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

  • šŸ’¼ **Private Equity Basics**: Private equity (PE) firms invest in companies, restructure them for growth, and then sell for a profit.
  • šŸ“‰ **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.
  • šŸ›’ **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.
  • šŸ”‘ **Leadership Changes**: Experienced businessman Jim Lanzone was brought in to lead Yahoo, leveraging his past success in turning around Ask.com.
  • šŸš€ **Yahoo's Transformation**: Through strategic sales and focusing on core strengths, Yahoo became profitable again, indicating a potential path towards an IPO.
  • šŸ¤ **General Partners' Role**: General partners in PE firms are industry veterans with strong networks, crucial for raising investment capital.
  • šŸ’° **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.
  • šŸ“ˆ **Leveraged Buyouts**: PE firms often use leveraged buyouts, where they borrow money to buy companies, amplifying potential returns but also risks.
  • šŸ¬ **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.
  • šŸ›ļø **Consequences of PE Ownership**: Private equity ownership can lead to store closures, service quality declines, and increased costs for consumers.
  • āš–ļø **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

šŸ’¼ 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

šŸ¤ 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

šŸ“‰ 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

šŸ›’ 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

šŸ¤– 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.

šŸ“š 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

šŸ’”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.

šŸ’”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.

šŸ’”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.

šŸ’”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.

šŸ’”

šŸ’”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.

šŸ’”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.

šŸ’”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.

šŸ’”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.

šŸ’”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.

šŸ’”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.

šŸ’”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 ideaā€¦ in theory. FundsĀ  take investor money, buy a bunch of fledglingĀ Ā 

00:07

or faltering companies, shuffle around theirĀ  structure and leadership and operating model,Ā Ā 

00:11

grow their worth, then sell them a few yearsĀ  later for a profit. Whatā€™s wrong with that?Ā 

00:16

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

00:23

was consistently worth more than Amazon andĀ  Apple combined. Its market-cap reached a highĀ Ā 

00:28

water mark of over $125 billion. But today, itā€™sĀ  known for what it isnā€™tā€”after rejecting a $44.6Ā Ā 

00:37

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

00:43

Verizon for a humiliating $4.8 billion. VerizonĀ  then merged the company with AOL, previouslyĀ Ā 

00:49

bought for $4.4 billion, but after the downwardĀ  trend continued Verizon finally sold the combinedĀ Ā 

00:53

company for just $5 billionā€”an enormous loss. The buyer was Apollo Global Managementā€”a behemothĀ Ā 

01:02

private equity firm previously headed by LeonĀ  Black until his $158 million in payments toĀ Ā 

01:07

Jeffrey Epstein emerged in the media. ThroughĀ  the years, Apollo has owned and transformedĀ Ā 

01:12

companies like ADT, Chuck E. Cheeseā€™s,Ā  Qdoba, and AMC Theaters, but this time,Ā Ā 

01:17

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

01:22

For their strategy to work, they neededĀ  a leader, and for that they turned toĀ Ā 

01:26

experienced businessman Jim Lanzone. Part ofĀ  the reasoning was surely that this wouldnā€™tĀ Ā 

01:31

be the first time Lanzone attempted to turnĀ  around a faltering internet business. He madeĀ Ā 

01:35

a name for himself while working at Ask.com.Ā  This company started as Ask Jeevesā€”an earlyĀ Ā 

01:42

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

01:46

much like todayā€™s AI-driven chatbots. Google,Ā  of course, won that competition, so the companyĀ Ā 

01:51

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

01:55

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

02:01

and while always overshadowed by the companyā€™sĀ  fall from its promising early days, Lanzone wasĀ Ā 

02:06

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

02:10

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

02:14

Lanzone went on to lead CBSā€™s digital businessĀ  leading up to its massive merger with ViaCom, andĀ Ā 

02:19

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

02:25

This new leadership team, CEO Lanzone and investorĀ  Apollo, started by selling off extraneous yetĀ Ā 

