Exactly this. Red Lobster made over $2 billion in revenue during that time, so the endless shrimp may as well have been a rounding error, while the rent was almost a tenth of their total income for the year. I normally enjoy this channel's content, but excluding that context borders on journalistic malpractice. What an absolute joke of a video
@@patrickn4171 business like casual restaurants operate on pretty thin margins. Any amount of losses could lead to negative cash assets hence its a combination of stuff
I mean that should’ve been mentioned because that’s also part of asset stripping because if I used to remember correctly red lobster used to own all there locations then the private equity firm bought them they sold the locations and did rent to use deals which worked at first when rent was lower but then when rent shot up they lost a ton of money
As a former newspaper employee, I can tell you asset stripping by private equity only benefits the investors who expect a regular short term positive financial return regardless of market conditions. if you start stripping the car for parts, eventually it can't be used as a taxi.
Asset stripping is essentially buying an unprofitable business at a discount and making money off the assets instead. There is no difference between asset stripping and a business liquidating itself btw
Definitely a second or third hand story my supervisor told me. But here goes. His brother worked for a company that raised nursery stock. A PE fund bought the company, stripped down operations, and sold assets. Later, they made a deal to provide, nationwide, nursery stock for an entire chain (something the size of Home Depot or Lowes). Although his brother wasn't a primary stakeholder, the chain wanted him to sign off and certify the company's ability to meet the demand. He refused saying that they no longer had the resources to do that. His brother was very nervous for a long time due to amounts involved.
This is a weird take. Almost all of your examples saddle the company with unsustainable debts and sell off important parts to enrich the private equity firm. Then there's the loading up on more debt to pay the firm and two out of three declared bankruptcy while a third could still be in the cards. Not sure what part of this is supposed to convince us it was a potentially good thing. Edit: Fixed some grammar errors, and wanted to mention when I look at this piece it also seems out of place compared to a lot of the other content on the channel. There might be an argument here, I can concede that, but I don't think this video succeeds in making a compelling one.
I would say it is not the norm to try to let the audience make up its mind but it is a nice change of pace from most videos which I feel is very much trying to make you feel a particular way.
Bingo. They can just sell their shares and walk away and roll the dice on the next company. They like to tell you they're footing all the risk but it couldn't be further from the truth. The employees who get let go in the process and have to try and find a way to pay their mortgage definitely have a lot more skin in the game than some PE broker who wouldn't hesitate to shut the whole thing down if it means he makes a buck.
Exactly. like what do they even think assets mean, it’s company value that translates to workers, material capital, etc. Once that’s stripped there literally can’t be a company anymore
I've only watched the Red Lobster part, and while asset stripping might not have been the reason, without private equity buying the company, it's hard to believe Red Lobster would've sold it's land and started paying rent. That wouldn't be good for it's profits.
I think his take was that we can’t point out the real estate vs the shrimp deal as the culprit. Therefore his conclusion was “dubious”. In my eyes if you had a hand in it then you are at fault. Just because someone else had a hand in it doesn’t take the blame from the PE firm too.
ProTip: If your company announces that it intends to “merge” with a PE company, do not walk, *RUN* to the nearest exit! Chances are you’ll be a casualty of downsizing if not outright sinking with the ship, so my rando internet guy advice is cut your losses.
A bunch of my coworkers and I were let go after our company was bought by PE (and after record profits). The most baffling part is they let go some of the most critical people in the business with no handoff. If my new company goes through the same I’m not going to trust their promises that “things will improve” and will immediately plan my exit.
@@alperakyuz9702 if that is an option then certainly consider it. Happened to me that way once because I got caught flat-footed and didn’t see the writing on the wall. Luckily I found employment again two months later and it worked out. Another time, I saw it coming from a mile away so I had enough time (many months) to find the right role at the right place and I’ve been loving it (5 years later) ever since!
12:15 pretty much sums it up. It's only better for the private equity firm and it's clients not the company that was bought and stripped and all of its employees
Are the Business Insider Editors on vacation? How did this get through.? There's not a good side to leveraged buyouts. It just harmful Greed. People lose jobs, the product get's worse and more expensive, everyone else looses money for someone's greed. It's just as bad a MLMs.
right?? i feel like this video just glazed over why leveraged buyout is a thing in the first place, let alone okay to do again and again, while it also acknowledges this kind of practice is what has been causing all this mess, the root cause. I thought the regulation segment at the end was gonna touch more on how to limit the buyouts, but not really, and then he just mentioned it only once at the end (as I've said, the narrative here acknowledges it!). totally sounds like it's trying to shift the blame on the so called asset stripping policies, which basically is just how any for-profit entities will operate????
Fully leveraged buyouts definitely seem like they'd be unwise for an underwriter to back, but it's the self-dealing, as in the Red Lobster case, that is where the grift really lives. The purchased company doesn't *really* need to turn a profit - so long as the owners' real business(es) do.
Your car asset stripping analogy missed the destroyed jobs, services, and competition. Oh, and the screwed over creditors who are the VC wrecking crew.
So the private equity firm takes no risk itself, does things that are bad for the actual health of the business in providing goods and services - whether or not it survives - and doesn't appear to create any value. It's hard to see this as a good thing. Though the shareholders were paid, the banks who loaned the money get paid, the company being torn apart is the private equity's property.
Leveraged buyouts should never be allowed. Take out debt if you want to make a massive purchase but then the VC should stay responsible for the debt. Preaching to the choir here though
Your description of Burger King (BK) seems incomplete. First, if the asset stripping involved selling corporate restaurants and the land they are on to a franchisee, then the franchisee should be in a decent position to earn money. But if just the restaurant is sold to the franchisee and the land is sold to someone else, then the franchisee is possibly on the hook to pay unreasonable rent, which will eventually put the franchisee out if business. And if all the franchisees go out of business, then the parent franchise won't have anyone to sell to and will go out of business. So this part of the video seems incomplete. Second, you showed BK revenues rising over time, but also showed the number of locations rising more quickly. That means the average revenue per BK location is declining over time, and that is typically a bad sign for a chain company.
Yeah using number of restaurants opened is such an oversimplification. BK makes money from charging franchisees, of course they will give the go ahead for everyone that wants to open one. That’s not far off from how Subway operated and in instances had 2 stores 200 feet from each other.
Getting the company bought to pay back the loan with which the company was bought is exactly what happened many times in Slovenia during privatisation and in the run up to the 2008 crisis. For most of these companies the result was either failure or long struggle as profits weren't being reinvested and the effects became apparent after 10 years. Also the new owners often weren't business savvy, just well politically connected and thus ran the company bad.
Burger King has Berkshire as an investor with 3G Capital, so they approached this differently. Most PEG's are the old LBO corporate raiders, and yes, most extract as much money as possible, they sell or bankrupt the businesses.
"Pay 200 million in rent due to this deal, lose 75 million overall, who can say if selling their real estate was what made them go bankrupt?" followed by the 'Hmm, dubious' was ridiculous. If you're going to dismiss the idea that the asset stripping is what made Red Lobster go bankrupt, at least give *another* response other than "it paid 3x as much in rent as it lost money overall, but that isn't why they lost money" All the talk about 'help with the debt' is almost taken as a given that these companies had debt... except that only was because they were saddled with it by the PE firm in that leveraged buyout. Even the 'positive' burger king one doesn't really even look like a success lol
The most simple thing to remember in business, buying things with debt is always a time bomb, if your quick enough to sell it to another person,it wont blow up in your own face.
@@sairadha674 True, most times after 1 or 2 years the private equity firm has stripped enough cash from the company they "bought" to cover their initial investment and some nice profit margin. The company is then left to rot and or sell of for parts. So every leveraged buyout is indeed a time bomb, except once the bomb goes off the private equity firm that set up the bomb is drinking cocktails on their private island.
