How Private Equity Consumed America

Wendover Productions
7 May 202422:23

Summary

TLDRThe video script explores the concept of private equity, discussing its theoretical appeal and contrasting it with the realities of its impact on companies like Yahoo and Marsh Supermarkets. It details how private equity firms operate, leveraging their connections to raise funds, using leveraged buyouts to magnify returns, and focusing on growth to maximize profits. The script highlights the potential downsides, including job losses, increased costs for consumers, and the risk of bankruptcy for acquired companies. It also touches on the tax advantages enjoyed by general partners and the emotional detachment that can lead to exploitative practices. The narrative concludes with a reflection on the human consequences of private equity's focus on efficiency and cost-cutting, rather than fostering innovation and collaboration within the companies they acquire.

Takeaways

  • ūüíľ **Private Equity Basics**: Private equity (PE) firms invest in companies, restructure them for growth, and then sell for a profit.
  • ūüďČ **Yahoo's Decline**: Yahoo, once more valuable than Amazon and Apple combined, declined after rejecting a Microsoft buyout, eventually being sold to Verizon for a fraction of its peak value.
  • ūüõí **Asset Sales for Survival**: Apollo Global Management, a private equity firm, sold off non-core Yahoo assets to focus on its successful divisions like Yahoo Finance and Yahoo Sports.
  • ūüĒĎ **Leadership Changes**: Experienced businessman Jim Lanzone was brought in to lead Yahoo, leveraging his past success in turning around Ask.com.
  • ūüöÄ **Yahoo's Transformation**: Through strategic sales and focusing on core strengths, Yahoo became profitable again, indicating a potential path towards an IPO.
  • ūü§Ě **General Partners' Role**: General partners in PE firms are industry veterans with strong networks, crucial for raising investment capital.
  • ūüíį **Firm Profitability**: PE firms typically charge a 2% annual fee on funds under management and take 20% of profits above a certain benchmark, which can lead to significant earnings for general partners.
  • ūüďą **Leveraged Buyouts**: PE firms often use leveraged buyouts, where they borrow money to buy companies, amplifying potential returns but also risks.
  • ūüŹ¨ **Marsh Supermarkets Case**: The decline of Marsh Supermarkets under Sun Capital's ownership illustrates the potential negative consequences of PE ownership, including bankruptcy and job losses.
  • ūüõćÔłŹ **Consequences of PE Ownership**: Private equity ownership can lead to store closures, service quality declines, and increased costs for consumers.
  • ‚öĖÔłŹ **Tax Advantages**: The carried interest loophole allows PE general partners to pay lower taxes on their income, further incentivizing aggressive profit maximization.

Q & A

  • What is the basic concept of private equity?

    -Private equity involves funds taking investor money to buy companies, restructuring them, growing their worth, and then selling them for a profit after a few years.

  • What was Yahoo's market capitalization at its peak in the early 2000s?

    -Yahoo's market capitalization reached a high watermark of over $125 billion.

  • Why did Yahoo ultimately decline and sell to Verizon?

    -Yahoo declined due to a series of strategic mistakes, including rejecting a $44.6 billion purchase bid by Microsoft in 2008, which led to a decade of decline and eventual sale to Verizon for $4.8 billion.

  • Which private equity firm bought Yahoo from Verizon?

    -Apollo Global Management, a large private equity firm previously headed by Leon Black, bought Yahoo from Verizon.

  • What was Jim Lanzone's previous experience that made him a suitable candidate to lead Yahoo's turnaround?

    -Jim Lanzone had experience turning around Ask.com, leading CBS's digital business through a merger with Viacom, and briefly serving as CEO of Tinder in 2020.

  • What assets did Apollo and the new leadership team of Yahoo sell off to focus on the company's core?

    -They sold off Yahoo! Japan to SoftBank for $1.6 billion and Edgecast, a streaming technology company, for $300 million.

  • What were the two key Yahoo divisions that maintained their reputation and were chosen to double-down on success?

    -The two key divisions were Yahoo Finance and Yahoo Sports.

  • How does the general partner in a private equity firm typically raise money?

    -The general partner starts by investing a couple of million dollars of their own money and then pitches investors on their ability to manage the fund, often highlighting specific industry experience and a track record of success.

  • What are the two main ways private equity firms make money?

    -Private equity firms make money by taking a 2% annual fee on all money in the fund and a 20% fee on any returns above a predetermined hurdle rate.

  • What is a leveraged buyout and how does it impact potential earnings and losses for a private equity firm?

    -A leveraged buyout is when a private equity firm uses a combination of its own money and borrowed money to purchase a company. This magnifies the potential earnings but also increases the potential losses.

