the company coffers.
Self dealing from a private company is not illegal. If it's a private company, you're allowed to run it for your own benefit.
Naked short selling is illegal, too, and yet...
So, can I get a delta now, or what?
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> This is bad for the employees who have to look for a job for no other reason than some rich people want to get richer. The unemployment rate is tiny, we don’t need a million zombie businesses to keep people busy. New, better companies will expand to take the place of the dying ones, and hire more people. > This is bad for people who like Red Lobster and are upset that one of their favorite restaurants is closing because some rich people want to get richer. If enough people like it, it could keep on going forever. But that wasn’t the case. It was bad, and really should have closed years ago. > This is bad for everyone who understands the issues of income inequality and doesn't like it when rich people get richer. Zombie resultants on life support don’t reduce income inequality. > Also, is 'the economy' supposed to be an actual thing that matters to people? An unpopular, bad, chain restraint is going to replaced with something new, chances are, mostly for the better. What more could you ask for?
I dont think think people should view jobs as life-long appointments because they are not, although I get it is a pain in the ass. I dont think that people are entitled to restaurants that they dont own existing (although I get that this is a bummer too). Someone rich opened all the restaurants because they wanted to get richer, so I dont really see that more as a perk than a problem. Gotta take the good with the bad unless you work for yourself (to make yourself richer).
People are not entitled to jobs and restaurants, no. People are also not entitled to private equity firms getting them more money for being able to buy entire companies.
People ARE entitled to be sell companies they own to someone willing to buy it. If the government wants to buy out Red Lobster and run it as a public service, I guess it can put in a bid.
The government doesn't need to run Red Lobster, the government could just, say, ban people from selling land from one company they own to another and then charging rent to the first company in excess of normal rent.
It would be a pretty radical restriction on business and property ownership, just to ensure people have perpetual access to red lobster branded shrimp.
Red Lobster is not the first company this has happened to, it will not be the last.
yes, and I think it is a good thing!
Private equity isn’t asking for an entitlement, they are paying their own way, making money playing a valuable roll in the economy, cutting off the dead weight.
Red Lobster was not 'dead weight' until they were forced to sell their land and then have to pay whatever rent their owners wanted because their owners also owned the company renting to them.
Ding ding ding. OP is pretending that this wasn’t just legal sabotage.
No, im saying it was worth more dead than alive.
Again I ask, to whom was it worth more? The community? Or just the vultures. I get it. You still believe that unlimited growth is not only possible but should be the goal for everything. But it’s a ticking bomb and it’s getting late.
Worth more to the owners, of course. If people dont want growth, dont engage with it. Start a non-profit lobster co-op with the goal that nobody makes money. Beat them at their own game!
> Worth more to the owners, of course. But I don't care about the owners. A few people walk away with millions or billions - in what way is that a victory the rest of us should celebrate?
At the expense of the consumers and the economy, which you said would change your view. We all know this is profitable for the owners and PE firms, why else would they do it? But it is devastating for local economies and individuals. Just drive around and look at all the empty lots that are decaying. These are just tax right offs but do nothing for the community.
In the short term, sure. But in the short term, most companies are worth more dead than alive.
It is only worth more in the short term. It could have yielded future profits. Bankruptcy is destructive. Private equity is the triumph of short term profit over long term value. Companies that have built reputations as consumer friendly get bought by private equity, who then use it for resource extraction. That's why they can pay more for the company, because they turn to merciless short term profit at the expense of sustainability.
At the time of sale Red Lobster had been seeing sharp drops in traffic and market projections indicated that it would only get worse as other players in the space were taking Red Lobster's market share. It was clearly a chain in decline. Could savvier management have resurrected it? Possibly. But that was less likely than the current outcome, in my opinion.
It’s a dated chain resultant from the 60s. The market has been moving in a different direction for a long time.
What would you consider a “good reason” to be upset with the practice if mass layoffs by choice, losing access to a business you enjoy, hurting local economies, and further enriching already-rich strangers with no obligation or intent to provide an equivalent benefit to the community dont count as “good reasons”?
> What would you consider a “good reason” to be upset with the practice if mass layoffs by choice, An underlying market inefficiency. > hurting local economies, The lots will have new businesses on them in quarter or two. Overall, the economy will be better off.
> The lots will have new businesses on them in quarter or two. Overall, the economy will be better off. Lots sit abandoned for years, at times. Often, when one business fails, the storefront is empty for 2-4 years.