Sorry to double post but you go “it’s a little of everything” and cite red lobsters plan to sell its land and then pay rent as if that was red lobsters idea and not PE. This is a clown show of a report and embarrassing to this channel
@@James-un8io Its not the same answer, hes separating the damages done by PE by separating them out and going "thats in addition to the stuff you think is bad" no that is the same stuff thats bad
@@WritkinAgree, but to Morning Brew's defence, PE firms are usually not buying 100% of a company and replacing the entire board. If possible, they usually want some of the founders left in the company with some type of incentive for them to keep developing the business. However, in the Red Lobster case it really seems like they bought 100% and replaced the entire board meaning it is whoever the PE firm placed on the board who are to blame for the horrible business decisions and the company's eventual bankruptcy.
Private Equity is so obsessed with efficiency that they cut through the fat, past the muscle and into the marrow. Then they complain that the business can't stand because the model isn't there.
What I don't understand is why the next owners down the line, Thai Union and seafood Alliance in this case, continue to buy companies from private Equity companies when the track record is that these companies will be left holding an asset which will soon be worthless...
The information provided is useful and does discuss well how private equity can be harmful to businesses, but the framing of it as a two-sided coin seems jarring considering how one-sided the issue is presented. Clear examples of how asset stripping can negatively affect businesses but periodic prodding of "but it can be good! we'll let you decide" while providing little evidence for that fact. Centering the video thesis around letting the audience decide can work and is interesting (to me, at least) but any supporting evidence for how private equity can be good seems to be missing beyond Gustavo saying "Yes it can be good but it just tends to be done badly often." The examples of businesses doing well while under private equity didn't show evidence that the growth was due to any contribution from private equity, rather it seemed to be despite them. At the same time the video seems to be confused about the motivations for asset stripping. The example of the car at the start, where you are left with $25 but no car, clashes with Gustavo's claim that asset stripping can improve and help grow a business. Is it stripping a car for parts or reducing excess weight? You choose to let the audience decide but only provide clear evidence for the former. This video very well produced however, the effort there is clear and impressive. Looking forward to further videos :)
Weird video. We see 4 examples of PE buying companies and how that worked out but we do not see an alternative to asset stripping. How were toys r us, red lobster and burger king doing before they were purchased? I just cant see how asset stripping is a medicine if you dont tell me how the companies were sick.
This is by far the weirdest and worst take I have seen on this channel yet. Not every subject needs a both sides argument when one side is clearly in the wrong
@@Ohdamn-ci6gj was hitler good or bad? it depends on who you ask. Ill let you viewers decide the truth. There are good people on both side - Donald Trump
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If this type of behaviour is profitable, then who is footing the bill? I'm guessing not the previous shareholders. They were probably paid enough premium that it was worth it for them. I think it's the employees and everyday taxpayers who don't take advantage of the system's bankruptcy protections. They're the most hurt when these companies go belly up.
@@Mastercane98 If you're arguing that this type of behaviour creates value, you should provide evidence of this. I don't think there is any value creation in their business model of taking over companies using excessive leverage.
@@ktktktktktktkt The value comes from the restructuring of a failing business, the target company is usually showing signs of distress before being acquired. Private equity's goal is to turn them around, replace management, rectify inefficiencies and perhaps even change the business model. Unlike what some people say, they are very interested in the viability of the firms they acquire, their profit and reputation depend on it. In the long run, creative destruction spurs economic growth, if some companies have to go under for the overall economy to benefit so be it.
It's not just Private Equity that does risky leveraged buyouts - Elon Musk famously bought out Twitter and saddled it with about $13 billion in additional debt which is estimated to cost Twitter about $1 billion per year to service.
Is sharecropping poison, or medicine? It depends on who you ask. 🙃 Maybe do some journalism in response to "these failures deserve outcry but aren't systemic" and not just tell us "PE thinks they're fine" and "other people think this sucks"? The only wider context number you gave, the 10x failure rate, does NOT make it sound like a "depends on who you ask" nuanced affair, but an extremely risky manuever that frequently results in catastrophe. But not always, therefore it's fine, apparently. If you have any statistics that make this look not horrible, show em. Otherwise this sounds like propaganda, not even a fluff piece.
It's also possible that companies which are already on a downward trend are getting bought more frequently as they are cheaper and would've ended up in bankruptcy either way.
@@Janezslovenski If that were the case than the caveat that they go bankrupt 10x more than companies in similar positions should have been excluded and context should have been given. Leveraged buyouts are only ever beneficial to the shareholders/owners getting bought out and the private equity doing the buyout. Sometimes companies survive in spite of being saddled with excessive debt, but it is never a good idea. If leveraged buyouts were illegal and the private equity firms were legally responsible for the debt than it can work as there is a reason for them to invest, grow or optimize the business instead of what happens with leveraged buyouts to basically get their investment out of the company by extracting profits until their 20% investment is covered and letting the company rot and/or sell it for parts.
12:41: Buying companies with debt is risky. But then why are lenders willing to lend the money to do these transactions? They are not in the business of losing money and making bad loans. The returns must justify the risk they are taking.
The interest on the debt is based on the value and revenue of the company before acquisition. The bank doesn't know what strategy the new owners will employ. If you look at the examples cited the companies were bought when borrowing money was cheap (so cheap that bk was bought with
@@doom2avatar Interest is repaid from cash and profit and AFTER dividends paid to shareholders ( which in this case are PE firms who milk the company dry by taking large dividends). “Revenue” means nothing if expenses are more than that. And why would a bank lend money when they have no idea “ what the owners will be doing “? They better dang know when they are investing depositors’ or shareholders money.
Spotted a typo at 8:46, the chart shows its in millions when it should be billions. Looks like this is something that was copied from Statista as they have the same typo
How I heard the professor: The reality is: if you look at mismanagement that lead to bankrupcies, they DO happen. But, if done right, I THINK it MAY end up being better for everyone, MAYBE. If stars aling and people in right positions are responsible. The same people who "buy" companies on borrowed money and then force these companies to pay back the money that was used to purchase the company itself. Those that are more likely to pay themselves by taking a giant debt, sell the land the business operates on and renting it back... Yeah, very responsible, business savvy people. Just look at cryptocurrency exchanges - super responsible! Seems like a politically correct speech from someone with vested interest... Oh, and I totally agree that switching burger king from a business of making and selling burgers to selling a brand franchise was the best thing ever!!! For a business. Not for people who worked there, but who cares what people think. Its the MONEY that's important, right?! Nah, I'll stick to my opinion on private equity. High reward zero risk business - bankrupting other people's companies using other people's money. While making a huge amount of profit in the process. The "government" will bail them out eventually, right? Except the "government" doesnt have money of its own. Its all from our taxes, or our savings (by printing money you devalue everyone's money, savings included). And when pension funds lose money due to lobster going bankrupt, who will suffer? Private equity? Nope, your pension! Not mine because they don't have my money - I'm not from the us of a 😂
6:08: The answer is no. The Endless Shrimp promotion started after Thai Union took majority control of the company. The conflict of interest with Thai as the owner and also the supplier of the shrimp was a major cause, alongside industry wide issues including higher labor costs. The whole situation with Thai Union seems very suspicious. It apparently owns more than a dozen businesses, world wide including Chicken of the Sea Tuna. Almost all have been acquired in the last 20 years and possibly with debt, just like the "evil" leveraged buyouts of the "evil Private Equity firms". I wonder if somewhere down the road we learn it is a Ponzi scheme that has been cooking the books.
My prediction before watching the video, "no, they want to just make as money as possible. If they can make a profit cutting the fat and improving the business then great. If not, they will gladly hack it to pieces and make money while they do it. They don't care"
It is possible that interest rates are high and they lend to many companies that few losses would not matter. Also they may get their money back in bankruptcy proceedings. Do not forget for credit company loan appears as asset in balance sheet which is good for executives as these loans are meant to be paid over many years considering the loan size. If you still feel that this is risky let us not forget how subprime mortgage crisis started in 2008 recession.