  • What is the typical impact on headcount at public companies bought by private equity?

    -On average, headcount at public companies bought by private equity shrinks by 12% over the following two years.

  • How does private equity investment affect the likelihood of a company going bankrupt?

    -Companies acquired by private equity firms through leveraged buyouts are found to be 10 times more likely to go bankrupt in the following ten years than those that are not.

Outlines

00:00

ūüíľ The Private Equity Model and Yahoo's Transformation

Private equity is presented as a theoretical concept where funds invest in struggling companies, restructure them, and sell for profit. The story of Yahoo serves as an example of a company that declined after failing to sell to Microsoft. Yahoo was later bought by Apollo Global Management, a private equity firm, which implemented a strategy led by Jim Lanzone to focus on core assets like Yahoo Finance and Yahoo Sports, leading to a potential IPO and profitability.

05:03

ūü§Ě The Structure and Operation of Private Equity Firms

Private equity firms operate through general partners who use their connections to raise funds from investors. These partners invest their own money and pitch to investors, often focusing on sectors they have experience in. The firms earn money through a 2% annual fee and a 20% performance fee on returns over a benchmark. This structure incentivizes growth and can lead to significant wealth for general partners, who often use leveraged buyouts to magnify potential earnings.

10:05

ūüďČ The Downside of Private Equity: The Marsh Supermarkets Case

Marsh Supermarkets, a regional grocery chain, is used to illustrate the negative outcomes of private equity ownership. Despite a strong local presence, the company struggled under Sun Capital's ownership, which focused on short-term gains through asset sales and cost-cutting. This strategy eventually led to the company's bankruptcy, highlighting the potential for private equity to strip companies of their long-term viability while still benefiting the firm through management fees and asset commissions.

15:09

ūüõí The Impact of Private Equity on Local Communities and Workers

The closure of Marsh Supermarkets had significant impacts on local communities and employees. The loss of local grocery stores and pharmacies affected access to fresh food and healthcare services. Employees faced pension fund underfunding, leading to financial insecurity. The narrative suggests that private equity's focus on efficiency and cost-cutting often leads to negative consequences for consumers and employees, with a lack of empathy due to the distance between decision-makers and those affected.

20:11

ūü§Ė The Incentives and Consequences of Private Equity Practices

The narrative discusses the incentives within the private equity industry that drive firms to prioritize growth and efficiency, often at the expense of long-term sustainability. The structure of the industry, with its focus on short-term profits and the use of leverage, can lead to brutal cost-cutting measures and exploitation of employees. The general partners' compensation model, which includes a significant performance-based component, exacerbates this focus on immediate gains rather than building for the future.

ūüďö Learning About AI and STEM with Brilliant

The script concludes with a sponsorship message for Brilliant, an educational platform offering courses on complex STEM subjects, including large language models like ChatGPT. The courses are designed to be accessible and practical, breaking down complex topics into manageable parts and using interactive exercises to build understanding. The platform is praised for making learning part of daily life and for its effectiveness in teaching traditionally challenging subjects.

Mindmap

Keywords

ūüí°Private Equity

Private equity refers to investment funds that pool capital from various investors to directly invest in companies, often with the aim of restructuring or improving them for resale at a profit. In the video, private equity is discussed in the context of both successful and unsuccessful business transformations, highlighting its potential for profit as well as its risks.

ūüí°Yahoo

Yahoo is an internet services company that was once a dominant player in the tech industry but later faced significant challenges. The video uses Yahoo as a case study to illustrate the potential pitfalls and successes of private equity involvement, noting its decline after rejecting a Microsoft acquisition offer and subsequent transformation under Apollo Global Management.

ūüí°Leveraged Buyout

A leveraged buyout (LBO) is a strategy where a private equity firm acquires a company using a significant amount of borrowed money, with the goal of improving its operations and reselling it for a profit. The video explains that this method can amplify potential earnings but also increases the risk of losses, as seen with the example of a hypothetical $100 million fund.

ūüí°General Partner

In the context of private equity, a general partner (GP) is an individual who manages the fund and is responsible for its investment decisions. The video emphasizes the importance of GPs' connections and experience, as well as the financial incentives they have to maximize the firm's gains, which can lead to significant wealth accumulation for them.

ūüí°

ūüí°Management Fee

A management fee is a fixed annual fee that private equity firms charge their investors, typically around 2% of the assets under management. The video explains that this fee is used to cover the operating costs of the private equity firm and is independent of the investment performance, ensuring a steady income for the firm regardless of the investment outcomes.

