Comment by loutre
2 years ago
Watching private equity take over and subsequently destroy businesses is so frustrating! This is a story that comes up again and again and there isn’t yet the overwhelming backlash that’s necessary to stop it. I highly recommend the book “Plunder: private equity’s plan to pillage America” for an extremely cogent overview of the entire situation. https://www.goodreads.com/book/show/62874267
They're currently buying up veterinary practices in the UK and turning them into cash cows. This has the effect that pet insurance has gone through the roof, and general vet bills are much higher than they used to be. Pets suffer too if owners can't afford to treat them any longer. (https://www.theguardian.com/business/2024/mar/12/uk-vet-pric...)
M&M Mars here in the US has been buying up the independent veterinary practices and turning them into corporate run businesses.
https://en.wikipedia.org/wiki/Mars_Inc.#Mars_Petcare
This sounds like something out of Idiocracy
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Out here, they’re all being bought up by VCA.
My vet is absolutely considering selling his practice. We (selfishly, not seriously) suggested selling his practice and then opening a new one closer to where we live. (We moved out of the area several years ago, but continue to drag the cats in to see him.)
We said it in gest but he said he was already giving it serious consideration. When he bought his practice from the previous vet, the original owner did exactly that —- opening a new practice elsewhere.
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I just saw a blurb about something similar in the US! Mars (the candy company) is 'the largest owner of stand-alone veterinary clinics in the United States.' Also: 'JAB Holding Company, the owner of National Veterinary Associates’ 1,000-plus hospitals (not to mention Panera and Espresso House), also holds multiple pet-insurance lines in its portfolio.'
https://www.theatlantic.com/ideas/archive/2024/04/vet-privat...
A few years ago my cat needed his teeth cleaned my local vet charged me £125. The same vet, now owned by CVS, is now going to charge £250
Here in the Bay Area I've been quoted $800 to clean a dog's teeth.
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$250 for a cleaning in the US is still a loss leader.
The actual cost to the clinic of a dental cleaning is ridiculous for how often it needs to be done.
That was €10 here in Portugal.
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If the PE firm is charging more than a vet operating alone would, then why wouldn't a vet operating alone just undercut the PE firm's veterinary practice?
There must be some barrier to entry in the market that prevents that, and that's what I would target. Because the PE firm isn't the root cause. After all, if you can't just enter a market and charge whatever you want as a standalone vet, what makes a PE firm different?
Sister-in-law is a vet tech at a place that sold out to PE a few years ago. Wife is a pharmacist who worked at a small chain of pharmacies and had it taken over by one of the national ones. Both industries are seeing massive consolidation.
A couple of things that they observed between them: A) a lot less interest among newly graduated pharmacists and vets for going into business themselves- they are deeply in debt from school, taking out business loans to start up a new business on top of those loans is a real threat to their financial stability B) they want to do vet/pharmacy things with a reasonable work/life balance, not running a business things with an insane work/life balance while carrying that huge risk C) (unique to vet) people want the convenience of big, one stop shops that can offer complimentary goods like grooming, boarding, surgeries, and their medications all in one place, which requires large capital investments- the vet firm my s-i-l works for just got a nice brand new facility with brand new fancy equipment and surgery centers etc. D) (unique to pharmacy) Pharmacy Benefit Managers are destroying the reimbursement rates of small pharmacies, if you aren't a national chain you don't have the scale to effectively negotiate with the three PBM's that control 80% of the drug insurance business, and they are getting gutted by those PBM's, forcing pharmacy consolidation (one of those three PBM's is actually one of those national drug stores, CVS Caremark- thank the George W Bush administration for that bit of anti-competitive nonsense).
I'm not as sure about vet as I am about pharmacy, but at least in pharmacy it is not generally any harder because of regulations or anything like that, to start up than it was decades ago. My wife also points out that because we have more drugs than before, with more varied storage requirements, and they are more expensive than before, inventory costs a lot more than it did decades ago. So these newly graduated Pharm.D's with their 200k in debt would need to get even larger loans to start up a new business, and they get reimbursed less for it thanks to PBMs, making it hard for the indy pharmacies to stay in business whether they are new or old alike.
> There must be some barrier to entry in the market that prevents that, and that's what I would target.
Training to be a vet is a long process. The patients are nice (mostly), but don't communicate well, and some of the customers are terrible. In my area, there's a shortage of small animal vets because they can make a lot more money in the big city. There's an even worse shortage of large animal vets because the job is worse, and they can make a lot more money working with small animals in the big city. Our large animal vet won't do callouts for emergency/urgent services anymore unless you're on contract for annual checkups; routine visits are good for vet morale and help the budget.