02:30

valuable assets Yahoo had acquired through theĀ  yearsā€”they wanted to focus on the companyā€™s core,Ā Ā 

02:35

rather than just acting as a collection ofĀ  random revenue-creating resources that managedĀ Ā 

02:39

to survive through time. So the key assetsĀ  of the comparatively strong and independentlyĀ Ā 

02:43

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

02:49

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

02:54

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

02:59

Apollo was reportedly able to more-or-lessĀ  recoup what it had borrowed to financeĀ Ā 

03:03

the purchase of Yahoo in the first place.Ā  The key next step was facing realityā€”recognizingĀ Ā 

03:10

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

03:15

was hardly even an email provider anymoreā€”really,Ā  Yahoo was simply just whatever still worked. AndĀ Ā 

03:22

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

03:29

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

03:34

So to double-down on success, they once againĀ  hired from experienceā€”Ryan Spoonā€™s time at ESPNĀ Ā 

03:40

and BetMGM gave him context into the fantasyĀ  sports audience that drives so much of YahooĀ Ā 

03:45

Sportsā€™ traffic, so he was tapped to be thatĀ  divisionā€™s president. Tapan Bhatā€™s time asĀ Ā 

03:49

Chief Product Officer of NerdWallet informed hisĀ  experience in the wants of the newest generationĀ Ā 

03:54

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

03:59

within Yahoo, each of these core divisions wasĀ  given a high degree of autonomy to build outĀ Ā 

04:03

unique product offerings for their specificĀ  customer-basesā€”Yahoo Sports started work toĀ Ā 

04:08

bolster its sports betting offerings, includingĀ  acquiring sector-startup Wagr in 2023. YahooĀ Ā 

04:13

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

04:18

offering advanced trading tools and data, isĀ  reported to now have more than two millionĀ Ā 

04:22

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

04:27

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

04:32

by cutting off its appendages, reinforcing itsĀ  core, and itā€™s workingā€”while obscured by the lackĀ Ā 

04:38

of reporting requirements due to its privateĀ  ownership, all indications suggest that theĀ Ā 

04:41

company is, while smaller, as healthy as its beenĀ  in decades, and the CEO has said that itā€™s on theĀ Ā 

04:46

path towards IPO and is ā€œvery profitable.ā€ However Apollo exits this investment,Ā Ā 

04:52

it will almost certainly yield them a tremendousĀ  return. And itā€™d be fair to argue they will haveĀ Ā 

04:58

deserved itā€”they came in, took a risk, foundĀ  a new leadership team, developed a viableĀ Ā 

05:02

strategy, then shepherded the company through aĀ  transformation. They took an obsolete institutionĀ Ā 

05:08

and brought it back into relevancy. And thisĀ  is exactly what the private equity industryĀ Ā 

05:13

would like you to believe private equity is.Ā  Structurally, private equity firms are notĀ Ā 

05:19

complicated. Their cores are the GeneralĀ  Partner. General partners typically knowĀ Ā 

05:24

the right peopleā€”it is not an entry levelĀ  job. To take the example of a rather random,Ā Ā 

05:29

rather unremarkable firm, J.W. Childs AssociatesĀ  was founded by general partner John W. ChildsĀ Ā 

05:34

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

05:39

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

05:44

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

05:48

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

05:53

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

05:58

These connections are crucial thanks to stepĀ  two in the processā€”raising money. TypicallyĀ Ā 

06:03

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

06:08

then theyā€™ll go around pitching investors on whyĀ  theyā€™re the best person to manage the investorsā€™Ā Ā 

06:12

money. Often it has something to do with havingĀ  particular experience in a particular industryĀ Ā 

06:16

that is particularly attractive for particularĀ  reasonsā€”in the case of J.W. Childs, he likely wentĀ Ā 

06:21

around arguing that he had a particular knack forĀ  investing in consumer food and beverage companiesĀ Ā 