ūüí°Hurdle Rate

The hurdle rate is a minimum return that private equity firms must achieve before they can collect performance fees from their investors. The video describes it as a benchmark that the firm aims to beat in year-over-year investment growth, with any returns above this rate subject to a performance fee, which can be quite lucrative for the firm.

ūüí°Sale-Leaseback

A sale-leaseback is a transaction where a company sells an asset, such as real estate, and then leases it back from the buyer. The video discusses this strategy in the context of Marsh Supermarkets, where the sale-leaseback of properties provided short-term financial benefits but contributed to long-term financial strain and eventual bankruptcy.

ūüí°Sun Capital

Sun Capital is a private equity firm that is mentioned in the video in relation to its acquisition and subsequent management of Marsh Supermarkets. The video uses this example to illustrate the potential negative consequences of private equity ownership, including underfunding of employee pensions and the ultimate bankruptcy of the acquired company.

ūüí°Artificial Intelligence (AI)

Artificial intelligence is a broad field of computer science that aims to create machines capable of intelligent behavior. In the video, AI is mentioned as a groundbreaking technology comparable to the internet and is used as a segue to promote a sponsor's course on how large language models, like the one the video might be using, work.

ūüí°Brilliant

Brilliant is an educational platform that offers courses on complex STEM subjects. The video recommends Brilliant for its ability to break down complicated subjects into understandable parts through intuitive teaching methods and interactive exercises. It is highlighted as a resource for learning about AI and other advanced topics.

ūüí°Efficiency Gains

Efficiency gains refer to improvements in the performance or productivity of a company, often through cost-cutting or streamlining operations. The video discusses how private equity firms often pursue efficiency gains, which can sometimes lead to negative consequences such as layoffs, reduced service quality, or increased prices for consumers.

Highlights

Private equity funds invest in struggling companies, restructure them, and aim to sell for a profit.

Yahoo's market value once exceeded $125 billion but was later sold to Verizon for $4.8 billion.

After Verizon, Apollo Global Management acquired Yahoo for $5 billion, seeking to extract value from the web services company.

Jim Lanzone, with experience turning around Ask.com, was chosen to lead Yahoo's transformation.

Lanzone's strategy involved selling off non-core assets and focusing on Yahoo's key assets like Yahoo Finance and Yahoo Sports.

Ryan Spoon and Tapan Bhat were appointed to lead Yahoo Sports and Yahoo Finance, respectively, to capitalize on their past successes.

Yahoo's transformation included bolstering sports betting offerings and growing subscription-based platforms.

Despite being private, Yahoo's health indicators suggest profitability and a potential IPO.

Private equity firms like Apollo are structured around General Partners who leverage their connections to raise funds.

General Partners earn a 2% annual fee and a 20% performance fee based on returns above a set hurdle.

The use of leveraged buyouts allows private equity firms to acquire companies with a small percentage of their own funds.

Marsh Supermarkets' decline under Sun Capital Partners illustrates the potential downsides of private equity ownership.

Private equity ownership has been linked to job losses, higher mortality rates in nursing homes, and increased bankruptcy risks.

The general partners' focus on growth can lead to cost-cutting measures that have negative human consequences.

The private equity model incentivizes exploitation and profit maximization, often at the expense of employees and consumers.

Brilliant offers a course on large language models, providing an understanding of AI's groundbreaking technology.

Brilliant's teaching method breaks down complex subjects into intuitive principles and interactive exercises.

Transcripts

00:00

Private Equity is a great idea… in theory. Funds  take investor money, buy a bunch of fledgling  

00:07

or faltering companies, shuffle around their  structure and leadership and operating model,  

00:11

grow their worth, then sell them a few years  later for a profit. What’s wrong with that? 

00:16

For example: do you remember Yahoo? In the early  2000s, it was an icon of the early internet. It  

00:23

was consistently worth more than Amazon and  Apple combined. Its market-cap reached a high  

00:28

water mark of over $125 billion. But today, it‚Äôs¬† known for what it isn‚Äôt‚ÄĒafter rejecting a $44.6¬†¬†

00:37

billion purchase bid by Microsoft in 2008, a  decade of decline led to its eventual sale to  

00:43

Verizon for a humiliating $4.8 billion. Verizon  then merged the company with AOL, previously  

00:49

bought for $4.4 billion, but after the downward  trend continued Verizon finally sold the combined  

00:53

company for just $5 billion‚ÄĒan enormous loss. The buyer was Apollo Global Management‚ÄĒa behemoth¬†¬†

01:02

private equity firm previously headed by Leon  Black until his $158 million in payments to  

01:07

Jeffrey Epstein emerged in the media. Through  the years, Apollo has owned and transformed  

01:12

companies like ADT, Chuck E. Cheese’s,  Qdoba, and AMC Theaters, but this time,  

01:17

they believed there was value to be had in  the beleaguered web services company, Yahoo.  