The banks lending money for LBOs do heavy due diligence on the PE firm, target company and the entire deal plan for bankruptcies to not happen and in most cases they don't. In the Red Lobster case though, the only one not losing money on the deal was Golden Gate Capital, the bank probably won't get all its money back. And while Golden Gate Capital made money off this deal, the negative attention it brought means they will likely struggle as a company in the future, who would ever want their company to be bought by those con artists and who would consider lending money to them?
Regulation to require larger amounts of cash and greater obligation to look after all investors in a business, not just private equity , makes sense. Make it easier for investors to sue PE firms if acquired business goes bankrupt. Require more transparency. Make it easier for companies to fight off hostile PE takeovers. Still, we need PE firms because sometimes management is hurting shareholders, not using capital properly, or businesses really need to be totally restructured by someone invested in long-term performance. And, sometimes, businesses just need to close, but employees won't let it. Someone needs to be willing to be the bad guy.
The question I've never fully understood with private equity and leveraged buy outs: Who gives the loan to the PE group in order to make the deal possible? These companies go bankrupt and are unable to payoff these debts way too often, yet the PE firm always seems to make money- what lender is willing to take on all the risk while only receiving a small portion of the potential reward?
So private equity’s whole business model seems to be load up a company with more debt and hope to God it continues increasing revenue in future to pay off that extra debt ! what a weird time to be alive
>endless shrimp cost 11mil >asset stripped land alone was 190mil Hmm dubious, could have been a mix of factors and definitely not entirely because of the LBO
Gee, I would love to buy a billion dollar business and make it take all the debt of the purchase while I take the profits off the top. Where else in the real world does a regular small business owner get to do this?????
Your pro asset flipping guest had some lame arguments and I think you know it with him barely in the video, "It lowers cost for equity firms", "It increases profits for equity firms", all in technical terms so you can tell your not meant to understand what he's saying
I had seen a few of the more populist and conspiratorial videos you guys had published recently and was really disappointed. This one was a remarkably honest and well-researched breath of fresh air. Congrats to Nathan and the team. I hope Morning Brew keeps moving in the direction of this kind of content (including Good Work).
4:16 Are the companies performing badly when these sales of ownership are happening? How do they convince Thai Union to buy a company loaded with debt? In the first place buying a company with debt then placing that debt on the company (2:43) seems insane and I'm pretty sure I'm misunderstanding what's happening. How does the private equity fund get its funds from these people? Is it because the manage to pay it back reliably through this asset stripping process (or whatever you want to call it)? And it looks like more of the money they use is from debt, I guess it must be similar to before where they manage to pay back their debt enough where creditors are happy to lend money, but why is the debt placed on the target company? Is it to avoid risk for the private equity company? The target company would surely perform and sell ownership better if it isn't hassled by debt? Obviously this makes money otherwise it wouldn't be done, I just have trouble seeing how they manage to sell ownership reliably I guess, especially with that companies purchased with leveraged buyouts are 10x more likely to go bankrupt stat. And if you can strip assets from a company and sell it for more, then why isn't the company valued higher, aren't assets valued into the cost of a company?
Either morning brew is trying way too hard to be "unbiased" and ended up spinning a story with an obvious culprit (private equity) as just one problem or they're intentionally being ignorant here.
Several months ago they made a short citing the endless shrimp as the reason for bankruptcy, basically parroting the lines that private equity wants. They got called out in the comments, because everyone knows that leveraged buyouts take healthy companies that turn reliable small profits and put them into impossible positions where any bad news kills them.
“It depends who you ask!” If you ask someone who works in private equity, they always seem to think private equity is good for some reason. Other people seem divided on this for some unknown reason.
The UK is suffering from this at larger scale than any other western country. As PEs have moved in after brexit and started doing leverage buyout of most known brands in the UK. The UK government has a big problem, because they want foreign investment, however, most of it is coming this way.
The board of the company being bought has to actually agree to this. In theory they represent the interest of the company (with an asterisk on if that applies in practice, but that's another debate). if they are running a very profitable business, they will not sell to anyone, including private equity firms, without charging and arm and a leg. if the business seems fine for now but the CEO says "hey we got problems, and not only can I not fix them, but you don't know anyone who can" then selling for a moderate price makes sense. The private equity firm (or the buyout fund) might strip the company's assets and then it might be able to turn the business around. Alternatively, it might be run into the ground like Red Lobster. A third possibility if the PE gets a dividend but doesn't really change anything or lay off people like Burger King buyout 1 example. The $20 shrimp must have been approved by its CEO and by proxy that meant the private equity owner must have approved that boneheaded idea. But the company would not have been sold in the first place if the board of directors doing their fiduciary duty thought that a currently profitable business would stay profitable in the future, so from their perspective if they didn't sell, the business would go stagnant. So from this perspective, the businesses being bought are actually not completely healthy in the long term to begin with and trying to see if asset striping can turn things around as a hail marry makes some sense. There is a caveat about the board actually doing their job they are supposed to do in theory, but in theory they won't sell the company against its interests. If you notice that many of these directors tend to graduate from the same schools as private equity managers, this probably isn't a coincidence and I bet many of them have each other's phone number.
The proof is in the pudding. Companies bought out by private equity are exponentially more likely to fail. Gustavo's argument is essentially "sometimes it works out" - responsibility for the debt has to stay with the private equity firm, and that will eliminate the risky behaviour
This video tries way too hard to be balanced about a subject that is very black and white. Companies exist to serve communities by selling goods and services, providing jobs, and contributing to the local economy. Dismantling them for parts exists soley to bring profit to the PE firm, and does measurable damage to all other organizational goals and harms local economies, increases unemployment, and cuts competition out at a time when regulators are already struggling to contain monopolistic business practices. Private Equity exists to squeeze money out of anything and everything at all costs, it's utterly antithetical to the purpose of a business and represents everything people hate about greed. Any other viewpoint on this practice and the industry that supports it requires extreme cognitive dissonance to even begin to find a different viewpoint of. Even if your retirement depends on the value of PE firms (because your public or private retirement fund got too lazy to do direct investment and settled for a PE-heavy portfolio), your life will be worsened by the practices of these companies far more than the small ROI your retirement gets. Not to mention, these closures tend to do the most damage to small, low-income communities where almost nobody is in line to receive a penny from the PE profit that was earned by destroying the local economy. This kind of practice is objectionable on every level. Do better in your coverage.
It seems like a lot of commenters were expecting a “private equity is evil” conclusion in there. Personally, I like videos that allow me to reach that conclusion myself. It sounds like private equity owners are under no obligation to manage the company for its own best interests - only their own. That’s not illegal, but maybe it should be.
Anytime you remove responsibility from profits, you have problems, full stop. If actions no longer have consequences for those making the decisions, natural feedback loops cease to function and you just end up with wealth extraction. Furthermore, if the people affected by a decision (the stakeholders) are far removed from those making the decisions, then the system becomes ripe for abuse. It's notable that the defender of private equity in this video spoke only of market efficiency, and not the human costs that these actions create. That efficiency is only in the monetary realm, but otherwise destroys quality of life overall, especially long term.
Due to the fees being paid towards the private equity company, as well as the dividend pay outs, private equity companies always make their money back, even if they fuck over the company. Private equity companies should be banned for the damage they are causing. Also cutting down on non core activities is a very short term strategy, R&D and innovation are typical long term investments that can make a company much stronger over time but don't immediately pay themselves back. Also i think only the people benefiting from the sector are positive about it, pretty much all independent journalist, writers or economist will say its a blight on society.
Financial restructure is when it is done for future growth. Asset stripping is when the assets are gone without money being reinvested. "But the company grew, they helped it..." it may have been going to grow faster without the pirates.