Part of what's happening here is a combo of making a small business being expensive and a good chunk of the population living hand to mouth.
The people with the cash to start the business and get the space and equipment just sold to PE and you have people that were employees and a much smaller number of these people are going to be able to just quit and fire up a business.
> If the PE firm is charging more than a vet operating alone would, then why wouldn't a vet operating alone just undercut the PE firm's veterinary practice?
It takes capital to start a business and people don't have that.
> There must be some barrier to entry in the market that prevents that
People retiring are selling their brick and mortars and the next generation don't have the personal wealth to buy them because they're saddled with medical/education/credit card debt and stuck with bad rent terms that caused low savings.
The only people around to buy the places are private equity.
> If the PE firm is charging more than a vet operating alone would, then why wouldn't a vet operating alone just undercut the PE firm's veterinary practice?
Finance.
Throwing in with the PE firm means you don't have to negotiate real estate leases, don't have to think about POS systems, and don't have to worry about collections.
So, the vet probably gets paid the same and spends a lot more time on being a vet. On the other hand, the consumers spend a LOT more once the PE firm has a monopoly position and switches to gouging them.
You see the same with Dentist, the cost to start a practice after paying for college? Or get a job at a big PE owned Dentist Office and work for commission.
Optum is doing the same thing here in the US PNW for actual doctors' offices. My SO had a mysterious charge suddenly appear in her account that nobody would explain and then she got fired as a patient and sent to collections by them a few years ago. Now that they're buying all of the clinics she essentially can't get in to any providers because of it.
Dentists too.
Something I don't understand is why private equity would destroy a business they themselves own.
It doesn't make any sense - they paid billions for Red Lobster, they made some money, they could make even more by having a viable business.
If this were a publicly owned company I could understand outrage, but it's privately owned, the owner presumably isn't interested in losing money. What's his motivation for taking these steps that are "obviously" bad?
IMO the fundamental issue is that the goal of private equity isn't to save the company, but to make as much money as quickly as possible off of it. The article hits on the exact pattern. Equity strips down a business, does whatever they can to juke the numbers with no concern for sustainability. As soon as they can make the numbers look appealing [enough], they sell it to the next sucker, and that person is left holding the bag, while the PE gets out with a tidy profit. From the article:
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After the real estate move, Golden Gate sold 25% of the company in 2016 to Thai Union, a Thailand seafood company, for $575 million and unloaded the rest of the company to an investor group called the Seafood Alliance, of which Thai Union was a part, in 2020. Golden Gate likely came out ahead, but the same can't be said for Thai Union, which also controls the Chicken of the Sea brand. It is now looking to get out of its stake in Red Lobster...
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The bigger question to me is why there are so many entities interested in buying up businesses from private equity, when this exact pattern has been repeated about a million times. I suppose in this game nobody ever thinks they're the sucker. After all if you can casually toss around billions of dollars, you must clearly have had plenty of financial success at some point, and it most certainly was due exclusively to your exceptional financial genius.
It reminds one of NFTs in a way. Spending hundreds of thousands of dollars on a poorly drawn picture of a cartoon ape is either moronic or brilliant dependent exclusively on whether you're the one left holding the cartoon.
When you value a business, part of it is brand and people's habits. The new owners are betting that they can trade in that value for cash, by selling a crap lesser product under the old name, and that this will return faster than a sustainable business.
It's not obviously bad from a finance point, it's just significantly shorter term thinking than the original owner.
If they can make even more money on a different viable business by vampiring out this one, the NPV calculation says...
(What %age of eastern european enterprises got long term investment in the 1990s?)
Not certain, but I would guess it is to do with investment horizons and getting a 10x return on the money they put in to return to their fund, rather than 1x revenue per year.
Once you realize the destruction of the sunk cost fallacy it's easy to detach from things that would harm you long term.
For the same reason that large tech firms lay off thousands and shutter successful, or yet to be released projects.
Short term gains over a long, steady market is the current driving mentality of Western capital.
Making money off restaurants is incredibly hard. It's just a lousy business. Even well-run, well-liked, well-attended restaurants are often running on incredibly thin profit margins.
Which seems crazy, since the costs of inputs are so low at most restaurants. They pay workers embarrassingly little money, and the ingredients have massive externalities. (Those "endless shrimp" are possible because of literal slave labor and environmental destruction in southeast Asia.)