01:22

For their strategy to work, they needed  a leader, and for that they turned to  

01:26

experienced businessman Jim Lanzone. Part of  the reasoning was surely that this wouldn’t  

01:31

be the first time Lanzone attempted to turn  around a faltering internet business. He made  

01:35

a name for himself while working at Ask.com.¬† This company started as Ask Jeeves‚ÄĒan early¬†¬†

01:42

and promising competitor in the search engine  space focused on natural-language processing,  

01:46

much like today’s AI-driven chatbots. Google,  of course, won that competition, so the company  

01:51

pivoted its business model to center on  questions and answers, rather than search,  

01:55

and correspondingly rebranded as Ask.com. It was  around then that Jim Lanzone was appointed CEO,  

02:01

and while always overshadowed by the company’s  fall from its promising early days, Lanzone was  

02:06

recognized as having finished his term as  CEO with the company on a firmer footing,  

02:10

and is therefore credited for its continued  survival. In the years that followed,  

02:14

Lanzone went on to lead CBS’s digital business  leading up to its massive merger with ViaCom, and  

02:19

then was briefly CEO of Tinder in 2020, so Apollo  believed he had all the experience for the job. 

02:25

This new leadership team, CEO Lanzone and investor  Apollo, started by selling off extraneous yet  

02:30

valuable assets Yahoo had acquired through the¬† years‚ÄĒthey wanted to focus on the company‚Äôs core,¬†¬†

02:35

rather than just acting as a collection of  random revenue-creating resources that managed  

02:39

to survive through time. So the key assets  of the comparatively strong and independently  

02:43

operated Yahoo! Japan were sold off to its other  owner, SoftBank, for $1.6 billion, then Edgecast,  

02:49

a streaming technology company that the former  owner had grouped into the Yahoo/AOL merger,  

02:54

was sold for $300 million. With just those  two sales and the $2 billion they brought in,  

02:59

Apollo was reportedly able to more-or-less  recoup what it had borrowed to finance  

03:03

the purchase of Yahoo in the first place.¬† The key next step was facing reality‚ÄĒrecognizing¬†¬†

03:10

that Yahoo was no longer truly a search engine,  it was no longer an internet homepage, and it  

03:15

was hardly even an email provider anymore‚ÄĒreally,¬† Yahoo was simply just whatever still worked. And¬†¬†

03:22

what worked was clear: Yahoo Finance and Yahoo  Sports. Through the years, each had maintained  

03:29

and gained a reputation as the best places to  go for investing and sports news and data.  

03:34

So to double-down on success, they once again¬† hired from experience‚ÄĒRyan Spoon‚Äôs time at ESPN¬†¬†

03:40

and BetMGM gave him context into the fantasy  sports audience that drives so much of Yahoo  

03:45

Sports’ traffic, so he was tapped to be that  division’s president. Tapan Bhat’s time as  

03:49

Chief Product Officer of NerdWallet informed his  experience in the wants of the newest generation  

03:54

of retail investors, so he was appointed  general manager of Yahoo Finance. Structurally,  

03:59

within Yahoo, each of these core divisions was  given a high degree of autonomy to build out  

04:03

unique product offerings for their specific¬† customer-bases‚ÄĒYahoo Sports started work to¬†¬†

04:08

bolster its sports betting offerings, including  acquiring sector-startup Wagr in 2023. Yahoo  

04:13

Finance focused on growing its subscription-based  offerings, and its Yahoo Finance Plus platform,  

04:18

offering advanced trading tools and data, is  reported to now have more than two million  

04:22

customers and double-digit year-over-year growth.  The details of what Apollo and this new leadership  

04:27

team are doing go on and on, but in short,  Yahoo has gone through a transformation marked  

04:32

by cutting off its appendages, reinforcing its¬† core, and it‚Äôs working‚ÄĒwhile obscured by the lack¬†¬†

04:38

of reporting requirements due to its private  ownership, all indications suggest that the  

04:41

company is, while smaller, as healthy as its been  in decades, and the CEO has said that it’s on the  

04:46

path towards IPO and is ‚Äúvery profitable.‚ÄĚ However Apollo exits this investment,¬†¬†

04:52

it will almost certainly yield them a tremendous  return. And it’d be fair to argue they will have  

