Comment by civilized
2 years ago
Good point. I think this changes the story a bit. It's not exactly that PE is predatory. If PE were unlocking the value of assets held by an underperforming company, the transaction could be explained as the creative destruction of capitalism making room for something better to hold those assets.
In this case, it's more like private equity wasn't as smart as Red Lobster's owners, so now Red Lobster's owners have extra capital to allocate in the economy. Which is also arguably good.
If you liked the restaurant, of course, none of this is much comfort. But if nobody with a ton of money thinks Red Lobster is a good use of capital, from either a financial or sentimental perspective, it may go the way of the dodo.
Correct. Everything is working fine. If those individual Red Lobster locations are making money, they will continue to exist because the lenders will get paid back more by cutting a deal and continuing to operate than by closing the restaurants. If the individual restaurants are not making money then they will close, as they should. The overall demand for restaurants is unchanged in either scenario, so if they close, their place will be taken by other restaurants.
And I suppose the individual owners were paying rent in some form to Red Lobster Inc, since it owned the land? It might be that all that changes for them is who they write the check out to. And possibly the amount, if Red Lobster Inc was in the habit of subsidizing its locations.
The PE playbook (assuming 5 year term):
1. buy asset-heavy companies with good cashflow and add to you portfolio. 2. aggressively cut costs on long-term investments like R&D, major capital projects, and squeeze OPEX 3. at the same time focus solely on S&M. If possible get everyone on multi-year contracts that last until year 6 (often with heavy discounting on the back end) 4. shed impressive dividends over the term 5. years 3-4 make signalling investments that hint towards hockey-stick growth: (real life) examples: 1. replatform your database from on-prem to AWS, 2. move OFF aws to fixed-provisioned (I'm not making this up) 6. shop for a new PE fund to sell. Look for a 3x or higher multiplier on initial investment 7. sell, repeat, parchute in your bench of executives.
Eventually you've got a bunch of companies that look like subprime-backed CDOs
It sounds like a legal pump-and-dump scheme with sophisticated counterparties. You would think that the counterparties would wise up over time?