Most deals are successful under their management, and this is why banks usually lend 70-90% of the purchase funds.

They specifically target companies that are undervalued, in distress, and can be turned around or liquidated for more than the cost.

PE isn't an exotic business philosophy. It is literally just a private buyer.

PE here acts like a fungus unlocking the energy stored in dead trees that have fallen to the forest floor. :P If this is good nor not depend on if you're one of the creatures that has made their home in the log, if you're the fungus, or if you're the newly growing shoots that appreciate clearing out the obstructions.

PE "vulture capitalism" is profitable because it takes advantage of vulnerable people who want to see their dream continue. and yes, the execs at $1.5bn companies can still be vulnerable people who want to accomplish something in the world.

the argument that PE firms are skilled managers only holds water if they actually turn the companies around and make them succeed. but more often than not they don't, they're burning things down to milk as much profit as they can before the end.

sometimes the company is worth more dead than alive, the parts are worth more the whole, especially when you can leave someone holding the bag, and the PE company gets paid to make them dead.

in any event the company is worth more to an extremely unscrupulous buyer than as a going concern in public markets.

https://www.dailymotion.com/video/x4348lj

Strong companies usually aren't killed in this way. They are making everyone money and their share price is too high to allow activists to get a controlling interest.

"Regulations are lobbied to the ground" is not what is described in the article. The regulation was to conserve fish, and it was so onerous to comply with that only large companies could do it efficiently. Assuming this description is accurate, regulation (i.e. non-free markets) is causing this side-effect of consolidation.

Now, is the regulation worth the side effect? If the consequence is overfishing, yeah, I'll take a little hit to market efficiency to avoid tragedy of the commons. Avoiding tragedy of the commons is a great thing for the government to regulate. The flip side is that the government should have enforced anti-trust better to prevent the consolidation.

I think the parent post is a fundamental misunderstanding of what markets are intended to do. If you want a static world that doesn't and can't change, then of course something like a command economy is preferable

Yes, there was a time during industrial revolution when laissez faire was experimented with in a region of England. It ended up in a total hellhole apparently. Also it looks like it was tried in Norway to a lesser degree and it ended up in another hell:

https://www.quora.com/What-would-happen-if-the-Nordic-countr...

"Red Lobster failed because of X corporate restructuring," "Red Lobster succeeded due to Y ad campaign." People go to restaurants for reasons completely unrelated to things like that. Those things are important, but just constitute the small slice of reality that can easily be measured.

I saw a Twitter thread arguing how the video game Stardew Valley succeeded due to the way it was marketed. Marketing is important, but maybe the game succeeded because it was cute and had a soul and is fun to play. You can't measure that.

I too have a few local places that despite being busy and great food for ages, suddenly couldn't keep good people working there. They were doing great then just fell on their face.

I suspect that they just couldn't adapt to it being more difficult to retain / keep good people and everything else suffered.

Dominoes Pizza (US national pizza chain), seems to be the alternate story, long time bargain pizza chain with poor quality.... got better quality pizza and reportedly took off again.

I'm not so sure that Red Lobster would have survived if instead of lowering the quality of the product they'd have just raised the prices by say 80% overnight. I mention 80% because that's how much many hospitality businesses have raised prices in my area in London since the pandemic.

I've seen businesses go bust here that have tried both things:

- lowering quality and raising the prices by less than the average

- maintaining roughly the same quality and service but raising prices drastically

Plenty of examples in my area of businesses just collapsing with either strategy. People simply would not accept the new prices in many cases.

A business that is sort-of a luxury business like those specialised in oysters, shellfish in general, high-end cuisine etc only a very select few have survived. Those that are large chains have suffered the most, because they are not seen as so much of a special expenditure and people would just stop going.

Red Lobster perhaps would have fared better by not reacting and simply raising prices. Who knows, it's easy to make the counterfactual scenario in the abstract.

This is just demonstrably false. Good food and service is no guarantee of product-market fit.

