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Watching private equity take over and subsequently destroy businesses is so frustrating! This is a story that comes up again and again and there isn’t yet the o

• readthenotes1 2y ago
  Similar story with Sears. Bought by a real estate investor who didn't care about running the stores that much...
  • gadders 2y ago
    Wait until you hear about Thames Water and Maquarrie in the UK. https://www.theguardian.com/business/2023/jul/10/as-thames-water-sinks-macquarie-group-continues-its-unstoppable-rise https://www.theguardian.com/business/2023/jul/10/as-thames-w...
• ars 2y ago
  Something I don't understand is why private equity would destroy a business they themselves own. It doesn't make any sense - they paid billions for Red Lobster, they made some money, they could make even more by having a viable business. If this were a publicly owned company I could understand outrage, but it's privately owned, the owner presumably isn't interested in losing money. What's his motivation for taking these steps that are "obviously" bad?
  • gadders 2y ago
    Not certain, but I would guess it is to do with investment horizons and getting a 10x return on the money they put in to return to their fund, rather than 1x revenue per year.
  • johnrgrace 2y ago
    The private equity fund who makes the decisions about what to do is buying the company with other people's money. They get a % of the other peoples money they manage as revenue and slice of the profits on success. Also they often engineer things so the money the fund put into the deal comes back very fast. In this case they sold the companies real estate which got a big chunk of their initial investment back ASAP. the simplified view - red lobster they bought it for $2.1b - they sold off the real estate for $1.5b and 25% of the equity for $575m - so the PE fund has $25m of their original investment in the deal. They borrowed a bunch of money and then paid out dividends on that $25m that were multiples times that amount.
  • 48864w6ui 2y ago
    If they can make even more money on a different viable business by vampiring out this one, the NPV calculation says... (What %age of eastern european enterprises got long term investment in the 1990s?)
  • plussed_reader 2y ago
    Once you realize the destruction of the sunk cost fallacy it's easy to detach from things that would harm you long term.
  • DopplerSmell 2y ago
    When you value a business, part of it is brand and people's habits. The new owners are betting that they can trade in that value for cash, by selling a crap lesser product under the old name, and that this will return faster than a sustainable business. It's not obviously bad from a finance point, it's just significantly shorter term thinking than the original owner.
  • somenameforme 2y ago
    IMO the fundamental issue is that the goal of private equity isn't to save the company, but to make as much money as quickly as possible off of it. The article hits on the exact pattern. Equity strips down a business, does whatever they can to juke the numbers with no concern for sustainability. As soon as they can make the numbers look appealing [enough], they sell it to the next sucker, and that person is left holding the bag, while the PE gets out with a tidy profit. From the article: --- After the real estate move, Golden Gate sold 25% of the company in 2016 to Thai Union, a Thailand seafood company, for $575 million and unloaded the rest of the company to an investor group called the Seafood Alliance, of which Thai Union was a part, in 2020. Golden Gate likely came out ahead, but the same can't be said for Thai Union, which also controls the Chicken of the Sea brand. It is now looking to get out of its stake in Red Lobster... --- The bigger question to me is why there are so many entities interested in buying up businesses from private equity, when this exact pattern has been repeated about a million times. I suppose in this game nobody ever thinks they're the sucker. After all if you can casually toss around billions of dollars, you must clearly have had plenty of financial success at some point, and it most certainly was due exclusively to your exceptional financial genius. It reminds one of NFTs in a way. Spending hundreds of thousands of dollars on a poorly drawn picture of a cartoon ape is either moronic or brilliant dependent exclusively on whether you're the one left holding the cartoon.
  • bena 2y ago
    That's the trick though, they don't own it. They often take a company private and make the company "own itself". Then make it take out exorbitant loans to pay them their consultation fees. Then they fuck around as consulting management as the company struggles to meet even the interest payments on the massive loan taken out in its name. All reward, no risk.
  • maerF0x0 2y ago
    It's rooted in societal culture and what people incentivize (ie assign the highest multiple to). Until Americans take on a mindset of longterm/family (as I've seen many Chinese families express), they'll be doomed to make short term decisions. Right now very few Americans are able to accept an optimization that looks like "I invest today, and my grandkids will get the returns". So America is stuck in that local maxima of invest for next few quarters. The obvious tradeoff being the risks/ability to predict the future.
    • khill 2y ago
      At some point in my lifetime, the mindset switched from "I'm investing because I want to see long-term, steady growth and get regular dividends" to "I want to make as much money as possible as quickly as possible and damn the consequences to others". The short-sightedness and greed is destroying so much.
      • pfdietz 2y ago
        Or, the hardnosed focus on economical value over sentimentality is freeing resources to be used more productively elsewhere. Schumpeter tells us the market operates by creative destruction. Properly killing companies is just as important as properly starting them.
