How Private Equity Consumed America

Summary

The video script discusses the concept and practice of private equity, highlighting both its potential for revitalizing companies and the risks it poses. It uses the example of Yahoo, which after a decline was bought by Apollo Global Management and revitalized under new leadership. The script also contrasts this success story with the failure of Marsh Supermarkets, which went bankrupt following a private equity takeover. It delves into the structure of private equity firms, their fee models, and the use of leveraged buyouts. The narrative criticizes the industry for its focus on short-term gains over long-term sustainability, leading to job losses, reduced service quality, and even bankruptcy for acquired companies. The script concludes with a reflection on the human cost of private equity practices and the emotional detachment that allows for exploitation in the name of profit.

Takeaways

• 💼 **Private Equity Basics**: Private equity (PE) firms invest in companies, restructure them for growth, and then sell for a profit.
• 📉 **Yahoo's Decline**: Yahoo, once worth more than Amazon and Apple combined, declined after rejecting Microsoft's bid, eventually being sold to Verizon and then Apollo Global Management.
• 🔄 **Transformation Strategy**: Apollo Global Management, under Jim Lanzone's leadership, focused on Yahoo's core assets like Yahoo Finance and Yahoo Sports, selling off other assets to refocus the company.
• 📈 **Growth and Profitability**: Through strategic sales and focusing on successful divisions, Yahoo reportedly became profitable, with an IPO potentially in the future.
• 🤵 **General Partners**: PE firms are typically led by experienced individuals known as general partners, who use their connections to raise funds and invest in companies.
• 💰 **Firm Earnings**: PE firms earn money through a 2% annual fee on all money and a 20% performance fee on returns above a certain benchmark, often resulting in significant income for general partners.
• 🏢 **Leveraged Buyouts**: PE firms often use leveraged buyouts, where they borrow money to buy companies, amplifying potential earnings but also increasing risk.
• 🛒 **Asset Sales and Leasebacks**: PE firms may sell and lease back company assets to generate immediate cash, which can be used for further investment or to pay down debt.
• 📊 **Consequences of PE Ownership**: The pursuit of efficiency and cost-cutting by PE firms can lead to negative outcomes like job losses, reduced service quality, and even bankruptcy for acquired companies.
• 🛍️ **Impact on Local Communities**: Closure of local businesses, like Marsh Supermarkets, after PE ownership can have significant social and economic impacts on communities.
• ⚖️ **Tax Advantages**: The income of general partners from performance fees is often taxed at the capital gains rate, which is lower than the rate for traditional income, further incentivizing aggressive growth strategies.

Q & A

What is the basic premise of private equity investing?

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 reject Microsoft's purchase bid in 2008?

The script does not provide a specific reason for Yahoo's rejection of Microsoft's bid, but it mentions that the decision led to a decade of decline for Yahoo.

Which private equity firm bought Yahoo after its sale to Verizon?

Apollo Global Management, a large private equity firm, bought Yahoo after its sale to Verizon.

What was Jim Lanzone's previous experience before being appointed to lead Yahoo's turnaround?

Jim Lanzone had previously worked at Ask.com, CBS's digital business, and briefly as CEO of Tinder, which gave him experience in turning around and leading digital businesses.

What were the two key assets that Apollo and Yahoo's new leadership team decided to focus on?

The two key assets that Yahoo decided to focus on were Yahoo Finance and Yahoo Sports, as they had maintained a strong reputation in their respective fields.

How does the private equity firm make money from its investments?

Private equity firms typically charge a 2% annual fee on all money invested, regardless of performance, and a 20% performance fee on any returns above a predetermined hurdle rate.

What is a leveraged buyout and how does it amplify potential earnings 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 strategy amplifies potential earnings by allowing the firm to acquire larger companies and increase the value of their investments.

What was the fate of Marsh Supermarkets after its acquisition by Sun Capital?

Marsh Supermarkets filed for chapter 7 bankruptcy in 2017, closing all locations and liquidating assets. The company struggled to keep up with rent payments and pay vendors under Sun Capital's ownership.

How does the private equity model potentially impact employees and consumers?

The private equity model can lead to layoffs, reduced service quality, and increased prices for consumers. Employees may face underfunded pensions and job losses, while the focus on short-term returns can lead to long-term negative consequences for the companies involved.

What are some of the negative outcomes associated with private equity ownership?

Negative outcomes of private equity ownership can include company bankruptcies, increased mortality rates at nursing homes, and a higher likelihood of layoffs. The focus on efficiency and cost-cutting can lead to a decline in the quality of products and services.

Why is the general partner in a private equity firm incentivized to maximize firm gains?

The general partner is incentivized to maximize firm gains due to the compensation model, which includes a significant share of the performance fee from investments that exceed the hurdle rate. This fee is treated as capital gains, leading to a lower tax rate and potentially substantial personal income.