Do they want Red Lobster to be socialized and run by the government for the public good? Should it be deemed a historic or essential business, with laws to ensure it lasts until the end of time? Do they really think owners shouldn't be able to sell companies they own, or "bust them out" (aka, simply selling off assets for profit).

If a company makes $X in reveune and has $X - Y (Y<X) in costs that doesn't seem to me like a dieing company. Of course if you use PE to purchase that company and add in $2X in costs then it sounds like a dieing company. However, it was perfectly fine until you came along and strangled it.

The price of RL share prices is pretty irrelevant to whether PE can kill it or not. Honestly the higher the price the better it is. If you can spend $100M to buy a company and gut it for $300M that sounds a lot more attractive then buying 100 $1M companies to gut for $3M a peice.

The system is full of perverse incentives.

I guess the reason that isn’t true is differing time horizons. If the consequences of the deal only become apparent years later, then the PE firm can sell the business before the chickens come home to roost.

But how do they sell Red Lobster without the buyer realizing what is going to happen? Who would be dumb enough to buy from a company that has a history of crippling companies it owns then selling them to suckers?

Holding a ton of a cash locked up in assets is highly inefficient.

Google did this - sell a building they own and lease it back. Do something else with the money.

The nice thing about the lease is that it’s a tax deductible expense for the business, and if you no longer need it, just don’t renew the lease.

Take a small restaurant. Grandad bought the building 50 years ago. That's long since paid off.

The restaurant makes say 10k a month. Good honest business. But the building/land is worth say a million.

The owners don't care, it's paid off. The business makes a good living.

So I come along and offer 500k for the business. That's basically 4 years profit up front. They want to retire soon, so that's good deal. But I turn around and sell the land for a mil. I've made a big profit, and since rent is now 10k, in only a few months the restaurant goes under.

The root problem is that the business is delivering a really poor return on asset value. Which opens the door to someone buying the assets, not the business.

You can get away with cutting quality for a little while, but eventually customers are going to lose trust and you're not going to get it back.

A good portion of this is cartels that could be squashed. Notably, real estate (commercial and otherwise, driving up the single biggest cost of business/living). But, then, you'd have to deal with the people who rely on cartel-ized pricing power for their income, investment collateral, etc. (But someone is going to get thrown under the bus, so might as well be them.)

People will say it's all about greed, or whatever. But it's not 'the rich' buying these PE investments. It's public pension funds (i.e., government workers, teachers, mailmen). It also has nothing to do with the interest rate (although that certainly enables it, it doesn't explain the demand for the investment vehicle itself or the source of funds).

According to a study from UNC Chapel Hill [1], public pensions comprise 31% of investors at PE funds and 67% of capital.

That means that, while it's true that perhaps the other 69% of investors are the supposedly greedy rich, if it were just them investing, PE would be 3x smaller than it is today.

We have to face the truth which is that these sorts of deleterious economic effects that occur as a result of PE takeovers are due to unfunded public pension liablities.

[1] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4283853

They wanted Darden to liquidate all of Olive Garden's real-estate holdings and declare a one-off dividend that would net investors a billion dollars, while literally yanking the floor out from beneath Olive Garden, converting it from owner to tenant, subject to rent-shocks and other nasty surprises.

They wanted to asset-strip the company, in other words ("asset strip" is what they call it in hedge-fund land; the mafia calls it a "bust-out," famous to anyone who watched the twenty-third episode of The Sopranos)

The giant slide-deck making fun of Olive Garden's food was just a PR campaign to help it sell the bust-out by creating a narrative that they were being activists* to save this badly managed disaster of a restaurant chain

This is the same story that explains why health care is ridiculously expensive in the US, why we’re unable to supply our military at prices comparable to other nations, why we’ve seen so many price increases across the economy in recent years, etc. Consolidation and unchecked market power abuses. It probably ends with a new Depression that triggers reform, if we’re extremely lucky.

Let's use a metaphor HN might understand: sale-leasebacks are a bit like migrating to the public cloud from an on-prem setting, and in some cases the government pays you for migrating to the cloud. It helps you balance capital expenditure among other things.

The general public doesn't give a rat's ass about business strategies and nor should they.