04:58

deserved it‚ÄĒthey came in, took a risk, found¬† a new leadership team, developed a viable¬†¬†

05:02

strategy, then shepherded the company through a  transformation. They took an obsolete institution  

05:08

and brought it back into relevancy. And this  is exactly what the private equity industry  

05:13

would like you to believe private equity is.  Structurally, private equity firms are not  

05:19

complicated. Their cores are the General  Partner. General partners typically know  

05:24

the right people‚ÄĒit is not an entry level¬† job. To take the example of a rather random,¬†¬†

05:29

rather unremarkable firm, J.W. Childs Associates  was founded by general partner John W. Childs  

05:34

after a long and successful stint at Thomas  H. Lee Partners, founded by Thomas H. Lee.  

05:39

Thomas H. Lee founded his firm after a long  stint at the First National Bank of Boston,  

05:44

where he rose to the rank of Vice President.  Other examples of private equity general partners  

05:48

include Mitt Romney of Bain Capital, who was  also the 2012 Republican nominee for president,  

05:53

and Steven Schwarzman of Blackstone,  the 34th wealthiest person in the world. 

05:58

These connections are crucial thanks to step¬† two in the process‚ÄĒraising money. Typically¬†¬†

06:03

general partners start by throwing in a couple  million of their own money, to set the stakes,  

06:08

then they’ll go around pitching investors on why  they’re the best person to manage the investors’  

06:12

money. Often it has something to do with having  particular experience in a particular industry  

06:16

that is particularly attractive for particular¬† reasons‚ÄĒin the case of J.W. Childs, he likely went¬†¬†

06:21

around arguing that he had a particular knack for  investing in consumer food and beverage companies  

06:26

since at his prior firm he had helped arrange the  buyout of Snapple for $135 million in 1992, which  

06:32

his firm sold two years later for $1.7 billion  after massive revenue-growth. And he’d likely  

06:38

argue that food and beverage companies are great  for investment since people have to eat and drink,  

06:42

and therefore the sector is less subject to the  cycles of the market than something like tech. 

06:47

This sort of stability is particularly attractive  to the massive institutions that make up the core  

06:52

of private equity investors‚ÄĒin John W.¬† Childs‚Äô case, insurance companies like¬†¬†

06:56

Northwestern Mutual or employee pension  funds like the Bayer Corporation Master  

07:00

Trust. Individuals can theoretically invest  in PE funds, but only if they hold enormous  

07:06

wealth‚ÄĒit varies dramatically, but many funds¬† have minimum investments upwards of $25 million.¬†¬†

07:13

Meanwhile, the way private equity firms themselves¬† make money is remarkably consistent‚ÄĒthey just take¬†¬†

07:19

two percent of it. Two percent, of all money, each  year, is taken as a fee, regardless of whether or  

07:25

not the firm actually grows the investment. But  then to incentivize returns, the firm also sets  

07:30

a benchmark, called a hurdle, that they‚Äôre aiming¬† to beat in year-over-year investment growth‚ÄĒsay,¬†¬†

07:35

7%. Any money earned on top of that hurdle is  then subject to a 20% fee that goes back to  

07:41

the firm. So, say, if a fund was originally worth  $100 million but grew to $110 million, $3 million  

07:47

would be subject to that performance fee and so  20% of it, $600,000, would go back to the firm. 

07:53

In practice, what’s earned from the 2% base fee  is fairly consistent, since there are generally  

07:58

restrictions as to when investors can take  money out of the fund so the sum does not  

08:02

generally fluctuate rapidly‚ÄĒtherefore, firms¬† typically earmark this base fee for covering¬†¬†

08:07

basic operating costs like office rent and analyst  salaries. But how much is made from the 20% fee  

08:13

varies enormously‚ÄĒsome years it could be¬† nothing, others it could be yacht money,¬†¬†

08:18

especially since the gains from that fee are  generally distributed primarily to the general  

08:22

partner. This is how general partners like John  W. Childs become billionaires. And even better:  

08:28

the money from these fees is not considered  traditional income by the American tax  

08:32

authorities‚ÄĒit‚Äôs considered capital gains.¬† Despite the fact that these earnings do not¬†¬†

08:37

truly come from investment by the general partners  themselves, the IRS treats them as if they do and  

08:42

therefore only about 20% goes to taxes, versus  the 37% they’d pay on traditional income. 