It’s disgusting this is presented as “depending on who you ask” when the objective reality is you will not find a single person outside of PE that tells you the benefits. Easily the worst video on this channel. Easily.
What I'm hearing is that you watched the video on mute with your eyes closed and just wanted to comment what you already thought without _properly_ digesting what the video said.
@@edwardhoffenheim3249 Oh sweet dude you using some sort of text to audio app? Thats real nifty. Anyways you can go ahead and explain what I missed if you feel so strongly but first can you explain why this silly goose of a reporter says that GGC purchased red lobster then sold the land and then later when trying to dilute the blame away from PE he goes "other things caused problems outside of private equity, like when they sold their buildings in the lease scheme...these were all problems in addition to GGC's actions" No? Those were GGC's actions lmaooooooooooooo.
@@Writkin The video highlighted two franchise restaurants for a reason. The group that bought BK did the same as RL by selling of corporate land. It worked for them because their branches are more franchises than actual corporate establishment. They said a lot of things in the video and even highlighted potential legislation and what they might focus on to fix the issue. You're just yelling at them because they aren't saying exactly what you want instead of listening to what they're saying. That's not very conducive to fixing the issue.
@@edwardhoffenheim3249 Ah so you cant explain the inconsistency then. Projecting prettttyyyyy hard here with the yelling at them stuff. Are you the reporter's alt account?
This feels like a well balanced report. Often times, issues aren't black and white. Not totally bad or totally good. This seems to be a case where it's in the Grey. Sometimes it can be good. Sometimes its bad.
A private equity firm is a cross between a Real Estate flipper and a Record Label. They want to flip these companies to make quick profits but the Artist or singer is left with all the debt. *( an Advance)* that they have to pay off.
The guy who's supposed to be arguing for private equity made some great arguments against it. Namely that there beholding to their investors not the company. And all they have to do is give their investors their money back with maybe a little extra.
How on earth companies could ever consciously believe that leasebacks represent good value is insane. It's literally adding a middle man into the mix and expecting somehow that means profit.
IMO the problem with private equity, whether or not it improves certain business operations, is that it just does not add real value to society, despite controlling a massive amount of the capital, resources, and talent of society. Cost controls, operational improvements, and capital allocation all fall under the umbrella of proper management in any regular business -- PE firms just add layers of redundancy and nodes of extraction to the existing economy. The largest PE firms like Brookfield and Blackstone now control trillion-dollar, multinational portfolios of infrastructure including ports, toll roads, energy production, and residential housing, not to mention hospitals, charter schools, nursing homes, and prisons. A society in which all of these essential services are controlled by finance bros looking to maximize quarterly returns and load up on debt is not a healthy one.
This happened to Vermont Bread - they were bought by a shaky baking company which was suddenly bought by a huge hedge fundie thing. They sold off the physical assets and now no one sells a comparable bread that I can find. And the employees wee all laid off. VT Bread was a profitable company. The company that bought was not and they are who the capital group bought to asset strip.
🧐 @13:31 Lists a bunch of businesses owned by a private equity company "..even Morning Brew" albeit "a few parent companies up." To everyone wondering why this issue was framed as anything other than practically, ethically, and morally one-sided; there's your answer. I appreciated many of the details given here, but I think Georg Rockall-Schmidt ("Private Equity: Apex Predator") had a better take on this topic.
Love the long videos, and also love the shorts. I come from a cryptocurrency background and really don't know much about Trad-Fi stuff but I find your videos entertaining and informative. I've learned a couple of things here and there about stock market and finance. keep up the good work.
I spent years financing LBOs in an investment bank. I can see how they're poison, but it's hard to argue they're medicine. Leverage is risky. If you buy a company that's poorly run and you start running it well, then great. But that just means you're a good operator. You could have been the same operator and use less debt. But just like people try to get as much debt from the bank as they can when they buy property, private equity that does LBOs tries to get as much debt as they can. At best, it creates a direct incentive to run a very tight ship, because of how much debt you have to repay. Either way that's not medicine.
I would love some real world examples of a PE leveraged purchase that benefited or at least did not destroy said company….. looking at you Morning Brew
Just a correction, Formula one is mentioned to be owned by a Private equity, which it has never been as per my knowledge, however, Williams F1 team is not on the list even though it has been owned by one since 2020.
The problem isn’t private equity though but leveraged buyouts ! It’s employing capital more effectively for private equity firms but very poorly for the company and its employees. Overall it’s only killing companies that could generate more wealth otherwise.
If different private equity companies have different buy out strategies, does the target company have the ability to “shop around” for buyers with different strategies?
They lost 11 million selling shrimp and paid 195 million in rent.
It was definitely the shrimp that caused them to go under
Exactly this. Red Lobster made over $2 billion in revenue during that time, so the endless shrimp may as well have been a rounding error, while the rent was almost a tenth of their total income for the year.
I normally enjoy this channel's content, but excluding that context borders on journalistic malpractice. What an absolute joke of a video
Yeah I would have loved to see a bar graph of all the issues called out, it seemed like rent was far above & beyond all other causes.
@@patrickn4171 business like casual restaurants operate on pretty thin margins.
Any amount of losses could lead to negative cash assets hence its a combination of stuff
I mean that should’ve been mentioned because that’s also part of asset stripping because if I used to remember correctly red lobster used to own all there locations then the private equity firm bought them they sold the locations and did rent to use deals which worked at first when rent was lower but then when rent shot up they lost a ton of money
@@Chario_I’m pretty sure they mention that through the sale lease back part
As a former newspaper employee, I can tell you asset stripping by private equity only benefits the investors who expect a regular short term positive financial return regardless of market conditions. if you start stripping the car for parts, eventually it can't be used as a taxi.
the amount of businesses and entire towns destroyed because of this and it still continues
💯Perfect illustration
what a metaphor 👏👏👏
Asset stripping is essentially buying an unprofitable business at a discount and making money off the assets instead.
There is no difference between asset stripping and a business liquidating itself btw
Definitely a second or third hand story my supervisor told me. But here goes. His brother worked for a company that raised nursery stock. A PE fund bought the company, stripped down operations, and sold assets. Later, they made a deal to provide, nationwide, nursery stock for an entire chain (something the size of Home Depot or Lowes). Although his brother wasn't a primary stakeholder, the chain wanted him to sign off and certify the company's ability to meet the demand. He refused saying that they no longer had the resources to do that. His brother was very nervous for a long time due to amounts involved.
This is a weird take. Almost all of your examples saddle the company with unsustainable debts and sell off important parts to enrich the private equity firm. Then there's the loading up on more debt to pay the firm and two out of three declared bankruptcy while a third could still be in the cards. Not sure what part of this is supposed to convince us it was a potentially good thing.
Edit: Fixed some grammar errors, and wanted to mention when I look at this piece it also seems out of place compared to a lot of the other content on the channel. There might be an argument here, I can concede that, but I don't think this video succeeds in making a compelling one.
Which is why he said we should decide who are the thieves. He is not trying to convince us about anything.
I would say it is not the norm to try to let the audience make up its mind but it is a nice change of pace from most videos which I feel is very much trying to make you feel a particular way.
It’s true though even the Red Lobster example was pretty striking in how PE helped sink that ship
@@sairadha674 He said that, but then the conclusion to the Red Lobster one is "Dubious that asset stripping played a role there"
@@mattgopack7395 It was dubious in a "wink wink nudge nudge" kind of way...
"is it really poison, is it just about the dosage?", is a weird way of coping with people routinely putting polonium in your tea
if that's where you're coming from then watching this video is unnecessary
Table salt in a high dosages is poisonous
sick quote tho
They’re partially owned by private equity so they had to make asset stripping seem partially good
the poison is the dosage, so is it really poison, or is it just about the poison?
It's not that they intend to bankrupt their acquisitions, they just don't care if it happens after they've made their money.
