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.

Outlines

00:00

📈 The Concept and Challenges of Private Equity

Private Equity involves taking investor money to buy, restructure, and sell companies for profit. However, it’s not always successful. For example, Yahoo's market value plummeted from over $125 billion to $4.8 billion before Apollo Global Management bought it. Apollo, known for its controversial history with figures like Leon Black, aimed to revitalize Yahoo with new leadership under Jim Lanzone, who had prior success with Ask.com. Yahoo's transformation involved selling off non-core assets like Yahoo! Japan and Edgecast, focusing on core strengths such as Yahoo Finance and Yahoo Sports, which saw significant growth and new leadership. This restructuring has reportedly made Yahoo profitable again and poised for an IPO.

05:03

🔍 Understanding Private Equity Firms

Private equity firms are centered around General Partners (GPs) who leverage their networks and expertise to raise funds and invest in companies. Notable GPs include Mitt Romney of Bain Capital and Steven Schwarzman of Blackstone. These firms make money through a 2% management fee on all funds and a 20% performance fee on returns above a set hurdle rate. Leveraged buyouts (LBOs) amplify potential earnings by using borrowed money, but also increase risks. The tax structure favors GPs by taxing their earnings as capital gains rather than income. This system incentivizes GPs to maximize firm gains, often through aggressive strategies.

10:05

📉 The Downfall of Marsh Supermarkets

Marsh Supermarkets, a regional grocery chain, expanded rapidly in Indiana and Ohio before being bought by Sun Capital Partners. Under private equity ownership, the chain faced significant changes, including asset sales and store renovations. However, these moves, including sale-leaseback arrangements, strained the company’s finances. Despite initial sales boosts, long-term strategies failed, leading to bankruptcy and the closure of all Marsh locations in 2017. This example highlights the detrimental impact private equity can have on regional businesses, employees, and local communities.

15:09

🏬 Consequences of Private Equity Ownership

Sun Capital’s ownership of Marsh Supermarkets resulted in bankruptcy and significant financial losses. Despite failing to recoup their investment, Sun Capital still profited from management fees and asset sales. The closure of Marsh locations had severe effects on communities, turning areas into food deserts and undermining employee pensions. This case exemplifies a broader pattern where private equity firms prioritize short-term gains over long-term stability, often at the expense of employees and consumers.

20:11

💼 The Dark Side of Private Equity

Private equity’s focus on efficiency and cost-cutting often leads to negative outcomes, including layoffs and reduced service quality. Industries like healthcare, regional groceries, and casual dining chains are particularly affected. PE-owned companies see higher bankruptcy rates and, in the case of nursing homes, increased mortality rates. The drive for profit, enabled by leveraging and incentivized by favorable tax treatments, encourages practices that prioritize short-term financial gains over sustainable business health. This system benefits a small number of individuals at the top while often harming employees and consumers.

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The script transitions to a sponsor message, promoting Brilliant as a learning platform that simplifies complex STEM subjects through interactive exercises. Highlighting a course on large language models, the ad emphasizes Brilliant’s approach to breaking down topics into small, manageable chunks that can fit into daily routines. This method makes learning more accessible and practical for users, encouraging continuous self-improvement. The ad offers a free 30-day trial and a discount on an annual subscription, encouraging viewers to explore Brilliant’s educational resources.

Keywords

💡Private Equity

Private Equity refers to investment funds that pool capital from various investors to buy, manage, and sell companies with the goal of generating a profit. In the video, it is discussed as a concept that can transform companies but also carries risks, as exemplified by the story of Yahoo and its acquisition by Apollo Global Management.

💡Leveraged Buyout

A Leveraged Buyout (LBO) is a strategy where a company is purchased primarily using borrowed money, with the assets of the company serving as collateral for the loans. The script mentions this as a common method used by private equity firms to amplify potential earnings, although it also increases the potential for loss.

💡General Partner

In the context of private equity, a General Partner (GP) is an individual or a firm that manages the private equity fund. The GP is typically responsible for sourcing, managing, and exiting investments. The video highlights the role of GPs like John W. Childs in raising funds and making investment decisions.