08:48

So, considering it’s the primary source of  their wealth, the general partner is massively  

08:53

incentivized to maximize their firm’s gains, and  to supercharge this to the next level they almost  

08:57

all rely on one simple trick‚ÄĒthey don‚Äôt actually¬† invest their own money, at least primarily. Now,¬†¬†

09:04

if a $100 million fund bought a $100 million  company and increased its value by 25%,  

09:10

they’d gain $25 million. But, if a $100 million  fund bought a $400 million company and increased  

09:17

its value by the same multiple, they‚Äôd gain $100¬† million‚ÄĒthey‚Äôd 2x the fund‚Äôs value. And believe it¬†¬†

09:24

or not, a $100 million fund can buy a $400 million  company… as long as they have a friendly banker.  

09:31

This is what‚Äôs referred to as a leveraged¬† buyout‚ÄĒthe fund puts in some of their money,¬†¬†

09:36

but primarily relies on borrowed money to pay the  seller, just like a homebuyer with a mortgage.  

09:42

This magnifies the potential earnings, but  in turn, of course, the potential losses.  

09:47

But it’s worth considering what this does for the  General Partner. In a $100 million fund buying a  

09:52

$400 million company with 75% borrowed money,  very small margins of growth can make all the  

09:58

difference for this one individual. With a 7%  hurdle and 7.5% growth, 20% of the margin above  

10:04

7% on that $400 million company would earn  this individual $400,000 But if, instead,  

10:12

the company reached 7.75% growth, the general¬† partner would earn $600,000‚ÄĒbecause of this¬†¬†

10:19

amplifying effect, every quarter of a percent  growth, a rather small difference, earns the  

10:24

general partner another $200,000 in income.  It’s also worth considering that it really  

10:31

doesn’t matter exactly how this value is  created. For every miraculous Yahoo-turnaround  

10:37

story there’s a Marsh Supermarkets. At no point did Marsh reach the size  

10:42

or level of national ubiquity as Yahoo‚ÄĒif¬† you aren‚Äôt from Indiana or Western Ohio,¬†¬†

10:48

you’ve likely never heard of Marsh SuperMarket.  Yet, while confined to just two states, Marsh  

10:53

Supermarkets and its private equity takeover,  exemplifies a pattern that spans all fifty. 

10:58

The first Marsh opened here, a small local grocer  catering to specific local needs in Muncie,  

11:04

Indiana in 1931. The simple concept  took. Weathering the Great Depression,  

11:10

then outlasting World War II, the budding Indiana  institution began to expand: by the 1950s there  

11:15

were 16 Marsh locations across the state, by 1952  there was a Marsh distribution center in Yorktown,  

11:21

Indiana, and by 1956, the store was expanding¬† into Ohio. As demands changed in the ‚Äė60s,¬†¬†

11:27

the company adjusted. Marsh Foodliners became  Marsh SuperMarkets, growing in size to accommodate  

11:32

one-stop shopping. Diversifying as decades  progressed, the company also established its  

11:37

own convenience store: The Village Pantry, its own  bargain bin store: Lobill Foods, and eventually  

11:42

purchased its own upscale grocers in O’Malia  Foods and Arthur’s Fresh Market. Blanketing urban  

11:47

and suburban Indiana and western Ohio, Marsh and¬† Marsh properties were a mainstay through the ‚Äė90s¬†¬†

11:53

and 2000s. And it was at about this time that  Sun Capital became interested in the company.  

11:59

Today, there are zero Marsh locations. In  2017, unable to keep up with rent payments  

12:06

and struggling to pay vendors, the company  filed for chapter 7 bankruptcy, closing  

12:11

every last location and liquidating all remaining  assets. Like an empire spread too thin, Marsh had  

12:17

reached its territorial epoch before collapsing¬† in on itself within just two decades‚ÄĒall on a¬†¬†

12:24

timeline that rather neatly lines up with the  brand’s time under Sun Capital’s ownership.  

12:29

Now, Sun Capital Partners didn’t instigate the  regional grocer’s fall from grace. Prior to the  

12:34

sale, Marsh had expensively failed to expand into  Chicago; it had felt the revenue squeeze from  

12:39

encroaching box stores; and it watched Krogers  parade into its grocery market. In response,  

12:45

the company began to fall behind, failing to  modernize its stores or products, backing out of  

12:50

sponsorship deals with the Indiana State Fair, and  opening itself up to the possibility of selling.  

12:55

In an atmosphere of supermarket consolidation,  though, there wasn’t much interest in the  

12:59

struggling chain… not until someone noticed in a  footnote in the company’s financial report that  

13:04

the company held a rather robust real estate  portfolio. A $325 million purchase point then  

13:11

became more palatable, and in early 2006,  Sun Capital jumped, paying $88 million in  

13:16

cash and assuming $237 million of debt.  To Sun Capital, the deal was a can’t lose  

13:23

proposition‚ÄĒeither they‚Äôd turn around and flip¬† a bloated business, or they‚Äôd sell the assets,¬†¬†

13:29

assets which just in real estate have been  estimated to be worth $238 to $360 million.  