Bingo. They can just sell their shares and walk away and roll the dice on the next company. They like to tell you they're footing all the risk but it couldn't be further from the truth. The employees who get let go in the process and have to try and find a way to pay their mortgage definitely have a lot more skin in the game than some PE broker who wouldn't hesitate to shut the whole thing down if it means he makes a buck.
Asset Stripping = Private Equity, which is all about taking company value and putting it into the pockets of a small group of people.
Exactly. like what do they even think assets mean, it’s company value that translates to workers, material capital, etc. Once that’s stripped there literally can’t be a company anymore
I've only watched the Red Lobster part, and while asset stripping might not have been the reason, without private equity buying the company, it's hard to believe Red Lobster would've sold it's land and started paying rent. That wouldn't be good for it's profits.
I think his take was that we can’t point out the real estate vs the shrimp deal as the culprit. Therefore his conclusion was “dubious”.
In my eyes if you had a hand in it then you are at fault. Just because someone else had a hand in it doesn’t take the blame from the PE firm too.
*its 😊
I've only watched the Red Lobster part, and first thought is that the world and the oceans might not be all worse off with the loss of Red Lobster.
One question does the money from sale of asset go to the company or as some form to pay off the debt.
@@1968harsh tax followed by debtors
ProTip: If your company announces that it intends to “merge” with a PE company, do not walk, *RUN* to the nearest exit! Chances are you’ll be a casualty of downsizing if not outright sinking with the ship, so my rando internet guy advice is cut your losses.
I have just one question, wouldnt getting laid off and getting severance be better than quitting outright or am i missing something here?
A bunch of my coworkers and I were let go after our company was bought by PE (and after record profits). The most baffling part is they let go some of the most critical people in the business with no handoff. If my new company goes through the same I’m not going to trust their promises that “things will improve” and will immediately plan my exit.
@@alperakyuz9702depending on your state you may not be guaranteed severance.
@@alperakyuz9702 if that is an option then certainly consider it. Happened to me that way once because I got caught flat-footed and didn’t see the writing on the wall. Luckily I found employment again two months later and it worked out. Another time, I saw it coming from a mile away so I had enough time (many months) to find the right role at the right place and I’ve been loving it (5 years later) ever since!
@@jeddpearce249 right. Cuz there’s a price for complacency as well. 👍
12:15 pretty much sums it up. It's only better for the private equity firm and it's clients not the company that was bought and stripped and all of its employees
TFW your boss's boss's boss's boss says that you should glaze PE or the entire business unit gets unalived.
"Is it poison or medicine? Depends on who you ask" sounds weird after pointing out companies drinking it are 10x more likely to go bust...
It could be the case that PE targets companies that are 10x likely to go under. Correlation doesn't equal causation
@@shaunwu3910it literally said they go bust more often than COMPARABLE companies.
Are the Business Insider Editors on vacation? How did this get through.? There's not a good side to leveraged buyouts. It just harmful Greed. People lose jobs, the product get's worse and more expensive, everyone else looses money for someone's greed. It's just as bad a MLMs.
right?? i feel like this video just glazed over why leveraged buyout is a thing in the first place, let alone okay to do again and again, while it also acknowledges this kind of practice is what has been causing all this mess, the root cause.
I thought the regulation segment at the end was gonna touch more on how to limit the buyouts, but not really, and then he just mentioned it only once at the end (as I've said, the narrative here acknowledges it!).
totally sounds like it's trying to shift the blame on the so called asset stripping policies, which basically is just how any for-profit entities will operate????
And creates debt that will always be paid by the customers. As that becomes the norm, we are all paying PE debt more than purchasing goods.
Fully leveraged buyouts definitely seem like they'd be unwise for an underwriter to back, but it's the self-dealing, as in the Red Lobster case, that is where the grift really lives. The purchased company doesn't *really* need to turn a profit - so long as the owners' real business(es) do.
Your car asset stripping analogy missed the destroyed jobs, services, and competition. Oh, and the screwed over creditors who are the VC wrecking crew.
the creditors don't get screwed they get their money by liquidating the company
if the creditors did not think the terms were in their favor they should not have lent the money.
So the private equity firm takes no risk itself, does things that are bad for the actual health of the business in providing goods and services - whether or not it survives - and doesn't appear to create any value. It's hard to see this as a good thing. Though the shareholders were paid, the banks who loaned the money get paid, the company being torn apart is the private equity's property.
Leveraged buyouts should never be allowed. Take out debt if you want to make a massive purchase but then the VC should stay responsible for the debt. Preaching to the choir here though
Your description of Burger King (BK) seems incomplete.
First, if the asset stripping involved selling corporate restaurants and the land they are on to a franchisee, then the franchisee should be in a decent position to earn money. But if just the restaurant is sold to the franchisee and the land is sold to someone else, then the franchisee is possibly on the hook to pay unreasonable rent, which will eventually put the franchisee out if business. And if all the franchisees go out of business, then the parent franchise won't have anyone to sell to and will go out of business. So this part of the video seems incomplete.
Second, you showed BK revenues rising over time, but also showed the number of locations rising more quickly. That means the average revenue per BK location is declining over time, and that is typically a bad sign for a chain company.
Yeah using number of restaurants opened is such an oversimplification. BK makes money from charging franchisees, of course they will give the go ahead for everyone that wants to open one. That’s not far off from how Subway operated and in instances had 2 stores 200 feet from each other.
Getting the company bought to pay back the loan with which the company was bought is exactly what happened many times in Slovenia during privatisation and in the run up to the 2008 crisis. For most of these companies the result was either failure or long struggle as profits weren't being reinvested and the effects became apparent after 10 years. Also the new owners often weren't business savvy, just well politically connected and thus ran the company bad.
Burger King has Berkshire as an investor with 3G Capital, so they approached this differently. Most PEG's are the old LBO corporate raiders, and yes, most extract as much money as possible, they sell or bankrupt the businesses.
"Pay 200 million in rent due to this deal, lose 75 million overall, who can say if selling their real estate was what made them go bankrupt?" followed by the 'Hmm, dubious' was ridiculous. If you're going to dismiss the idea that the asset stripping is what made Red Lobster go bankrupt, at least give *another* response other than "it paid 3x as much in rent as it lost money overall, but that isn't why they lost money"
All the talk about 'help with the debt' is almost taken as a given that these companies had debt... except that only was because they were saddled with it by the PE firm in that leveraged buyout. Even the 'positive' burger king one doesn't really even look like a success lol
The most simple thing to remember in business, buying things with debt is always a time bomb, if your quick enough to sell it to another person,it wont blow up in your own face.
It is not time bomb if you have the firm give big dividends and fees from day 1 with asset stripping or further loans taken by the company.
@@sairadha674 True, most times after 1 or 2 years the private equity firm has stripped enough cash from the company they "bought" to cover their initial investment and some nice profit margin. The company is then left to rot and or sell of for parts. So every leveraged buyout is indeed a time bomb, except once the bomb goes off the private equity firm that set up the bomb is drinking cocktails on their private island.
Sorry to double post but you go “it’s a little of everything” and cite red lobsters plan to sell its land and then pay rent as if that was red lobsters idea and not PE. This is a clown show of a report and embarrassing to this channel
Technically after PE bought it isn't Red lobster under their control and owned by them so whose plan it is
Is basically the same answer
@@James-un8io Its not the same answer, hes separating the damages done by PE by separating them out and going "thats in addition to the stuff you think is bad" no that is the same stuff thats bad
@@WritkinAgree, but to Morning Brew's defence, PE firms are usually not buying 100% of a company and replacing the entire board. If possible, they usually want some of the founders left in the company with some type of incentive for them to keep developing the business. However, in the Red Lobster case it really seems like they bought 100% and replaced the entire board meaning it is whoever the PE firm placed on the board who are to blame for the horrible business decisions and the company's eventual bankruptcy.