    • grobgambit 2y ago
      [flagged]
    • abfan1127 2y ago
      I want my investments to pay back over 30 years to me. I don't care about quarter to quarter returns. I don't need to invest for my grandkids for any of this.
    • singleshot_ 2y ago
      It’s very interesting that you seem to be making a dichotomy between Chinese and American people instead of one between rich and poor mindsets.
  • jfengel 2y ago
    Making money off restaurants is incredibly hard. It's just a lousy business. Even well-run, well-liked, well-attended restaurants are often running on incredibly thin profit margins. Which seems crazy, since the costs of inputs are so low at most restaurants. They pay workers embarrassingly little money, and the ingredients have massive externalities. (Those "endless shrimp" are possible because of literal slave labor and environmental destruction in southeast Asia.) And yet restaurants bleed money. There are so many invisible costs -- replacing bent silverware, repairing the walk-in fridge, shady suppliers whose produce you have to toss, etc etc etc etc. It's just a crappy business. A private equity firm may not know how to turn a profit. Or they could run it with a tiny profit that just isn't worth their time and effort, and it's easier to just shutter it. It's a much bigger hardship to the employees than it is to them -- even the potential gains are too small.
  • devmor 2y ago
    For the same reason that large tech firms lay off thousands and shutter successful, or yet to be released projects. Short term gains over a long, steady market is the current driving mentality of Western capital.
  • deleted 2y ago
    [deleted]
• sevagh 2y ago
  Can we place blame on the people who sell their firms to private equity firms?
  • forgetfreeman 2y ago
    Nope.
  • getwiththeprog 2y ago
    Yep.
  • rwmj 2y ago
    It's understandable if you are a small business owner and someone makes an offer which means you can retire comfortably. The blame here is not with those owners, but with the private equity companies that exploit customers, and also the regulators that allow this monopolization & destruction of value to happen.
  • madaxe_again 2y ago
    Not necessarily. I’ve seen it happen involuntarily several times - most recently, a client was acquired by another technology company in a mutually beneficial buyout - however, a year later, the buyer found themselves undergoing a hostile takeover by private equity. They then gutted everything - all technology teams stripped back to nothing, or a single junior to KTLO as best as possible, all management fired, although of course kept all of sales and marketing. They handle amazingly sensitive data for manufacturers across numerous sectors, including the likes of Apple and BAE, and no longer have any infosec functions. So in the case of the client, they didn’t sell to PE, and it’s a time bomb I’m quite looking forward to seeing go bang. In another case, years ago, it was just a straight up hostile takeover initiated by a disgruntled investor who wanted out, and an asset strip followed by administration - we, their main technology partner, got screwed to north of £100k. One of the events that lead to me deciding to quit my previous business, as I couldn’t put down the murderous rage it incited in me. The money was almost immaterial, it was the fact that these fuckers essentially burgled a perfectly good and profitable business and then robbed their entire supply chain, from services to product, and cost several hundred people their livelihoods. Fire and ice in lucifer’s mouth for all eternity for these bastards. Yeah, a decade on, still haven’t quite put that down - but again, not initiated by anyone who actually had anything to do with the business - I felt terribly sorry for all of them.
• dmurray 2y ago
  The "private equity kills beloved brand" stories are usually overcooked, as far as I can tell. They usually involve PE taking over firms that were already in financial trouble, which is what made them attractively priced to PE in the first place. The PE firm would also prefer to have a nice profitable business, but if they can't turn it around, they have options like asset stripping or selling the name to a different company. Here TFA mentions "flagging sales" already in 2014. The most likely alternative to PE "killing" Red Lobster or Sears or Toys R Us wasn't that the businesses restructured with the same management and business model but 25% fewer stores. It was that they went out of business altogether. I'm worried by PE buying up successful natural mom-and-pop businesses like dentists and vets and worsening the consumer experience at those. Not so worried about them managing the decline of massive national brands slightly more aggressively than another billionaire owner might.
  • red_trumpet 2y ago
    From the article: > To raise enough cash to make the deal happen, Golden Gate sold off Red Lobster's real estate to another entity — in this case, a company called American Realty Capital Properties — and then immediately leased the restaurants back. So private equity didn't try to make Red Lobster profitable before stripping it of its assets. That was literally their first move.
    • AdamN 2y ago
      Because it was a dead man walking by the time PE bought it. The underlying assets were worth more than the sale price so it was never going to make sense to do anything other than what happened. With that said, the tax code and employee law could be improved so there are stronger guardrails to protect some stakeholders more.
      • red_trumpet 2y ago
        > The underlying assets were worth more than the sale price That's not so clear to me. The real estate wouldn't have been worth so much without the existing restaurants having to pay rent.