💡Management Fee

A Management Fee is a fixed annual fee that private equity firms charge their investors, usually around 2% of the assets under management. It is used to cover the operating expenses of the fund. The video explains that this fee is a consistent source of income for private equity firms, regardless of the fund's performance.

💡Hurdle Rate

The Hurdle Rate, also known as the preferred return, is a minimum rate of return that private equity firms must meet before they can receive additional performance fees from their investors. The video uses the hurdle rate to illustrate how private equity firms incentivize themselves to exceed a certain benchmark and earn a performance fee.

💡Performance Fee

A Performance Fee is a share of the profits that private equity firms earn if the fund's returns exceed the hurdle rate. Typically, this is around 20% of the profits above the hurdle rate. The video emphasizes that this fee structure can lead to significant earnings for the general partners, especially when leverage is involved.

💡Yahoo

Yahoo is presented in the video as a case study of a company that was once highly valued but later struggled and was eventually sold to Verizon. It was then acquired by Apollo Global Management, a private equity firm, which represents a typical scenario of private equity involvement in turning around underperforming companies.

💡Marsh Supermarkets

Marsh Supermarkets is used in the video as an example of a company negatively impacted by private equity ownership. After being acquired by Sun Capital Partners, the supermarket chain faced financial difficulties, leading to its closure. This illustrates the potential risks and downsides of private equity investments for the acquired companies and their stakeholders.

💡Sale-Leaseback

A sale-leaseback transaction is when a company sells an asset and then leases it back from the new owner. The video describes how Sun Capital used this strategy with Marsh Supermarkets, selling off properties and then collecting rent and commissions, which contributed to the financial strain on the company.

💡Artificial Intelligence

Artificial Intelligence (AI) is mentioned in the video as a groundbreaking technology comparable to the internet. The video suggests that understanding AI is important, especially as it becomes increasingly relevant to various industries, including finance and private equity.

💡Brilliant

Brilliant is an educational platform that offers courses on complex subjects, including AI and large language models. The video recommends Brilliant for those interested in learning about AI and other STEM subjects in a digestible and interactive way, emphasizing the practical application of such knowledge.

Highlights

Private equity firms operate by investing in struggling companies, restructuring them, and aiming to sell for a profit.

Yahoo's decline after rejecting a Microsoft acquisition offer led to its eventual sale to Verizon for a fraction of its peak value.

Verizon's merger of Yahoo with AOL resulted in a significant loss, eventually selling to Apollo Global Management.

Apollo Global Management, under the leadership of Jim Lanzone, focused on Yahoo's core assets like Yahoo Finance and Yahoo Sports.

The strategic sale of Yahoo's non-core assets allowed Apollo to recoup its initial investment.

Yahoo's transformation under Apollo included cutting off non-essential assets and focusing on profitable divisions.

Private equity firms typically operate through a General Partner who raises funds and manages investments.

General Partners in private equity firms are incentivized by a 2% management fee and a 20% performance fee.

Leveraged buyouts are a common strategy where private equity firms use borrowed money to magnify potential returns.

The case of Marsh Supermarkets illustrates the potential negative outcomes of private equity ownership, including bankruptcy.

Private equity firms often focus on industries like regional grocery chains, casual dining, and healthcare.

The consequences of private equity involvement can include job losses, increased costs for consumers, and reduced service quality.

Private equity ownership has been linked to higher mortality rates in nursing homes and increased likelihood of bankruptcy.

The general partner's compensation model encourages growth at all costs, which can lead to exploitation and negative human impact.

The distance between decision-makers and those directly affected by their decisions allows for easier exploitation in private equity.

U.S. tax authorities treat the general partner's earnings as capital gains, resulting in a lower tax rate compared to traditional income.

Artificial intelligence is a growing focus in finance, with potential implications for how private equity and other sectors operate.

Brilliant.org offers courses on complex subjects like large language models, making them accessible through intuitive teaching methods.

Transcripts

Private Equity is a great idea… in theory. Funds  take investor money, buy a bunch of fledgling  

or faltering companies, shuffle around their  structure and leadership and operating model,  

grow their worth, then sell them a few years  later for a profit. What’s wrong with that? 