Interested to hear a follow up about the health care sector that was mentioned. Including the veterinary health care system.
And nursing homes
👀
There are already a lot of videos out there on it so I wouldn't hold your breath.
Is it poison or medicine? It depends on who’s holding the glass.
"A few parent companies up"
We need the top level parent company be listed with the brand name every time the brand name is spoken or displayed.
Preferably with names of each person involved
Private Equity is so obsessed with efficiency that they cut through the fat, past the muscle and into the marrow. Then they complain that the business can't stand because the model isn't there.
What I don't understand is why the next owners down the line, Thai Union and seafood Alliance in this case, continue to buy companies from private Equity companies when the track record is that these companies will be left holding an asset which will soon be worthless...
No Nuance November is coming early guys, It’s poison
It's insane that this is not illegal
The information provided is useful and does discuss well how private equity can be harmful to businesses, but the framing of it as a two-sided coin seems jarring considering how one-sided the issue is presented. Clear examples of how asset stripping can negatively affect businesses but periodic prodding of "but it can be good! we'll let you decide" while providing little evidence for that fact. Centering the video thesis around letting the audience decide can work and is interesting (to me, at least) but any supporting evidence for how private equity can be good seems to be missing beyond Gustavo saying "Yes it can be good but it just tends to be done badly often." The examples of businesses doing well while under private equity didn't show evidence that the growth was due to any contribution from private equity, rather it seemed to be despite them. At the same time the video seems to be confused about the motivations for asset stripping. The example of the car at the start, where you are left with $25 but no car, clashes with Gustavo's claim that asset stripping can improve and help grow a business. Is it stripping a car for parts or reducing excess weight? You choose to let the audience decide but only provide clear evidence for the former.
This video very well produced however, the effort there is clear and impressive. Looking forward to further videos :)
Weird video. We see 4 examples of PE buying companies and how that worked out but we do not see an alternative to asset stripping. How were toys r us, red lobster and burger king doing before they were purchased? I just cant see how asset stripping is a medicine if you dont tell me how the companies were sick.
This is by far the weirdest and worst take I have seen on this channel yet. Not every subject needs a both sides argument when one side is clearly in the wrong
Lmao imagine being so dull
@@Ohdamn-ci6gj was hitler good or bad? it depends on who you ask. Ill let you viewers decide the truth. There are good people on both side - Donald Trump
@@tonyrex99 lol what
@@tonyrex99 lmfao Hitler comparison
One lesson I've learned from millionaires is to always put your money to work, no matter how small. Even investing €200 per month can compound to tremendous wealth over decades. The key is to keep going!
My advice for who wants to grow financially this year, invest. Saving is good, but investing elevates your finances. Thanks to my financial advisor, my portfolio is thriving, and l'm proud of last year's decisions.
People often don't realize how important financial advisors are. Data from the last 50 years shows that people who work with CFAs usually earn more than those who don't. I've worked with a Adviser for 7 years, and now I have a $2 million portfolio.
This is definitely considerable! think you could suggest any cfa I can get on the phone with? l'm in dire need of proper portfolio allocation.
I've stuck with ''Julianne Iwersen Niemann" for some years now, and her performance has been consistently impressive. She's quite known in her field, look her up..
I ran an online search on her name and came across her websiite; pretty well educated. thank you for sharing.
If this type of behaviour is profitable, then who is footing the bill? I'm guessing not the previous shareholders. They were probably paid enough premium that it was worth it for them. I think it's the employees and everyday taxpayers who don't take advantage of the system's bankruptcy protections. They're the most hurt when these companies go belly up.
The economy isnt a zero sum game.
@@Mastercane98 If you're arguing that this type of behaviour creates value, you should provide evidence of this. I don't think there is any value creation in their business model of taking over companies using excessive leverage.
@@ktktktktktktkt The value comes from the restructuring of a failing business, the target company is usually showing signs of distress before being acquired. Private equity's goal is to turn them around, replace management, rectify inefficiencies and perhaps even change the business model. Unlike what some people say, they are very interested in the viability of the firms they acquire, their profit and reputation depend on it. In the long run, creative destruction spurs economic growth, if some companies have to go under for the overall economy to benefit so be it.
It's not just Private Equity that does risky leveraged buyouts - Elon Musk famously bought out Twitter and saddled it with about $13 billion in additional debt which is estimated to cost Twitter about $1 billion per year to service.
Is sharecropping poison, or medicine? It depends on who you ask. 🙃
Maybe do some journalism in response to "these failures deserve outcry but aren't systemic" and not just tell us "PE thinks they're fine" and "other people think this sucks"? The only wider context number you gave, the 10x failure rate, does NOT make it sound like a "depends on who you ask" nuanced affair, but an extremely risky manuever that frequently results in catastrophe. But not always, therefore it's fine, apparently.
If you have any statistics that make this look not horrible, show em. Otherwise this sounds like propaganda, not even a fluff piece.
It's also possible that companies which are already on a downward trend are getting bought more frequently as they are cheaper and would've ended up in bankruptcy either way.
@@Janezslovenski If that were the case than the caveat that they go bankrupt 10x more than companies in similar positions should have been excluded and context should have been given. Leveraged buyouts are only ever beneficial to the shareholders/owners getting bought out and the private equity doing the buyout. Sometimes companies survive in spite of being saddled with excessive debt, but it is never a good idea. If leveraged buyouts were illegal and the private equity firms were legally responsible for the debt than it can work as there is a reason for them to invest, grow or optimize the business instead of what happens with leveraged buyouts to basically get their investment out of the company by extracting profits until their 20% investment is covered and letting the company rot and/or sell it for parts.
@@Hans_Unique_Handle I know, I would have to read more into what similar positions mean.
Is stabbing a man in the chest attempted murder or healthy blood drainage?depends on who you ask.
12:41: Buying companies with debt is risky. But then why are lenders willing to lend the money to do these transactions? They are not in the business of losing money and making bad loans. The returns must justify the risk they are taking.
The interest on the debt is based on the value and revenue of the company before acquisition. The bank doesn't know what strategy the new owners will employ. If you look at the examples cited the companies were bought when borrowing money was cheap (so cheap that bk was bought with
@@doom2avatar Interest is repaid from cash and profit and AFTER dividends paid to shareholders ( which in this case are PE firms who milk the company dry by taking large dividends). “Revenue” means nothing if expenses are more than that. And why would a bank lend money when they have no idea “ what the owners will be doing “? They better dang know when they are investing depositors’ or shareholders money.
love all the effort that went into the extra shots, charts, graphs, skits, and sets.
Spotted a typo at 8:46, the chart shows its in millions when it should be billions. Looks like this is something that was copied from Statista as they have the same typo
How I heard the professor:
The reality is: if you look at mismanagement that lead to bankrupcies, they DO happen. But, if done right, I THINK it MAY end up being better for everyone, MAYBE. If stars aling and people in right positions are responsible. The same people who "buy" companies on borrowed money and then force these companies to pay back the money that was used to purchase the company itself. Those that are more likely to pay themselves by taking a giant debt, sell the land the business operates on and renting it back... Yeah, very responsible, business savvy people. Just look at cryptocurrency exchanges - super responsible!
Seems like a politically correct speech from someone with vested interest...
Oh, and I totally agree that switching burger king from a business of making and selling burgers to selling a brand franchise was the best thing ever!!! For a business. Not for people who worked there, but who cares what people think. Its the MONEY that's important, right?!
Nah, I'll stick to my opinion on private equity. High reward zero risk business - bankrupting other people's companies using other people's money. While making a huge amount of profit in the process.
The "government" will bail them out eventually, right?
