Comment by munificent
2 years ago
I look at private equity as sort of like a bacterial infection. The infection may be the thing that kills its host by sucking of all of its energy, but the reason the host was infected in the first place was because of some other problem that led to a weakened immune system.
Private equity firms prey on companies that are already struggling. Yes, they take a struggling company and hasten its demise. But healthy companies don't end up getting bought by private equity in the first place.
In this case, I think dining culture has just changed in a way that's incompatible with Red Lobster's brand. It used to be considered higher-class fare, but drifted down market like almost every large restaurant chain does (see also: Friday's, Applebee's, etc.). For a while, it survived on the unusual combination of being a nice-seeming sit-down seafood restaurant, but not actually that expensive or close to the sea.
But, of course, the way they were able to do that was by cutting every possible corner (for example, calling langostino "lobster"). Diners today care more about their health and where their food is coming from. The post-WWII culture of "we can trust big companies because they're successful business" has been replaced by "we can't trust big companies because they must have grown by doing shady shit".
Frankly, a cheap restaurant in the midwest that lets you eat unlimited lobster no longer seems a delightful treat and a hell of a lot more like a suspicious food poisoning trap.
> look at private equity as sort of like a bacterial infection
This is honestly fair given bacteria’s ecological role as digesters/recyclers. There are probably better things to do with Red Lobster’s locations and people than serving terrible seafood.
And what's more likely, that they do that or that they leave a bunch more dead real estate for at least several years while they hold out for more money?
If Red Lobster can't pay their rents then the market is saying they should be dead. Presumably the owners of the properties wouldn't ask for those rents if that wasn't what the market would bear. Of course some properties sit idle for a while; there's going to be an optimal rate of that that isn't zero.
Seems like they exist to basically sell off a brand.
People thinking that Red Lobster is a good place to eat is a valuable asset, which can be traded for short-term profits until they catch onto what's actually going on.
Yeah, that's a good point.
One way to look at private equity is that they are playing an arbitrage game between the perceived value of a brand and the actual worth of the products the brand produces.
In a world where people had better access to true, recent information, perceived brand value wouldn't lag actual product value as much and there would be less opportunity to exploit the arbitrage.
> Private equity firms prey on companies that are already struggling. Yes, they take a struggling company and hasten its demise. But healthy companies don't end up getting bought by private equity in the first place.
From the finance/economics perspective, what should be the ideal replacement for Private Equity?
At least for me they seem like a part of the ecosystem responsible for extending the lifespan of some companies and eventually maximizing revenue in those that has success, and this premium is used to cover the losses in other bets.
I've been at 2 companies acquired by private equity firms. In one case, the company was totally healthy in the niche market of software for libraries. The company was sold because the owner wanted to retire.
The vampire capitalists did the standard playbook:
In the short term, profits go up. Long term, the once healthy company slowly dies, as customers get pissed to the point they are willing to incur the cost of transitioning to a new vendor.
Not only was this company once healthy, it had astonishing employee retention. We are talking many programmers and support people with 20+ years of specialized knowledge. People seem to forget how much productivity is lost with high turnover.