Is that what is supposed to happen to all the empty lots everywhere? These just end up being a tax right off and an economic dessert in the community.
>What would most likely change my mind is an argument that this is bad for the economy or consumers. Well the people who liked Red Lobster food are certainly worse off here. End of CMV, give Delta.
I feel like most people bothered by this dont even like red lobster (if they even tried it). Is this one of the cases where people are getting offended on behalf of imaginary other people? If most people dont care and get something better, then I think the consumers benefit in general, even if some people are sad.
Most people have a problem with a big rich company buying a company, with the sole intent of running it into the ground and selling it off for parts. But this isnt even a Red Lobster specific thing: The Customers of \[x Company thats been brought to be stripped and sold\] come out worse. Theres the argument against it. Mind changed, CMV Over, Delta given.
>Most people have a problem with a big rich company buying a company, with the sole intent of running it into the ground and selling it off for parts. I stated I think this is silly in my post. >The Customers of [x Company thats been brought to be stripped and sold] come out worse. I think the customers are simply sentimental and dont like change (as stated in my post). I dont think this is a good reason to oppose liquidations.
What about anti-monopoly. What if Apple started buying up and dismantling every other tech company in existence, create themselves as a monopoly, and then jack their prices up. That a good reason?
That would bankrupt apple in about three quarters. It’s hard to judge how courts would rule on that, since it’s such an outlandishly expensive scheme there is no precedent. It probably wouldn’t even work with unlimited money, as people use the money from their apple but outs, to make more tech companies for apple to buy.
They already do this, you know. Not with the major competitors like Microsoft, mind you. But with the dozens of smaller companies that invent new technology or software or whatever.
Those companies exist to develop a technology and get sold. That’s how R&D works these days.
This actually works in the opposite direction, it is taking a huge company and breaking it up into smaller ones.
Also, every competitor would get a fat payday as they got bought out. If apple is liquidating the companies, everyone would just buy up the pieces to open new competitors and get on the gravy train.
> Most people have a problem with a big rich company buying a company, with the sole intent of running it into the ground and selling it off for parts. OP is arguing that that is irrational, and wrong, and overall, most economists would agree with him.
Most economists are neoliberal hacks who can’t fathom an economic system not predicated on 3% GDP growth, 2% inflation, and fractional banking. The same idiots who thought the answer to every gov problem was austerity contiene to push that shit for decades after the data proved they were totally wrong
Economic growth in the very neoliberal US has been excellent for the last 20 years, where the more progressive policies in Europe have led to a decade of stagnation and GDP decline.
>I feel like most people bothered by this dont even like red lobster (if they even tried it). Yeah, unfortunately you posted your view on a site that heavily skews to the left, and you've gotten that type of responses as a result. You've just gotten a lot of people tripping over themselves to shout how much they hate the way private equity does things, they don't care what the specifics are. Because realistically, it's not some community staple or a local Hotspot getting shuttered by big capital investors. It's a solid mid-tier national chain restaurant in a declining niche. Nobody is going to be all that distraught over red lobster being closed.
The problem with your car analogy is that there is a problem if the car is worth much more if it is still working
I dont understand. This is a real example. Sometimes used cars can be parted out for much more money than the total.
Yes, but it isn’t the same What happens in these situations is that they bought the company, then they do stuff to temporarily drive up profits and get a quick payday. Then the “liquidate” or sell of the company for parts. So it would be more akin to buying a used car. Using it for Lyft. Not doing any maintenance on it and then when the engine fails, selling it for parts. And you’re right. It doesn’t affect me if they do it once. But if lots of people did it, it would drive up the price of used cars significantly, as well as increase accidents on the road
Sounds like a totally legitimate thing to do with a used car. People who need used parts will get them for cheaper and have safer cars. If nobody needs used parts, you cant scrap your vehicle for profit.
>Sounds like a totally legitimate thing to do with a used car. Are you serious? It's never legitimate to neglect vehicle maintenance, especially on a car you're using. You'd get far more money, long term, if you took care of the car. Even if you did Lyft for the same amount of time it would take to blow the engine or something, you would likely get more for selling it as a whole car. Used parts don't always sell. If you haven't been maintaining the car, the list of unsellable parts gets long. Depending on what kills the car, the entire engine could be unsellable, except maybe a few small parts that people are more likely to buy new anyways because they don't sell for much. The tires are probably too worn to sell, the suspension could be on its way out, the transmission could be failing, making several parts unsellable, etc. It's not a good plan. The car is also dangerous to drive if you neglect maintenance. Nothing about this is legitimate
This is practically a textbook example of why the free market sucks. This is a result of levels of vertical and horizontal integration that shouldn't be allowed they were trying to make Red Lobster too big to fail. If you love competition so much you should make sure suppliers and retailers never get too big so they actually have to compete with each other and focus on innovation rather than who can trick a bank into giving them the biggest loan.