And yet restaurants bleed money. There are so many invisible costs -- replacing bent silverware, repairing the walk-in fridge, shady suppliers whose produce you have to toss, etc etc etc etc. It's just a crappy business.
A private equity firm may not know how to turn a profit. Or they could run it with a tiny profit that just isn't worth their time and effort, and it's easier to just shutter it. It's a much bigger hardship to the employees than it is to them -- even the potential gains are too small.
The private equity fund who makes the decisions about what to do is buying the company with other people's money. They get a % of the other peoples money they manage as revenue and slice of the profits on success.
Also they often engineer things so the money the fund put into the deal comes back very fast. In this case they sold the companies real estate which got a big chunk of their initial investment back ASAP.
the simplified view - red lobster they bought it for $2.1b - they sold off the real estate for $1.5b and 25% of the equity for $575m - so the PE fund has $25m of their original investment in the deal. They borrowed a bunch of money and then paid out dividends on that $25m that were multiples times that amount.
It's rooted in societal culture and what people incentivize (ie assign the highest multiple to).
Until Americans take on a mindset of longterm/family (as I've seen many Chinese families express), they'll be doomed to make short term decisions. Right now very few Americans are able to accept an optimization that looks like "I invest today, and my grandkids will get the returns". So America is stuck in that local maxima of invest for next few quarters. The obvious tradeoff being the risks/ability to predict the future.
I want my investments to pay back over 30 years to me. I don't care about quarter to quarter returns. I don't need to invest for my grandkids for any of this.
It’s very interesting that you seem to be making a dichotomy between Chinese and American people instead of one between rich and poor mindsets.
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At some point in my lifetime, the mindset switched from "I'm investing because I want to see long-term, steady growth and get regular dividends" to "I want to make as much money as possible as quickly as possible and damn the consequences to others".
The short-sightedness and greed is destroying so much.
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That's the trick though, they don't own it. They often take a company private and make the company "own itself". Then make it take out exorbitant loans to pay them their consultation fees. Then they fuck around as consulting management as the company struggles to meet even the interest payments on the massive loan taken out in its name.
All reward, no risk.
Can we place blame on the people who sell their firms to private equity firms?
It's understandable if you are a small business owner and someone makes an offer which means you can retire comfortably. The blame here is not with those owners, but with the private equity companies that exploit customers, and also the regulators that allow this monopolization & destruction of value to happen.
Not necessarily. I’ve seen it happen involuntarily several times - most recently, a client was acquired by another technology company in a mutually beneficial buyout - however, a year later, the buyer found themselves undergoing a hostile takeover by private equity.
They then gutted everything - all technology teams stripped back to nothing, or a single junior to KTLO as best as possible, all management fired, although of course kept all of sales and marketing. They handle amazingly sensitive data for manufacturers across numerous sectors, including the likes of Apple and BAE, and no longer have any infosec functions.
So in the case of the client, they didn’t sell to PE, and it’s a time bomb I’m quite looking forward to seeing go bang.
In another case, years ago, it was just a straight up hostile takeover initiated by a disgruntled investor who wanted out, and an asset strip followed by administration - we, their main technology partner, got screwed to north of £100k. One of the events that lead to me deciding to quit my previous business, as I couldn’t put down the murderous rage it incited in me. The money was almost immaterial, it was the fact that these fuckers essentially burgled a perfectly good and profitable business and then robbed their entire supply chain, from services to product, and cost several hundred people their livelihoods. Fire and ice in lucifer’s mouth for all eternity for these bastards.
Yeah, a decade on, still haven’t quite put that down - but again, not initiated by anyone who actually had anything to do with the business - I felt terribly sorry for all of them.
Are they entirely to blame? No. Everyone who capitalizes on the deal shares some blame. The consumer and the economy do get hurt. Late stage capitalism is starting to destroy what was good about capitalism and we need regulations to keep things sane.
There is a finite amount of capital in the world (with a little more printed each year of course). But they're not printing 20% more every year, so companies can't keep expecting to grow by 20% every year forever. It's just not possible and once a company reaches certain thresholds, we need regulations that prevent them from destroying the good parts of capitalism for simply more money than they had last year.
I don't have the books of Red Lobster, but the economic rationale is that if the enterprise is continuing to persistently lose money, it is destroying capital not increasing it.