13:35

Under new ownership, things changed quickly: they  pared management, they sold the company jet, and  

13:41

with the money saved, they renovated storefronts.  Sales went up. Then came more maneuvering,  

13:47

but less the kind that would help bump sales.   Almost immediately after Sun Capital took over,  

13:53

store locations went up for sale: this one  for $750,000, this one for $2.15 million,  

14:00

and this one for $1.2 million. They’d stay  operating as Marsh stores, but they’d now  

14:05

be paying a lease while Sun Capital would collect  an unspecified commission on the sales. They even  

14:11

went as far as selling the company headquarters  for a reported $28 million before then straddling  

14:16

the grocer with a 20-year lease increasing on  a 7% clip every five years. This maneuver is  

14:23

called a sale-leaseback, and it's quite common  in private equity, because at least on paper,  

14:29

it makes sense for both parties. Marsh Supermarket  properties were no exception as they could boost  

14:34

dividends or provide capital for another  leveraged buyout for Sun Capital, while also  

14:38

helping the grocer to pay down debt and provide  investment flexibility in the short term. But  

14:42

as for the consequences accompanying that long,¬† escalating lease on company headquarters‚ÄĒalong¬†¬†

14:47

with cost-saving moves like carrying name brand  products, cutting staff, and contracting out more  

14:52

and more services‚ÄĒwell, Sun Capital just hoped it¬† wouldn‚Äôt have to deal with them. As early as 2009,¬†¬†

14:58

news bubbled to the surface that they  were trying to sell the grocery chain.   

15:02

  But to the dismay of Sun Capital, the new,  leaner, streamlined Marsh just wouldn’t sell.  

15:09

Ultimately, the new-owner business boost was  short-lasted, and in 2017, the grocer would go out  

15:14

of business with Sun Capital at the helm until the  very day it filed for bankruptcy. To Sun Capital,  

15:20

failing to sell was a missed opportunity in a  company overhaul that they would deem a loss,  

15:25

as the group ultimately came $500,000  short of recouping their investment  

15:29

into the chain grocery store.  But even in a loss the private  

15:33

equity firm won. They still collected their  management fee each year of ownership,  

15:38

afterall. They also collected their commission on  sold assets as the company spun off its property  

15:42

at seemingly every turn. Really, the only  loss was that they just didn’t win more.  

15:49

The same couldn’t be said about the consumers  or employees, though. Deeply embedded in Indiana  

15:54

and Ohios’ urban areas, Marsh locations provided  healthier, fresher alternatives in areas at risk  

15:59

of fading into food deserts. Beyond nostalgia,  residents who lost their local grocery and  

16:05

pharmacy were mad, confused, and lost with the  disappearance of a longtime local institution.  

16:11

Then there were the people that worked for  Marsh. According to Washington Post reporting,  

16:15

at the onset of Sun Capital’s ownership only one  of three retirement plans was agreed to be fully  

16:20

funded by the new ownership‚ÄĒunsurprisingly,¬† the executives‚Äô plan. As for store employees,¬†¬†

16:26

their pension went underfunded by some $32  million dollars, which fell not on Sun Capital  

16:31

to even out, but to the government insurer. As for  warehouse workers, Marsh owed some $55 million at  

16:38

the time of bankruptcy to their pension which  was already struggling to pay out full checks.  

16:44

Ultimately, Marsh Supermarkets as a business  and Sun Capital as a private equity firm are  

16:49

relatively small potatoes. But their  ill-fated 11-years speak to a larger  

16:53

pattern in American life. Private equity  quietly maneuvers, takes over, reorganizes,  

16:59

and moves on while consumers and employees grapple  with the consequences. Private equity fixates on  

17:04

industries: regional grocery chains like Marsh;  casual restaurant chains like Red Lobster;  

17:09

odd-end industries like animal retail and  veterinary care; and, most unnervingly, the most  

17:14

consequential industry of them all in healthcare.  In most cases, only the sharpest-eyed consumer  

17:20

notices the subtle changes, but frequently  enough, private equity’s internal tinkering  

17:24

turns things sideways. The local market goes out  of business, the menu items track upward in price,  

17:30

the understaffed and over-priced veterinary  clinic’s care drops in quality, the elderly home’s  

17:35

staff unintentionally neglects a call for help.  All this happens in the name of efficiency gains,  

17:40

cost-cutting, and corporate streamlining‚ÄĒbad¬† outcomes not even private equity firms can deny.¬†¬†

17:46

On average, headcount at public companies  bought by private equity shrinks by 12% over  

17:51

the following two years, translating to thousands  upon thousands of layoffs. PE-owned nursing homes  

17:57

see 11% higher mortality rates than the non-PE  owned counterparts, summing to a total of 1,000  

18:03

excess deaths per year. Companies acquired by  private equity firms through leveraged buyouts are  

18:08

found to be 10 times more likely to go bankrupt in  the following ten years than those that are not.  