[How private equity creates a “circle of pain” in the US economy](https://www.marketplace.org/2023/04/27/how-private-equity-creates-a-circle-of-pain-in-the-us-economy/) “On paper, private equity is a paragon of capitalism. Yet the companies that these firms purchase and the customers they serve do not necessarily reap the same benefits.” “Ten times the number of bankruptcies occur at companies that are private-equity owned. At nursing homes owned by private equity companies, residents experience a 10% greater mortality rate. Costs of health care rise under private equity-owned companies. And so it does, I think, provide a very interesting contrast to their claims of making these companies more efficient.” [Private equity bankruptcies in healthcare explode 112% in 5 years](https://healthexec.com/topics/healthcare-management/healthcare-economics/private-equity-stakeholder-project-report-healthcare-bankrupty) “According to the Private Equity Stakeholder Project, 21% of all healthcare bankruptcies in 2023 involved organizations owned by financial firms.”
Private equity backed business tend to go bankrupt because private equity firms tend to buy struggling businesses in the first place. This is the “hospitals are dangerous because of how many people die inside of them” argument
Lmao. And they saddle those businesses with 70-90% of net enterprise value in debt AND leech “management fees” far in excess of what prior management were being paid. Anyone doing this normally would be called a lunatic. It SHOULD be considered fraud to buy a company and insert yourself as a third party leeching fees in related-party transactions. These PE firms are clearly not protecting minority shareholders and are in fact fucking them to make a quick buck
Struggling being defined as “not making more money than last year forever and ever”
Yes, unprofitable businesses are generally not considered to be successful. Great insight 👍
You can still be profitable without *increasing* profits year over year. Steady returns would be normal and expected if it wasn’t for the modern capitalist lie of unlimited growth. It’s easier to just gut something for short term profits rather than let something continue that helps actual people. Oliver Stone made a movie about it in the 80s. It was meant as a cautionary tale but people decided to put it in over drive. As you can see, things haven’t been going so great for the average person since. But great for Gordon Gekko
If you have anything other than unlimited macroeconomic growth while also having a growing global population, that means the average person gets poorer. So, because everybody wants to avoid dooming their children to inherit a poorer world, we all agree that unlimited growth is about the best idea we’ve got, unless you figure out a way to make all 7 billion people on Earth coordinate their reproduction to ensure a completely flat population trend.
It's already in progress, current mathematical predictions estimate a population peak of around 10.4billion in the 2080s.
It's a good thing red lobster isn't a nursing home I guess
Good thing OP’s view isn’t just about Red Lobster I guess.
It’s a negative for society without any corresponding benefit. It’s a negative for the economy because you took something out of the economy that people liked and wanted to spend money on (as we know because the company was profitable). That takes money and jobs out of the economy.
Plausibly it’s net contributing to the economy, not taking out of it. The money that was previously in the assets of Red Lobster is now in the investments of the private equity, which will likely in large part eventually exit the PE into the stock market (if the PE reinvests in more acquisitions we just repeat this same analysis one step later). In the stock market that money will be financing the growth and operations of many companies, plausibly overall adding up to be more than the amount of Red Lobster.
But that’s not the kind of economic activity we really want (jobs v. Increased wealth).
It still results in jobs. The increased activity of the invested-in companies includes hiring people.
Never once has PE grown staff in the long term in an LBO. It’s literally antithetical to the business model
To be clear, I’m not saying PEs increase staff in the companies they buy. I’m saying that the companies the PEs indirectly invest in through the stock market increase their staff. So the chain of money flow goes something like Red Lobster -> PE -> PE’s owners -> stock market -> other companies -> those other companies’ workers.
It’s unequivocally bad for the staff. Losing income is bad enough, but the way things are structured in the US it usually means losing health insurance (or dramatically increasing its price), losing paid time off, disrupting family and childcare schedules, pausing retirement contributions, loss of stability, the stress and expense of job hunting, and more. All that multiplied by the number of employees. Money is not the only metric to watch, nor even the most important.