It's likely that the real estate that the Red Lobsters were built on was worth more than the entire enterprise. In such a case the implication is that the ongoing operation is negatively valued. Splitting the real estate off and valuing the restaurants at zero is a rational action -- and good for the economy.
Put a mom and pop restaurant on the spot. Or a nail salon. Or anything that can justify its costs.
"look what they (sellers) made them (PE) do!"
Nope.
Yep.
The "private equity kills beloved brand" stories are usually overcooked, as far as I can tell.
They usually involve PE taking over firms that were already in financial trouble, which is what made them attractively priced to PE in the first place. The PE firm would also prefer to have a nice profitable business, but if they can't turn it around, they have options like asset stripping or selling the name to a different company.
Here TFA mentions "flagging sales" already in 2014.
The most likely alternative to PE "killing" Red Lobster or Sears or Toys R Us wasn't that the businesses restructured with the same management and business model but 25% fewer stores. It was that they went out of business altogether.
I'm worried by PE buying up successful natural mom-and-pop businesses like dentists and vets and worsening the consumer experience at those. Not so worried about them managing the decline of massive national brands slightly more aggressively than another billionaire owner might.
From the article:
> To raise enough cash to make the deal happen, Golden Gate sold off Red Lobster's real estate to another entity — in this case, a company called American Realty Capital Properties — and then immediately leased the restaurants back.
So private equity didn't try to make Red Lobster profitable before stripping it of its assets. That was literally their first move.
Because it was a dead man walking by the time PE bought it. The underlying assets were worth more than the sale price so it was never going to make sense to do anything other than what happened.
With that said, the tax code and employee law could be improved so there are stronger guardrails to protect some stakeholders more.
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That's pretty standard, even for well-run chains. Gives the primary business (making food profitably) a huge cash infusion, and removes a distraction.
Obviously deal terms are important, but that action on its own isn't stripping for the sake of stripping.
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> The "private equity kills beloved brand" stories are usually overcooked, as far as I can tell.
What are some well known examples of "private equity turned troubled brand into wild success" where products become better than ever and consumers couldn't be happier? It seems like all I ever hear are stories where a brand is "rescued" only for it to be butchered for parts in a couple years time.
Maybe Dell? Not exactly a consumer darling, but certainly a successful story for a PE LBO.
There was a side plot of "PE partners with charismatic former founder", but the main story was PE cost-cutting, layoffs and loading the company up with debt.
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Barnes & Noble, maybe?
They were taken private a few years back, and after a long slow period they're expanding again.
It's especially jarring to see a story like this with Red Lobster as its subject.
I'm curious if anyone who has a negative reaction to this article has actually been to a Red Lobster in the last 10 years. They serve poor quality food for similar prices as other sit-down restaurants. You're as likely to get poor service as you are anywhere else (maybe more so), but you'll still have to tip the same amount and spend the same amount of time there. There is no value proposition and certainly no cause for mourning or hagiographies.
> but you'll still have to tip the same amount
Nitpick: You'll have to tip the same amount as another restaurant with bad service. If it's awful enough, that works out to about a 20% discount on the meal.
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> in the last 10 years.
From the article:
> In 2014, amid flagging sales and pressure from investors, Darden sold Red Lobster for $2.1 billion to Golden Gate Capital, a San Francisco private-equity firm.
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>The PE firm would also prefer to have a nice profitable business
Quotation needed. Usually they put no or little effort in this. They want to get their profit by destroying the business, either by breaking it down and selling the parts or by turning it into a shitty consumer-hostile money-grabbing version of its former self
I never understood how PE firms get blamed for rising costs in doctor's offices and vets. If a PE firm can just unilaterally raise prices, then why didn't he mom n pop practices do the same? Where is the competition? Why is there a barrier to entry that prevents some new young doctor or vet from coming in and undercutting the PE business?
It's common for PE to buy many "mom n pop" practices with the goal of reducing competition (eg https://kgnu.org/investigation-finds-that-private-equity-was... )
Reducing the friction of starting new business is good. But I don't think it's sufficient to protect consumers. (If it was sufficient, we wouldn't need antitrust law at all, right?) For example, the rolled-up firms might have economies of scale that allow it to undercut new competitors.
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Presumably because mom n pop businesses are not perfect optimizers and end up charging below the profit-maximizing price
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The two groups have very different goals. One wants sustainable profit running a sustainable business, the other wants short-term profit by any legal means necessary.
> If a PE firm can just unilaterally raise prices, then why didn't he mom n pop practices do the same?