Except the "government" doesnt have money of its own. Its all from our taxes, or our savings (by printing money you devalue everyone's money, savings included). And when pension funds lose money due to lobster going bankrupt, who will suffer? Private equity? Nope, your pension! Not mine because they don't have my money - I'm not from the us of a 😂
6:08: The answer is no. The Endless Shrimp promotion started after Thai Union took majority control of the company. The conflict of interest with Thai as the owner and also the supplier of the shrimp was a major cause, alongside industry wide issues including higher labor costs. The whole situation with Thai Union seems very suspicious. It apparently owns more than a dozen businesses, world wide including Chicken of the Sea Tuna. Almost all have been acquired in the last 20 years and possibly with debt, just like the "evil" leveraged buyouts of the "evil Private Equity firms". I wonder if somewhere down the road we learn it is a Ponzi scheme that has been cooking the books.
My prediction before watching the video, "no, they want to just make as money as possible. If they can make a profit cutting the fat and improving the business then great. If not, they will gladly hack it to pieces and make money while they do it. They don't care"
Why do the private credit firms keep lending for LBOs if such a high amount go bankrupt, do they just not get the loans back?
It is possible that interest rates are high and they lend to many companies that few losses would not matter. Also they may get their money back in bankruptcy proceedings. Do not forget for credit company loan appears as asset in balance sheet which is good for executives as these loans are meant to be paid over many years considering the loan size. If you still feel that this is risky let us not forget how subprime mortgage crisis started in 2008 recession.
The banks lending money for LBOs do heavy due diligence on the PE firm, target company and the entire deal plan for bankruptcies to not happen and in most cases they don't. In the Red Lobster case though, the only one not losing money on the deal was Golden Gate Capital, the bank probably won't get all its money back. And while Golden Gate Capital made money off this deal, the negative attention it brought means they will likely struggle as a company in the future, who would ever want their company to be bought by those con artists and who would consider lending money to them?
Regulation to require larger amounts of cash and greater obligation to look after all investors in a business, not just private equity , makes sense. Make it easier for investors to sue PE firms if acquired business goes bankrupt. Require more transparency. Make it easier for companies to fight off hostile PE takeovers. Still, we need PE firms because sometimes management is hurting shareholders, not using capital properly, or businesses really need to be totally restructured by someone invested in long-term performance. And, sometimes, businesses just need to close, but employees won't let it. Someone needs to be willing to be the bad guy.
The question I've never fully understood with private equity and leveraged buy outs: Who gives the loan to the PE group in order to make the deal possible? These companies go bankrupt and are unable to payoff these debts way too often, yet the PE firm always seems to make money- what lender is willing to take on all the risk while only receiving a small portion of the potential reward?
So private equity’s whole business model seems to be load up a company with more debt and hope to God it continues increasing revenue in future to pay off that extra debt ! what a weird time to be alive
>endless shrimp cost 11mil
>asset stripped land alone was 190mil
Hmm dubious, could have been a mix of factors and definitely not entirely because of the LBO
Gee, I would love to buy a billion dollar business and make it take all the debt of the purchase while I take the profits off the top. Where else in the real world does a regular small business owner get to do this?????
There should be a debate between these two
Your pro asset flipping guest had some lame arguments and I think you know it with him barely in the video, "It lowers cost for equity firms", "It increases profits for equity firms", all in technical terms so you can tell your not meant to understand what he's saying
I had seen a few of the more populist and conspiratorial videos you guys had published recently and was really disappointed. This one was a remarkably honest and well-researched breath of fresh air. Congrats to Nathan and the team. I hope Morning Brew keeps moving in the direction of this kind of content (including Good Work).
4:16 Are the companies performing badly when these sales of ownership are happening? How do they convince Thai Union to buy a company loaded with debt? In the first place buying a company with debt then placing that debt on the company (2:43) seems insane and I'm pretty sure I'm misunderstanding what's happening. How does the private equity fund get its funds from these people? Is it because the manage to pay it back reliably through this asset stripping process (or whatever you want to call it)? And it looks like more of the money they use is from debt, I guess it must be similar to before where they manage to pay back their debt enough where creditors are happy to lend money, but why is the debt placed on the target company? Is it to avoid risk for the private equity company? The target company would surely perform and sell ownership better if it isn't hassled by debt? Obviously this makes money otherwise it wouldn't be done, I just have trouble seeing how they manage to sell ownership reliably I guess, especially with that companies purchased with leveraged buyouts are 10x more likely to go bankrupt stat. And if you can strip assets from a company and sell it for more, then why isn't the company valued higher, aren't assets valued into the cost of a company?
Either morning brew is trying way too hard to be "unbiased" and ended up spinning a story with an obvious culprit (private equity) as just one problem or they're intentionally being ignorant here.
Several months ago they made a short citing the endless shrimp as the reason for bankruptcy, basically parroting the lines that private equity wants. They got called out in the comments, because everyone knows that leveraged buyouts take healthy companies that turn reliable small profits and put them into impossible positions where any bad news kills them.
The 1986 lbo of the Beatrice Company by KKR is a good example of how private equity can help turn things around.
Great video! Under-rated channel for sure
“It depends who you ask!” If you ask someone who works in private equity, they always seem to think private equity is good for some reason. Other people seem divided on this for some unknown reason.
The UK is suffering from this at larger scale than any other western country. As PEs have moved in after brexit and started doing leverage buyout of most known brands in the UK. The UK government has a big problem, because they want foreign investment, however, most of it is coming this way.
You are so right. Also the UK government wants other people to invest when it won't invest itself.
Typical British attitude (yes I'm British) 😂
it should be illegal for private equity firms to saddle the companies they buy with the debt they took on for the purchase of said company.
5:22 I love her
Lol even Gustavo argues it's bad for the company, it might be an "efficient capital structure capable of risk adjusted returns" but that's about it.
At 13:22 " Blackstone has over $ 1 Trillion of assets under its management". I thought it is over $10 Trillion.
That's BlackRock not Blackstone
@@999timepassyes,I corrected myself,see above.
The board of the company being bought has to actually agree to this. In theory they represent the interest of the company (with an asterisk on if that applies in practice, but that's another debate). if they are running a very profitable business, they will not sell to anyone, including private equity firms, without charging and arm and a leg. if the business seems fine for now but the CEO says "hey we got problems, and not only can I not fix them, but you don't know anyone who can" then selling for a moderate price makes sense. The private equity firm (or the buyout fund) might strip the company's assets and then it might be able to turn the business around. Alternatively, it might be run into the ground like Red Lobster. A third possibility if the PE gets a dividend but doesn't really change anything or lay off people like Burger King buyout 1 example. The $20 shrimp must have been approved by its CEO and by proxy that meant the private equity owner must have approved that boneheaded idea. But the company would not have been sold in the first place if the board of directors doing their fiduciary duty thought that a currently profitable business would stay profitable in the future, so from their perspective if they didn't sell, the business would go stagnant. So from this perspective, the businesses being bought are actually not completely healthy in the long term to begin with and trying to see if asset striping can turn things around as a hail marry makes some sense. There is a caveat about the board actually doing their job they are supposed to do in theory, but in theory they won't sell the company against its interests. If you notice that many of these directors tend to graduate from the same schools as private equity managers, this probably isn't a coincidence and I bet many of them have each other's phone number.
The proof is in the pudding. Companies bought out by private equity are exponentially more likely to fail. Gustavo's argument is essentially "sometimes it works out" - responsibility for the debt has to stay with the private equity firm, and that will eliminate the risky behaviour
Red lobster HQ might have had bad energy, but I love Macy's energy in all videos 😂
This video tries way too hard to be balanced about a subject that is very black and white. Companies exist to serve communities by selling goods and services, providing jobs, and contributing to the local economy. Dismantling them for parts exists soley to bring profit to the PE firm, and does measurable damage to all other organizational goals and harms local economies, increases unemployment, and cuts competition out at a time when regulators are already struggling to contain monopolistic business practices. Private Equity exists to squeeze money out of anything and everything at all costs, it's utterly antithetical to the purpose of a business and represents everything people hate about greed. Any other viewpoint on this practice and the industry that supports it requires extreme cognitive dissonance to even begin to find a different viewpoint of. Even if your retirement depends on the value of PE firms (because your public or private retirement fund got too lazy to do direct investment and settled for a PE-heavy portfolio), your life will be worsened by the practices of these companies far more than the small ROI your retirement gets. Not to mention, these closures tend to do the most damage to small, low-income communities where almost nobody is in line to receive a penny from the PE profit that was earned by destroying the local economy. This kind of practice is objectionable on every level. Do better in your coverage.