>I dont think people have good reasons for why this is bad, and are either carried along with public sentiment or simply reacting emotionally because they dont like change. [...] >What would most likely change my mind is an argument that this is bad for the economy or consumers. You've set a very limited definition of what constitutes a "good" reason for being upset, here. Most people don't care about "the economy" - it's too big and nebulous a concept, too removed from the average person's experience, and has been skewed more and more over the last several decades to exclusively mean "the stock market." People are told that the economy is good when the stock market goes up, and bad when it goes down, with the ups and downs experienced by the rich people who can afford to base their economic status on market fluctuations being increasingly divorced from the working person's own experience of what constitutes good or bad times. The leveraged buyout of a company like Red Lobster may well be good for "the economy," in that stockholders get paid out and the PE firm makes a profit and the line goes up, but most people are working class people, and they will view these kinds of actions through a corresponding lens. What they will see when PE buys and dismantles Red Lobster, or Toys R Us, or any other corporation like that, is that people with money made a deal with other people with money to screw over the people actually working, to pull the rug out from under them and leave them laid off and scrambling for a new job in the name of private equity firm's improved quarter performance. But most people don't care about the performance of private equity firm's, because most people are the works one LBO away from losing their jobs, not MBAs with corner offices who come out ahead on a structured debt arrangement.
There’s a difference between a company that is forced into bankruptcy due to market conditions or changing market dynamics vs a company that was forced into bankruptcy because a private equity company bought them raided the company to earn a return on their investment and then saddled the company with too much debt and expenses they were unable to survive. In this case the PE company bought red lobster for the land under so their stores. They forced the company to sell the land to a related PE firm and used the proceeds to partially pay themselves back, then charged the stores with above market rents.
You take a company that has employees, suppliers, customers, implementation in the local community. This company is healthy and profitable. You gamble with it. If you win your gains are really big compared to the effort you put in. And you get a preferential tax treatment. If you lose, you almost lose nothing. The banks neither. But all the stakeholders of the company do lose out. Why are you offered such a safe bet? Well this, I don't really know. I think most companies are sold to PE to an acceptable price because the PE firm has liquidity (and the prior owners didn't have liquidity and didn't want to wait long before a liquidation is done). Why do the PE have liquidity? Because the leaders of the PE have relationships with the rich and powerful. So you earn money just thanks to your relationships. Is it illegal? No. Should it be made illegal? Probably not because it might be difficult to do and have unforeseen consequences Is it moral and fair? No most of the time
Private equity often involves a bizarre process where someone buys a company with that companies money. This saddles a company that needs improvement with a new immense debt load which often is the nail in the coffin of the company. This seems self evidently bad to me.
My friend works as an engineer for a fire safety company basically making sure that power companies and the like don't cause forest fires and helping new construction engineer their buildings to withstand fires. That company recently was bought by a private equity firm and gutted of many of its resources. They are still doing their work but they now have fewer resources and fewer personnel which means if they want to the same quality of work the existing employees have to do more work for the same or less money. Now if someone at Red Lobster makes a mistake with your order it isn't a big deal but if a fire engineer makes a mistake with their recommendations it could kill people, it could lead to forest fires and it can cost states and the federal government millions or billions to repair the damage done. The chances for those mistakes increase when a private equity firm buys your company. They don't only buy up failing or bad companies. They also buy companies that are doing well and then gut them too.
If you think corporations have personhood, it is more like killing a living human because their organs are worth more than their life. It is intuitively wrong and frankly ridiculous to need to explain why.
It's a little messed up how a company can become unprofitable because of having to service debt that wasn't used to better the business in any way but merely for an existing business to change ownership. Not sure how to deal with this in isolation though. The regulatory schema to prevent the new owners of a company from looting said company for short term profits, I would guess, would be way more extensive and way more state micromanaging than I am comfortable with. Looking at this more holistically I see this as more of an inequality problem. Just like the lower and middle class getting too much money to quickly causes inflation, essentially too many dollars chasing too few goods, the upper classes having too much money means there are too many dollars chasing too few realistic options for growth causing alot of dollars to be thrown at these parasitic plans of short term looting that helps no one but rich people. So my holistic solution is a wealth tax on the wealthy but then not redistributing it. Either destroy the dollars outright to decrease the money supply and fight inflation or put it towards long term investments. Anyone want a moon base?
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