18:14

Theories abound as to why a benign structure  leads to such malignant results. But none are  

18:20

surprising. They all have to do with what happens  when one shrinks a conglomeration of hundreds or  

18:25

thousands of people, their relations,  their creativity, their capabilities,  

18:29

their faults, their everything down to a deluge of  figures on a spreadsheet. The stories of a private  

18:34

equity firm going in, working on the human  level, changing the fundamental culture of a  

18:38

company in a way that strengthens collaboration,  creativity, innovation towards the end of just  

18:43

creating a stronger, more competitive product for  their customers are tough to come by. The stories  

18:48

of a private equity firm going in, hiking pricing  after their analysts told them they could, hiring  

18:52

lobbyists to create more favorable legislative  conditions, initiating mass layoffs for divisions  

18:57

that are not yet profitable, saddling companies  with debt in complex financial maneuvers,  

19:01

shuffling assets around to create the illusion  of transformation, sacrificing future potential  

19:05

for present-day returns‚ÄĒthose stories, and their¬† calamitous human results, go on and on and on.¬†¬†

19:14

Exploitation is easy without emotion. When  the person making decisions is the same  

19:19

person unlocking the door each morning, it is  much more difficult for them to profit off of  

19:23

their employees' suffering. They have to face  the consequences of their greed face-to-face,  

19:28

and that’s uncomfortable. When the person  making decisions is the boss of the vice  

19:33

president who’s senior associate manages the  associate who sits on the portfolio company  

19:36

board which appoints the CEO who’s direct report  manages the division who’s vice president manages  

19:41

the regional manager who oversees the branch  manager that unlocks the door each morning,  

19:44

exploitation in the name of profit is easier. And those small number of individuals at the top,  

19:50

the general partners, have all the incentive  in the world to exploit on the margins.  

19:55

Because of the compensation model, the industry¬† is focused on growth at all costs‚ÄĒafter all,¬†¬†

20:00

without gangbusters growth, the person whose name  is on the sign doesn’t get paid. And finally,  

20:06

with a massive 20% of over-hurdle performance  multiplied by leverage then paid out to the firm,  

20:11

tiny margins of difference‚ÄĒsay, outsourcing HR¬† to a third-party firm that is less effective yet¬†¬†

20:16

cheaper‚ÄĒmake all the difference on the general¬† partner‚Äôs annual income. The incentives push¬†¬†

20:21

towards brutality, then this brutality is shielded  by layers of bureaucracy, and finally the US  

20:27

government rewards the brutality by subjecting the  gains from it to a lower tax rate. It’s a great  

20:32

system, assuming you happen to be the general  partner of an American private equity firm.  

20:38

As you may know, the latest fixation of the¬† finance world‚ÄĒeven beyond just private equity‚ÄĒis¬†¬†

20:42

artificial intelligence. Many investors believe  that it's as groundbreaking a technology as the  

20:47

internet, and so it’s probably worth learning how  it actually works. For that, I’d recommend our  

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sponsor Brilliant. They have a fantastic course on  how large language models like ChatGPT work which,  

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surprisingly, I didn’t find all that complicated  to understand. But that’s potentially thanks to  

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Brilliant‚ÄĒthey specialize in teaching complex STEM¬† subjects by breaking them down into small chunks¬†¬†

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that they teach through intuitive principles and  interactive exercises. As you keep going, they  

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bring these small, disparate concepts together  until you understand something massive, like how a  

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large language model, or calculus, or programming  works. Personally, as someone who always struggled  

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in traditional STEM education, I find it really  satisfying to gain this sort of understanding in  

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topics that I’d always thought were out of reach,  and it’s really useful for when something like  

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LLMs become relevant to so many other things. And  another aspect I really appreciate about Brilliant  

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is that they really understand the practicalities¬† of how people actually learn‚ÄĒwe don‚Äôt all have¬†¬†

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or tablet while you’re on the bus or waiting at  the doctor’s office or in other small moments in  

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