06:26

since at his prior firm he had helped arrange theĀ  buyout of Snapple for $135 million in 1992, whichĀ Ā 

06:32

his firm sold two years later for $1.7 billionĀ  after massive revenue-growth. And heā€™d likelyĀ Ā 

06:38

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

06:42

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

06:47

This sort of stability is particularly attractiveĀ  to the massive institutions that make up the coreĀ Ā 

06:52

of private equity investorsā€”in John W.Ā  Childsā€™ case, insurance companies likeĀ Ā 

06:56

Northwestern Mutual or employee pensionĀ  funds like the Bayer Corporation MasterĀ Ā 

07:00

Trust. Individuals can theoretically investĀ  in PE funds, but only if they hold enormousĀ Ā 

07:06

wealthā€”it varies dramatically, but many fundsĀ  have minimum investments upwards of $25 million.Ā Ā 

07:13

Meanwhile, the way private equity firms themselvesĀ  make money is remarkably consistentā€”they just takeĀ Ā 

07:19

two percent of it. Two percent, of all money, eachĀ  year, is taken as a fee, regardless of whether orĀ Ā 

07:25

not the firm actually grows the investment. ButĀ  then to incentivize returns, the firm also setsĀ Ā 

07:30

a benchmark, called a hurdle, that theyā€™re aimingĀ  to beat in year-over-year investment growthā€”say,Ā Ā 

07:35

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

07:41

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

07:47

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

07:53

In practice, whatā€™s earned from the 2% base feeĀ  is fairly consistent, since there are generallyĀ Ā 

07:58

restrictions as to when investors can takeĀ  money out of the fund so the sum does notĀ Ā 

08:02

generally fluctuate rapidlyā€”therefore, firmsĀ  typically earmark this base fee for coveringĀ Ā 

08:07

basic operating costs like office rent and analystĀ  salaries. But how much is made from the 20% feeĀ Ā 

08:13

varies enormouslyā€”some years it could beĀ  nothing, others it could be yacht money,Ā Ā 

08:18

especially since the gains from that fee areĀ  generally distributed primarily to the generalĀ Ā 

08:22

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

08:28

the money from these fees is not consideredĀ  traditional income by the American taxĀ Ā 

08:32

authoritiesā€”itā€™s considered capital gains.Ā  Despite the fact that these earnings do notĀ Ā 

08:37

truly come from investment by the general partnersĀ  themselves, the IRS treats them as if they do andĀ Ā 

08:42

therefore only about 20% goes to taxes, versusĀ  the 37% theyā€™d pay on traditional income.Ā 

08:48

So, considering itā€™s the primary source ofĀ  their wealth, the general partner is massivelyĀ Ā 

08:53

incentivized to maximize their firmā€™s gains, andĀ  to supercharge this to the next level they almostĀ Ā 

08:57

all rely on one simple trickā€”they donā€™t actuallyĀ  invest their own money, at least primarily. Now,Ā Ā 

09:04

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

09:10

theyā€™d gain $25 million. But, if a $100 millionĀ  fund bought a $400 million company and increasedĀ Ā 

09:17

its value by the same multiple, theyā€™d gain $100Ā  millionā€”theyā€™d 2x the fundā€™s value. And believe itĀ Ā 

09:24

or not, a $100 million fund can buy a $400 millionĀ  companyā€¦ as long as they have a friendly banker.Ā Ā 

09:31

This is whatā€™s referred to as a leveragedĀ  buyoutā€”the fund puts in some of their money,Ā Ā 

09:36

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

09:42

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

09:47

But itā€™s worth considering what this does for theĀ  General Partner. In a $100 million fund buying aĀ Ā 

09:52

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

09:58

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

10:04

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

10:12

the company reached 7.75% growth, the generalĀ  partner would earn $600,000ā€”because of thisĀ Ā 

10:19

amplifying effect, every quarter of a percentĀ  growth, a rather small difference, earns theĀ Ā 