• rwmj 2y ago
  They're currently buying up veterinary practices in the UK and turning them into cash cows. This has the effect that pet insurance has gone through the roof, and general vet bills are much higher than they used to be. Pets suffer too if owners can't afford to treat them any longer. (https://www.theguardian.com/business/2024/mar/12/uk-vet-pricing-competition-and-markets-authority-cma https://www.theguardian.com/business/2024/mar/12/uk-vet-pric...)
  • throwway120385 2y ago
    Optum is doing the same thing here in the US PNW for actual doctors' offices. My SO had a mysterious charge suddenly appear in her account that nobody would explain and then she got fired as a patient and sent to collections by them a few years ago. Now that they're buying all of the clinics she essentially can't get in to any providers because of it.
  • prepend 2y ago
    Dentists too.
  • mindracer 2y ago
    A few years ago my cat needed his teeth cleaned my local vet charged me £125. The same vet, now owned by CVS, is now going to charge £250
    • NegativeK 2y ago
      $250 for a cleaning in the US is still a loss leader. The actual cost to the clinic of a dental cleaning is ridiculous for how often it needs to be done.
    • madaxe_again 2y ago
      That was €10 here in Portugal.
      • sib 2y ago
        How long does the process take? What is the overhead (space / equipment / other costs)? And therefore, how much is the provider earning per hour?
• globular-toast 2y ago
  I wouldn't expect anything to change now. This is essentially what we're all doing to Earth: wringing it dry because we know we'll be dead before the oil runs out. People stopped dreaming of something better a long time ago.
  • pif 2y ago
    We didn't stop dreaming: it's just that we have not yet found non-polluting oil!
• rl3 2y ago
  >Watching private equity take over and subsequently destroy businesses is so frustrating! I agree. I uh, hope they don't do the same thing to Olive Garden, or Applebee's. That would be tragic..
  • coldtea 2y ago
    Ah, American classism, where crap like McDonalds is OK, but pissing on Olive Garden and Applebees is a signal for "I'm not working class, I have taste". Perhaps because the latter are associated with aspirational working class, which is to be mocked. The upper middle class and higher going to coffee shops and restaurants targeting them and dialing the pretentiousness and crap fusion food and such to 11 is OK though, that's in high taste. And McDonalds is acceptable too, since it's seen as neutral.
    • ghaff 2y ago
      I'm classist I guess but McDonalds is really not OK unless I need some fries on a long drive. But people can eat whatever they like/can afford/find convenient.
    • Xcelerate 2y ago
      > Perhaps because the latter are associated with aspirational working class, which is to be mocked. No, what’s being mocked is the quality of the food. The “aspirational working class” in Europe has much better food options for even better prices—has nothing to do with classism and everything to do with the development of an American culture that ruined food in this country. My grandparents grew up in rural Appalachia and what they prepared themselves and ate back then was much tastier and fresher than Olive Garden.
      • coldtea 2y ago
        >No, what’s being mocked is the quality of the food If that was the case the "quality of the food" would be mocked elsewhere, in tons of brands with crap quality. But those seem to be particular targets in the way that say McDonalds and other fast food or higher tier but still crappy brands are not. Besides, most references/parodies I've seen (like online, on SNL, movies, and so on) always seem to mock the working class in that context (or the ignorant lower middle class), in some "lol, these people think they're eating fancy" - usually with stereotypes about their appereance and mannerisms to match.
• nickpp 2y ago
  I used to feel the same, but eventually I came to understand that they have a tremendously important role in the business ecosystem. Like sharks in the sea or wolves in the wilderness, they identify and remove sick and ailing businesses. Additionally they offer a convenient exit to tired owners and investors, thus incentivizing further business creation. Finally, they identify and exploit regulation-created monopolies, enabling the government to re-allow competition through deregulation - something more and more important in today's populist and regulation-happy climate.
• toast0 2y ago
  Private Equity is a scapegoat business. Like Ticketmaster. If you have a company that's been slowly failing for a while, PE is here to help you out. They will pay you money today and take over the company and in 3-5 years it will go out of business in a convincing way. And PE will take the heat.
  • TheRealDunkirk 2y ago
    That belies that fact that the play is usually to finance a bunch of debt to prop it up, pay themselves PHAT bonuses, and then let it burn to the ground. Honestly, it's gotten way past tiring that the government continues to let this same scenario play out over and over and over again.
    • toast0 2y ago
      Well, they have to make money somehow. You can't just buy a failing business, run it into the ground completely, and take the blame without being compensated. If these businesses had a promising future, the owners would have been less interested in selling, someone interested in actually operating the business would have made an offer, or it could have been publicly traded.
  • delfinom 2y ago
    Eh, PE also takes over businesses where the owners just want to cash out. Plenty of businesses too small to IPO but plenty of revenue to sell to PE.