It seems like a lot of commenters were expecting a “private equity is evil” conclusion in there. Personally, I like videos that allow me to reach that conclusion myself.
It sounds like private equity owners are under no obligation to manage the company for its own best interests - only their own. That’s not illegal, but maybe it should be.
All medicine is poison, but not every poison is medicine.
Anytime you remove responsibility from profits, you have problems, full stop. If actions no longer have consequences for those making the decisions, natural feedback loops cease to function and you just end up with wealth extraction.
Furthermore, if the people affected by a decision (the stakeholders) are far removed from those making the decisions, then the system becomes ripe for abuse. It's notable that the defender of private equity in this video spoke only of market efficiency, and not the human costs that these actions create. That efficiency is only in the monetary realm, but otherwise destroys quality of life overall, especially long term.
What a DOA take on leveraged buyouts, asset stripping and private equity firms in general
Due to the fees being paid towards the private equity company, as well as the dividend pay outs, private equity companies always make their money back, even if they fuck over the company. Private equity companies should be banned for the damage they are causing. Also cutting down on non core activities is a very short term strategy, R&D and innovation are typical long term investments that can make a company much stronger over time but don't immediately pay themselves back. Also i think only the people benefiting from the sector are positive about it, pretty much all independent journalist, writers or economist will say its a blight on society.
Financial restructure is when it is done for future growth. Asset stripping is when the assets are gone without money being reinvested.
"But the company grew, they helped it..." it may have been going to grow faster without the pirates.
It’s disgusting this is presented as “depending on who you ask” when the objective reality is you will not find a single person outside of PE that tells you the benefits. Easily the worst video on this channel. Easily.
What I'm hearing is that you watched the video on mute with your eyes closed and just wanted to comment what you already thought without _properly_ digesting what the video said.
@@edwardhoffenheim3249 Oh sweet dude you using some sort of text to audio app? Thats real nifty. Anyways you can go ahead and explain what I missed if you feel so strongly but first can you explain why this silly goose of a reporter says that GGC purchased red lobster then sold the land and then later when trying to dilute the blame away from PE he goes "other things caused problems outside of private equity, like when they sold their buildings in the lease scheme...these were all problems in addition to GGC's actions" No? Those were GGC's actions lmaooooooooooooo.
@@Writkin The video highlighted two franchise restaurants for a reason. The group that bought BK did the same as RL by selling of corporate land. It worked for them because their branches are more franchises than actual corporate establishment.
They said a lot of things in the video and even highlighted potential legislation and what they might focus on to fix the issue.
You're just yelling at them because they aren't saying exactly what you want instead of listening to what they're saying. That's not very conducive to fixing the issue.
@@edwardhoffenheim3249 Ah so you cant explain the inconsistency then. Projecting prettttyyyyy hard here with the yelling at them stuff. Are you the reporter's alt account?
@@Writkin I'm gonna stop talking to you because it's pretty easy to see you want conflict and not really talk. Enjoy your day.
This is a very well produced video. Big ups to the team 🎉
the production of this video is very well done!
The answer to your question is: yes.
This feels like a well balanced report. Often times, issues aren't black and white. Not totally bad or totally good. This seems to be a case where it's in the Grey. Sometimes it can be good. Sometimes its bad.
Your tips help me improve my trading strategy. Thank you very much for your time and effort!
A private equity firm is a cross between a Real Estate flipper and a Record Label. They want to flip these companies to make quick profits but the Artist or singer is left with all the debt. *( an Advance)* that they have to pay off.
The guy who's supposed to be arguing for private equity made some great arguments against it. Namely that there beholding to their investors not the company. And all they have to do is give their investors their money back with maybe a little extra.
How on earth companies could ever consciously believe that leasebacks represent good value is insane. It's literally adding a middle man into the mix and expecting somehow that means profit.
I learn about this from the movie Pretty Woman
IMO the problem with private equity, whether or not it improves certain business operations, is that it just does not add real value to society, despite controlling a massive amount of the capital, resources, and talent of society. Cost controls, operational improvements, and capital allocation all fall under the umbrella of proper management in any regular business -- PE firms just add layers of redundancy and nodes of extraction to the existing economy. The largest PE firms like Brookfield and Blackstone now control trillion-dollar, multinational portfolios of infrastructure including ports, toll roads, energy production, and residential housing, not to mention hospitals, charter schools, nursing homes, and prisons. A society in which all of these essential services are controlled by finance bros looking to maximize quarterly returns and load up on debt is not a healthy one.
Okay everyone, we've gotta buckle down and get to work to pay off all this debt we accrued from buying ourselves
I agree MB has really gone to hell in a handbasket since KKR bought them in a roll up
This happened to Vermont Bread - they were bought by a shaky baking company which was suddenly bought by a huge hedge fundie thing. They sold off the physical assets and now no one sells a comparable bread that I can find. And the employees wee all laid off. VT Bread was a profitable company. The company that bought was not and they are who the capital group bought to asset strip.
🧐 @13:31 Lists a bunch of businesses owned by a private equity company "..even Morning Brew" albeit "a few parent companies up."
To everyone wondering why this issue was framed as anything other than practically, ethically, and morally one-sided; there's your answer.
I appreciated many of the details given here, but I think Georg Rockall-Schmidt ("Private Equity: Apex Predator") had a better take on this topic.
You guys should look at what has happened to Thames Water in the UK, it's criminal...
Love the long videos, and also love the shorts.
I come from a cryptocurrency background and really don't know much about Trad-Fi stuff but I find your videos entertaining and informative. I've learned a couple of things here and there about stock market and finance.
keep up the good work.
I spent years financing LBOs in an investment bank. I can see how they're poison, but it's hard to argue they're medicine. Leverage is risky. If you buy a company that's poorly run and you start running it well, then great. But that just means you're a good operator. You could have been the same operator and use less debt. But just like people try to get as much debt from the bank as they can when they buy property, private equity that does LBOs tries to get as much debt as they can. At best, it creates a direct incentive to run a very tight ship, because of how much debt you have to repay. Either way that's not medicine.
I would love some real world examples of a PE leveraged purchase that benefited or at least did not destroy said company….. looking at you Morning Brew
Such well done infotainment!
This is what Richard Gere’s character did in 1990 movie Pretty Woman. So it’s been around for a minute.
Ok but what if it was actually that bad energy at the HQ
Just a correction, Formula one is mentioned to be owned by a Private equity, which it has never been as per my knowledge, however, Williams F1 team is not on the list even though it has been owned by one since 2020.
endless parking is what killed red lobster and toys r us. burgar king has a drive through. they don't need endless parking.
If leveraged buyout usually results in bankruptcy, why do creditors even accept to participate? Do they like losing money?
The issue is that most large companies aren’t managed well enough to survive a leveraged private equity buyout. On average most executives are idiots
The problem isn’t private equity though but leveraged buyouts !
It’s employing capital more effectively for private equity firms but very poorly for the company and its employees. Overall it’s only killing companies that could generate more wealth otherwise.
Taking debt to buy a company and then making that company pay the debt used to buy it needs to be illegal.
If different private equity companies have different buy out strategies, does the target company have the ability to “shop around” for buyers with different strategies?
this absolute legal fiction of using debt as collateral should be illegal. I wish I could use my student loan debt as collateral on a mortgage