10:24

general partner another $200,000 in income.Ā  Itā€™s also worth considering that it reallyĀ Ā 

10:31

doesnā€™t matter exactly how this value isĀ  created. For every miraculous Yahoo-turnaroundĀ Ā 

10:37

story thereā€™s a Marsh Supermarkets. At no point did Marsh reach the sizeĀ Ā 

10:42

or level of national ubiquity as Yahooā€”ifĀ  you arenā€™t from Indiana or Western Ohio,Ā Ā 

10:48

youā€™ve likely never heard of Marsh SuperMarket.Ā  Yet, while confined to just two states, MarshĀ Ā 

10:53

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

10:58

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

11:04

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

11:10

then outlasting World War II, the budding IndianaĀ  institution began to expand: by the 1950s thereĀ Ā 

11:15

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

11:21

Indiana, and by 1956, the store was expandingĀ  into Ohio. As demands changed in the ā€˜60s,Ā Ā 

11:27

the company adjusted. Marsh Foodliners becameĀ  Marsh SuperMarkets, growing in size to accommodateĀ Ā 

11:32

one-stop shopping. Diversifying as decadesĀ  progressed, the company also established itsĀ Ā 

11:37

own convenience store: The Village Pantry, its ownĀ  bargain bin store: Lobill Foods, and eventuallyĀ Ā 

11:42

purchased its own upscale grocers in Oā€™MaliaĀ  Foods and Arthurā€™s Fresh Market. Blanketing urbanĀ Ā 

11:47

and suburban Indiana and western Ohio, Marsh andĀ  Marsh properties were a mainstay through the ā€˜90sĀ Ā 

11:53

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

11:59

Today, there are zero Marsh locations. InĀ  2017, unable to keep up with rent paymentsĀ Ā 

12:06

and struggling to pay vendors, the companyĀ  filed for chapter 7 bankruptcy, closingĀ Ā 

12:11

every last location and liquidating all remainingĀ  assets. Like an empire spread too thin, Marsh hadĀ Ā 

12:17

reached its territorial epoch before collapsingĀ  in on itself within just two decadesā€”all on aĀ Ā 

12:24

timeline that rather neatly lines up with theĀ  brandā€™s time under Sun Capitalā€™s ownership.Ā Ā 

12:29

Now, Sun Capital Partners didnā€™t instigate theĀ  regional grocerā€™s fall from grace. Prior to theĀ Ā 

12:34

sale, Marsh had expensively failed to expand intoĀ  Chicago; it had felt the revenue squeeze fromĀ Ā 

12:39

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

12:45

the company began to fall behind, failing toĀ  modernize its stores or products, backing out ofĀ Ā 

12:50

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

12:55

In an atmosphere of supermarket consolidation,Ā  though, there wasnā€™t much interest in theĀ Ā 

12:59

struggling chainā€¦ not until someone noticed in aĀ  footnote in the companyā€™s financial report thatĀ Ā 

13:04

the company held a rather robust real estateĀ  portfolio. A $325 million purchase point thenĀ Ā 

13:11

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

13:16

cash and assuming $237 million of debt.Ā  To Sun Capital, the deal was a canā€™t loseĀ Ā 

13:23

propositionā€”either theyā€™d turn around and flipĀ  a bloated business, or theyā€™d sell the assets,Ā Ā 

13:29

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

13:35

Under new ownership, things changed quickly: theyĀ  pared management, they sold the company jet, andĀ Ā 

13:41

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

13:47

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

13:53

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

14:00

and this one for $1.2 million. Theyā€™d stayĀ  operating as Marsh stores, but theyā€™d nowĀ Ā 

14:05

be paying a lease while Sun Capital would collectĀ  an unspecified commission on the sales. They evenĀ Ā 

14:11

went as far as selling the company headquartersĀ  for a reported $28 million before then straddlingĀ Ā 

14:16

the grocer with a 20-year lease increasing onĀ  a 7% clip every five years. This maneuver isĀ Ā 