For example: do you remember Yahoo? In the early  2000s, it was an icon of the early internet. It  

was consistently worth more than Amazon and  Apple combined. Its market-cap reached a high  

water mark of over $125 billion. But today, it’s  known for what it isn’t—after rejecting a $44.6  

billion purchase bid by Microsoft in 2008, a  decade of decline led to its eventual sale to  

Verizon for a humiliating $4.8 billion. Verizon  then merged the company with AOL, previously  

bought for $4.4 billion, but after the downward  trend continued Verizon finally sold the combined  

company for just $5 billion—an enormous loss. The buyer was Apollo Global Management—a behemoth  

private equity firm previously headed by Leon  Black until his $158 million in payments to  

Jeffrey Epstein emerged in the media. Through  the years, Apollo has owned and transformed  

companies like ADT, Chuck E. Cheese’s,  Qdoba, and AMC Theaters, but this time,  

they believed there was value to be had in  the beleaguered web services company, Yahoo.  

For their strategy to work, they needed  a leader, and for that they turned to  

experienced businessman Jim Lanzone. Part of  the reasoning was surely that this wouldn’t  

be the first time Lanzone attempted to turn  around a faltering internet business. He made  

a name for himself while working at Ask.com.  This company started as Ask Jeeves—an early  

and promising competitor in the search engine  space focused on natural-language processing,  

much like today’s AI-driven chatbots. Google,  of course, won that competition, so the company  

pivoted its business model to center on  questions and answers, rather than search,  

and correspondingly rebranded as Ask.com. It was  around then that Jim Lanzone was appointed CEO,  

and while always overshadowed by the company’s  fall from its promising early days, Lanzone was  

recognized as having finished his term as  CEO with the company on a firmer footing,  

and is therefore credited for its continued  survival. In the years that followed,  

Lanzone went on to lead CBS’s digital business  leading up to its massive merger with ViaCom, and  

then was briefly CEO of Tinder in 2020, so Apollo  believed he had all the experience for the job. 

This new leadership team, CEO Lanzone and investor  Apollo, started by selling off extraneous yet  

valuable assets Yahoo had acquired through the  years—they wanted to focus on the company’s core,  

rather than just acting as a collection of  random revenue-creating resources that managed  

to survive through time. So the key assets  of the comparatively strong and independently  

operated Yahoo! Japan were sold off to its other  owner, SoftBank, for $1.6 billion, then Edgecast,  

a streaming technology company that the former  owner had grouped into the Yahoo/AOL merger,  

was sold for $300 million. With just those  two sales and the $2 billion they brought in,  

Apollo was reportedly able to more-or-less  recoup what it had borrowed to finance  

the purchase of Yahoo in the first place.  The key next step was facing reality—recognizing  

that Yahoo was no longer truly a search engine,  it was no longer an internet homepage, and it  

was hardly even an email provider anymore—really,  Yahoo was simply just whatever still worked. And  

what worked was clear: Yahoo Finance and Yahoo  Sports. Through the years, each had maintained  

and gained a reputation as the best places to  go for investing and sports news and data.  

So to double-down on success, they once again  hired from experience—Ryan Spoon’s time at ESPN  

and BetMGM gave him context into the fantasy  sports audience that drives so much of Yahoo  

Sports’ traffic, so he was tapped to be that  division’s president. Tapan Bhat’s time as  

Chief Product Officer of NerdWallet informed his  experience in the wants of the newest generation  

of retail investors, so he was appointed  general manager of Yahoo Finance. Structurally,  

within Yahoo, each of these core divisions was  given a high degree of autonomy to build out  

unique product offerings for their specific  customer-bases—Yahoo Sports started work to  

bolster its sports betting offerings, including  acquiring sector-startup Wagr in 2023. Yahoo  