If you really enjoyed patronizing a particular business and then they go out of business or change in such a way as to remove what you enjoyed, you're going to be a bit upset about that regardless of how sound the business decision was.

You're completely correct. Everything described in the article was completely legal.

The things that are illegal, like overfishing protected waters, the company doesn't do. Instead, they lobby to make it legal, then do it.

See, all above board. It's all legal. Why would anyone get upset about a company that isn't breaking the law? If it were wrong it would be illegal, right?

While I can’t vouch for the accuracy of the strategy, the comparison with there health industry jives with my own experiences. Insurance companies buying up hospital chains to compete against pharma and gutting them in the process. When it’s hospitals shutting down instead of Red Lobster maybe people will understand.

On one side this is a study in destroying a chain restaurant, but what'll be taught in business school will be the other side: was this transaction profitable for one party and if so how do we repeat it? It won't be taught as a cautionary tale unless the hedge fund lost out.

https://news.ycombinator.com/item?id=40238807

I think many millennials would be fine with Red Lobster quality food, if it were quick enough for lunch. But the format is slow, sit-down service. And the atmosphere in these restaurants is not what millennials are looking for to relax or entertain.

But, that's assuming that the more well-off generations aren't going. I dunno if that's the case; things other than revenue can be squeezing RL.

The current owner (for the last 8 years) is the multinational seafood company Thai Union. They conducted a 150million stock buyback the same quarter they declared bankruptcy for Red Lobster, and are doing fine.

Option b, you grow super fast, you have a lot locations, each one barely profitable, but you make it up on scale. You scale quickly enough that you make a lot of money before trends change. They key is that you accept that you're chasing a trend and move as quickly as possible to extract as much as you can.

Option c, you come up with the core concept, and you create a franchise program. You make your money off franchise fees & shadier stuff like making the franchisers use suppliers that you own. The franchises die when trends change but some made a profit, and your capital outlays were never very high, so you make a lot of profit.

$CAVA, $WING, $SG, $SHAK, $TXRH... lots of names that will either be the next $CMG or crash back to earth when the next trendy restaurant catches the attention of social media.

I think a lot of young people are abandoning older brands like McDonalds in favor of these trendier options, so there's a lot of business there if a new brand can capture it. But like you say, nothing lasts long in that industry.

Bill Ackman (founder of Pershing Square Capital Management), for one: https://lexfridman.com/bill-ackman-transcript#chapter4_inves...

Margins are good. Spoilage is a non-issue.

Orders are pickup or delivery.

I can bring 10 pizzas to every party.

this would include coffee shops and other relatively low cost establishments

> Tons of capital investment

I mean it's not that much capital, compared to most businesses. You need way more money to start a software shop than a restaurant.

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.

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.

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.

The vampire capitalists did the standard playbook:

  leveraged buyout.  
  transfer debt to the once healthy company.  
  extract yearly management fees.  
  fire and/or encourage many employees to leave.  
  shift maintenance to low cost foreign outsourcing company.    
  skimp on R&D and customer support.  

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.

When the PE firm took over red lobster, it wasn't a thriving business. They made a gamble: if we sell the land, we can pay down the debt to reduce interest payments and restructure it into a profitable business.

It was always a risky proposition, but the alternative was probably slow decline. The PE firm lost their gamble and they suffered the losses for it.

If the PE firm sold the land to a landlord they owned at discount prices, then yea, that would be a conflict of interest but that isn't what happened.

Isn't this what Gordon Gecko did in the movie Wall Street? Look for asset-rich companies, buy a controlling interest of the stock (the equivalent of the PE leveraged buyout) then strip them for parts? Also, wasn't that a cautionary tale of the worst of the 80's vs. a "how to" manual?

It's been a grand mess from day 1. All of PE's common failings are on display for the 100s of millions of premier league viewers.

* Arrogantly uprooting working structures because PE knows better

* Lack of domain knowledge means over reliance on flimsy statistics

* a general sense of discomfort for every working member of the club

* Optimisticly dumping money to exploit so called loopholes that somehow every other team had missed (they hadn't, the loopholes were double edged swords)

* Destruction of legacy, eliminating the emotional aspect that keeps someone supporting a team.