14:23

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

14:29

it makes sense for both parties. Marsh SupermarketĀ  properties were no exception as they could boostĀ Ā 

14:34

dividends or provide capital for anotherĀ  leveraged buyout for Sun Capital, while alsoĀ Ā 

14:38

helping the grocer to pay down debt and provideĀ  investment flexibility in the short term. ButĀ Ā 

14:42

as for the consequences accompanying that long,Ā  escalating lease on company headquartersā€”alongĀ Ā 

14:47

with cost-saving moves like carrying name brandĀ  products, cutting staff, and contracting out moreĀ Ā 

14:52

and more servicesā€”well, Sun Capital just hoped itĀ  wouldnā€™t have to deal with them. As early as 2009,Ā Ā 

14:58

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

15:02

Ā Ā But to the dismay of Sun Capital, the new,Ā  leaner, streamlined Marsh just wouldnā€™t sell.Ā Ā 

15:09

Ultimately, the new-owner business boost wasĀ  short-lasted, and in 2017, the grocer would go outĀ Ā 

15:14

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

15:20

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

15:25

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

15:29

into the chain grocery store.Ā  But even in a loss the privateĀ Ā 

15:33

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

15:38

afterall. They also collected their commission onĀ  sold assets as the company spun off its propertyĀ Ā 

15:42

at seemingly every turn. Really, the onlyĀ  loss was that they just didnā€™t win more.Ā Ā 

15:49

The same couldnā€™t be said about the consumersĀ  or employees, though. Deeply embedded in IndianaĀ Ā 

15:54

and Ohiosā€™ urban areas, Marsh locations providedĀ  healthier, fresher alternatives in areas at riskĀ Ā 

15:59

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

16:05

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

16:11

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

16:15

at the onset of Sun Capitalā€™s ownership only oneĀ  of three retirement plans was agreed to be fullyĀ Ā 

16:20

funded by the new ownershipā€”unsurprisingly,Ā  the executivesā€™ plan. As for store employees,Ā Ā 

16:26

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

16:31

to even out, but to the government insurer. As forĀ  warehouse workers, Marsh owed some $55 million atĀ Ā 

16:38

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

16:44

Ultimately, Marsh Supermarkets as a businessĀ  and Sun Capital as a private equity firm areĀ Ā 

16:49

relatively small potatoes. But theirĀ  ill-fated 11-years speak to a largerĀ Ā 

16:53

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

16:59

and moves on while consumers and employees grappleĀ  with the consequences. Private equity fixates onĀ Ā 

17:04

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

17:09

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

17:14

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

17:20

notices the subtle changes, but frequentlyĀ  enough, private equityā€™s internal tinkeringĀ Ā 

17:24

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

17:30

the understaffed and over-priced veterinaryĀ  clinicā€™s care drops in quality, the elderly homeā€™sĀ Ā 

17:35

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

17:40

cost-cutting, and corporate streamliningā€”badĀ  outcomes not even private equity firms can deny.Ā Ā 

17:46

On average, headcount at public companiesĀ  bought by private equity shrinks by 12% overĀ Ā 

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

17:57

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

18:03

excess deaths per year. Companies acquired byĀ  private equity firms through leveraged buyouts areĀ Ā 

18:08

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

18:14

Theories abound as to why a benign structureĀ  leads to such malignant results. But none areĀ Ā 

18:20

surprising. They all have to do with what happensĀ  when one shrinks a conglomeration of hundreds orĀ Ā 

18:25

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

18:29

their faults, their everything down to a deluge ofĀ  figures on a spreadsheet. The stories of a privateĀ Ā 

18:34

equity firm going in, working on the humanĀ  level, changing the fundamental culture of aĀ Ā 

18:38

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

18:43

creating a stronger, more competitive product forĀ  their customers are tough to come by. The storiesĀ Ā 