Because they have a connection to their community, which means both (1) they're more vulnerable to backlash, and (2) they don't want to, because it would be taking directly from other members of their community.
Mom-and-pop shops tend to price based on what is fair. PE firms tend to price based on what is profit-maximizing.
The mom and pop, if they raise prices too high, punish themselves when they lose business. Perhaps even to the point of insolvency and folding.
If the PE firm raises prices too high, they don't punish themselves at all, because those customers go elsewhere. "Elsewhere" being just another office/practice which they also own. Mom and pop couldn't do that themselves. They didn't have monopoly-like powers to ensure their success.
> Why is there a barrier to entry that prevents some new young doctor or vet
Because the young ones are getting started, and do not have the capital to start a practice (or to buy an existing one). How much does a dental x-ray machine cost? How much do the dental chairs cost? How much does the lawyer that fills out the paperwork to get the permits for that retail space to be a dental office cost, per hour, and how many hours of paperwork?
>Watching private equity take over and subsequently destroy businesses is so frustrating!
I agree. I uh, hope they don't do the same thing to Olive Garden, or Applebee's. That would be tragic..
The really sad thing is that both of those used to be not so bad. Not good, mind you, but at least palatable. Now they're just nasty.
You keep your hands off Olive Garden.
Olive Garden is garbage, why would I want to put my hands on it?
Only Olive Garden and Chipotle have managed to give me a stomach ache.
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Too late. How much worse can they get at this point?
Ah, American classism, where crap like McDonalds is OK, but pissing on Olive Garden and Applebees is a signal for "I'm not working class, I have taste".
Perhaps because the latter are associated with aspirational working class, which is to be mocked.
The upper middle class and higher going to coffee shops and restaurants targeting them and dialing the pretentiousness and crap fusion food and such to 11 is OK though, that's in high taste. And McDonalds is acceptable too, since it's seen as neutral.
> Perhaps because the latter are associated with aspirational working class, which is to be mocked.
No, what’s being mocked is the quality of the food. The “aspirational working class” in Europe has much better food options for even better prices—has nothing to do with classism and everything to do with the development of an American culture that ruined food in this country.
My grandparents grew up in rural Appalachia and what they prepared themselves and ate back then was much tastier and fresher than Olive Garden.
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I'm classist I guess but McDonalds is really not OK unless I need some fries on a long drive.
But people can eat whatever they like/can afford/find convenient.
I mean, if McDonald's along with every restaurant in SoDoSoPa wanted to join Olive Garden and Applebees on a voyage into the sun, that wouldn't be a bad thing.
The fundamental problem is that all of these businesses are devoid of soul, and the majority of the profits don't go to the people working them.
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Similar story with Sears. Bought by a real estate investor who didn't care about running the stores that much...
Wait until you hear about Thames Water and Maquarrie in the UK.
https://www.theguardian.com/business/2023/jul/10/as-thames-w...
I wouldn't expect anything to change now. This is essentially what we're all doing to Earth: wringing it dry because we know we'll be dead before the oil runs out. People stopped dreaming of something better a long time ago.
We didn't stop dreaming: it's just that we have not yet found non-polluting oil!
Private Equity is a scapegoat business. Like Ticketmaster.
If you have a company that's been slowly failing for a while, PE is here to help you out.
They will pay you money today and take over the company and in 3-5 years it will go out of business in a convincing way. And PE will take the heat.
That belies that fact that the play is usually to finance a bunch of debt to prop it up, pay themselves PHAT bonuses, and then let it burn to the ground. Honestly, it's gotten way past tiring that the government continues to let this same scenario play out over and over and over again.
Well, they have to make money somehow. You can't just buy a failing business, run it into the ground completely, and take the blame without being compensated.
If these businesses had a promising future, the owners would have been less interested in selling, someone interested in actually operating the business would have made an offer, or it could have been publicly traded.
Eh, PE also takes over businesses where the owners just want to cash out. Plenty of businesses too small to IPO but plenty of revenue to sell to PE.
I used to feel the same, but eventually I came to understand that they have a tremendously important role in the business ecosystem.
Like sharks in the sea or wolves in the wilderness, they identify and remove sick and ailing businesses. Additionally they offer a convenient exit to tired owners and investors, thus incentivizing further business creation. Finally, they identify and exploit regulation-created monopolies, enabling the government to re-allow competition through deregulation - something more and more important in today's populist and regulation-happy climate.