* Haphazard changes with large impact that get touted as reform, but come across as cluelessness.

And this a *good* PE firm who is pouring money into an asset that is likely grow as the market grows. So not exactly a pclueless best.

_____

I've supported Chelsea for 20 years now, and 2022-24 was the only time my love for it has diminished.

What if VC and shareholders are just fulfilling their purpose in the capitalist circle of life? We can think of them as jackals, buzzards and bacteria combined into a superform. They cull herds, piece off the carrion and decompose what's left.

They are bringers and eaters of death, working as one.

They've managed to con a huge number of people into agreeing that they should have unchecked power and that government (that thing 'we the people' have direct influence on) is the real problem. It's shocking to me how many people fell for it and would rather be ruled over by corporations than government even through they don't get any kind of vote for who their corporate masters are, while we can (ostensibly) vote for our government officials and vote them out if they displease us, replacing them with someone more aligned with our interest.

Increasingly government is either bribed into letting corporations do whatever they want, sabotaged by regulatory capture, or stripped of their power by the people who have either been suckered into voting against their own interests or who fantasize about one day being able to carve out their own fiefdoms full of peasants they can chain and exploit

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?

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.

I agree. I uh, hope they don't do the same thing to Olive Garden, or Applebee's. That would be tragic..

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.

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.

I’ve been through a few depositions and anyone can leave for medical reasons. It’s not like there are bailiffs there forcing you to attend. Even with the most basic of cases, I can just walk out and tell my attorney to reschedule. I may have to pay other counsel’s fees, but I expect with the reason “I’m having a miscarriage” no judge is going to uphold their claim.

https://news.ycombinator.com/item?id=40238807

My homeless ex wanted RL for her bday last year. All of us and the families took her there for dinner. For me it was comparable to Walmart canned and frozen. She was happy enough with it but then she fixates on things.

I came in to the restaurant and there was no one at the front desk, but the place seemed to be operating normally so I just went on to seat at the nearest table I found. Waiters just started ignoring me; at some point I realized this was on purpose. Wtf.

Anyway, after like 20 mins. I stand up and ask one of the guys "what's going on?". He tells me that they knew I was there (!) but decided to ignore me because no one "seated me at that place". I tell him, well, do that now ... the guy just tells me they don't want to do that anymore because I should've done it when I entered the restaurant, then just like that asks me to leave the place (wtf x2).

I tell him that's ridiculous and he just says "I'm calling security" and walks away. After a few minutes, two huge guys come to my table and ask me what the problem is (they were actually quite polite). I tell them, I just walked into the restaurant, sat here, and just want to order something. They look at each other a bit confused (who knows what the waiter told them), ask me if that's it, "yes", ..., "ok, wait here a bit". After another like 10 mins., a different waiter comes up and starts catering to me.

Everything was normal afterwards, but that was super weird. Imagine getting beat up for walking into a restaurant and wanting to get some food.

Needless to say I never came back as the food turned out to be quite average, definitely not worth fighting for it, lol.

(It's not anyone you saw at the restaurant...)

When I started making my own money, it was one of my regular indulgences.

As an adult, I rarely ever see them anymore. And when I do go (it's been years), I'm always left feeling sick to my stomach, and yet still hungry. The portions sizes have shrunk considerably, even more shrinkflation. The greasiness, while expected with that kind of food, it so much worse. The fries are soggy, and you hardly ever get any crunchies anymore!

I missed the late 90's LJS something terrible. :)

How many private equity acquisitions are like this but circumstances are less obvious and the measurers to rescue need to be more involved than just waiting for a pandemic to end? I genuinely don't know. But I suspect that it's very easy, looking in from the outside as a customer, to come to the conclusion that the business went bad when private equity came in when the business was already struggling but prior leadership was avoiding dramatic changes.

Ah, culinary wisdom based on internet memes and bro quotes: the cockroach of the mind!

>ate a few and back at the hotel you know what happened :)

Reverted to the fast-food baseline?