18:48

of a private equity firm going in, hiking pricingĀ  after their analysts told them they could, hiringĀ Ā 

18:52

lobbyists to create more favorable legislativeĀ  conditions, initiating mass layoffs for divisionsĀ Ā 

18:57

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

19:01

shuffling assets around to create the illusionĀ  of transformation, sacrificing future potentialĀ Ā 

19:05

for present-day returnsā€”those stories, and theirĀ  calamitous human results, go on and on and on.Ā Ā 

19:14

Exploitation is easy without emotion. WhenĀ  the person making decisions is the sameĀ Ā 

19:19

person unlocking the door each morning, it isĀ  much more difficult for them to profit off ofĀ Ā 

19:23

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

19:28

and thatā€™s uncomfortable. When the personĀ  making decisions is the boss of the viceĀ Ā 

19:33

president whoā€™s senior associate manages theĀ  associate who sits on the portfolio companyĀ Ā 

19:36

board which appoints the CEO whoā€™s direct reportĀ  manages the division whoā€™s vice president managesĀ Ā 

19:41

the regional manager who oversees the branchĀ  manager that unlocks the door each morning,Ā Ā 

19:44

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

19:50

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

19:55

Because of the compensation model, the industryĀ  is focused on growth at all costsā€”after all,Ā Ā 

20:00

without gangbusters growth, the person whose nameĀ  is on the sign doesnā€™t get paid. And finally,Ā Ā 

20:06

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

20:11

tiny margins of differenceā€”say, outsourcing HRĀ  to a third-party firm that is less effective yetĀ Ā 

20:16

cheaperā€”make all the difference on the generalĀ  partnerā€™s annual income. The incentives pushĀ Ā 

20:21

towards brutality, then this brutality is shieldedĀ  by layers of bureaucracy, and finally the USĀ Ā 

20:27

government rewards the brutality by subjecting theĀ  gains from it to a lower tax rate. Itā€™s a greatĀ Ā 

20:32

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

20:38

As you may know, the latest fixation of theĀ  finance worldā€”even beyond just private equityā€”isĀ Ā 

20:42

artificial intelligence. Many investors believeĀ  that it's as groundbreaking a technology as theĀ Ā 

20:47

internet, and so itā€™s probably worth learning howĀ  it actually works. For that, Iā€™d recommend ourĀ Ā 

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

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surprisingly, I didnā€™t find all that complicatedĀ  to understand. But thatā€™s potentially thanks toĀ Ā 

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Brilliantā€”they specialize in teaching complex STEMĀ  subjects by breaking them down into small chunksĀ Ā 

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that they teach through intuitive principles andĀ  interactive exercises. As you keep going, theyĀ Ā 

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bring these small, disparate concepts togetherĀ  until you understand something massive, like how aĀ Ā 

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large language model, or calculus, or programmingĀ  works. Personally, as someone who always struggledĀ Ā 

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in traditional STEM education, I find it reallyĀ  satisfying to gain this sort of understanding inĀ Ā 

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topics that Iā€™d always thought were out of reach,Ā  and itā€™s really useful for when something likeĀ Ā 

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LLMs become relevant to so many other things. AndĀ  another aspect I really appreciate about BrilliantĀ Ā 

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is that they really understand the practicalitiesĀ  of how people actually learnā€”we donā€™t all haveĀ Ā 

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time to sit down and watch an hour-long lecture orĀ  something, so thatā€™s why they break their coursesĀ Ā 

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down into such small, digestible chunks which youĀ  can complete on your computer, or on your phoneĀ Ā 

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or tablet while youā€™re on the bus or waiting atĀ  the doctorā€™s office or in other small moments inĀ Ā 

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your day. Through this, you can make learningĀ  part of your daily habit of self-improvement,Ā Ā 

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just in the time you might otherwise spendĀ  scrolling social media. Brilliant is oneĀ Ā 

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so I think itā€™s worth at least giving it aĀ  shot. And you can super-easily since you canĀ Ā 

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