Finance focused on growing its subscription-based  offerings, and its Yahoo Finance Plus platform,  

offering advanced trading tools and data, is  reported to now have more than two million  

customers and double-digit year-over-year growth.  The details of what Apollo and this new leadership  

team are doing go on and on, but in short,  Yahoo has gone through a transformation marked  

by cutting off its appendages, reinforcing its  core, and it’s working—while obscured by the lack  

of reporting requirements due to its private  ownership, all indications suggest that the  

company is, while smaller, as healthy as its been  in decades, and the CEO has said that it’s on the  

path towards IPO and is “very profitable.” However Apollo exits this investment,  

it will almost certainly yield them a tremendous  return. And it’d be fair to argue they will have  

deserved it—they came in, took a risk, found  a new leadership team, developed a viable  

strategy, then shepherded the company through a  transformation. They took an obsolete institution  

and brought it back into relevancy. And this  is exactly what the private equity industry  

would like you to believe private equity is.  Structurally, private equity firms are not  

complicated. Their cores are the General  Partner. General partners typically know  

the right people—it is not an entry level  job. To take the example of a rather random,  

rather unremarkable firm, J.W. Childs Associates  was founded by general partner John W. Childs  

after a long and successful stint at Thomas  H. Lee Partners, founded by Thomas H. Lee.  

Thomas H. Lee founded his firm after a long  stint at the First National Bank of Boston,  

where he rose to the rank of Vice President.  Other examples of private equity general partners  

include Mitt Romney of Bain Capital, who was  also the 2012 Republican nominee for president,  

and Steven Schwarzman of Blackstone,  the 34th wealthiest person in the world. 

These connections are crucial thanks to step  two in the process—raising money. Typically  

general partners start by throwing in a couple  million of their own money, to set the stakes,  

then they’ll go around pitching investors on why  they’re the best person to manage the investors’  

money. Often it has something to do with having  particular experience in a particular industry  

that is particularly attractive for particular  reasons—in the case of J.W. Childs, he likely went  

around arguing that he had a particular knack for  investing in consumer food and beverage companies  

since at his prior firm he had helped arrange the  buyout of Snapple for $135 million in 1992, which  

his firm sold two years later for $1.7 billion  after massive revenue-growth. And he’d likely  

argue that food and beverage companies are great  for investment since people have to eat and drink,  

and therefore the sector is less subject to the  cycles of the market than something like tech. 

This sort of stability is particularly attractive  to the massive institutions that make up the core  

of private equity investors—in John W.  Childs’ case, insurance companies like  

Northwestern Mutual or employee pension  funds like the Bayer Corporation Master  

Trust. Individuals can theoretically invest  in PE funds, but only if they hold enormous  

wealth—it varies dramatically, but many funds  have minimum investments upwards of $25 million.  

Meanwhile, the way private equity firms themselves  make money is remarkably consistent—they just take  

two percent of it. Two percent, of all money, each  year, is taken as a fee, regardless of whether or  

not the firm actually grows the investment. But  then to incentivize returns, the firm also sets  

a benchmark, called a hurdle, that they’re aiming  to beat in year-over-year investment growth—say,  

7%. Any money earned on top of that hurdle is  then subject to a 20% fee that goes back to  

the firm. So, say, if a fund was originally worth  $100 million but grew to $110 million, $3 million  

would be subject to that performance fee and so  20% of it, $600,000, would go back to the firm. 

In practice, what’s earned from the 2% base fee  is fairly consistent, since there are generally  

restrictions as to when investors can take  money out of the fund so the sum does not  

generally fluctuate rapidly—therefore, firms  typically earmark this base fee for covering  

basic operating costs like office rent and analyst  salaries. But how much is made from the 20% fee  

varies enormously—some years it could be  nothing, others it could be yacht money,  

especially since the gains from that fee are  generally distributed primarily to the general  

partner. This is how general partners like John  W. Childs become billionaires. And even better:  

the money from these fees is not considered  traditional income by the American tax  

authorities—it’s considered capital gains.  Despite the fact that these earnings do not  

truly come from investment by the general partners  themselves, the IRS treats them as if they do and  

therefore only about 20% goes to taxes, versus  the 37% they’d pay on traditional income. 

So, considering it’s the primary source of  their wealth, the general partner is massively  

incentivized to maximize their firm’s gains, and  to supercharge this to the next level they almost  

all rely on one simple trick—they don’t actually  invest their own money, at least primarily. Now,  

if a $100 million fund bought a $100 million  company and increased its value by 25%,  

they’d gain $25 million. But, if a $100 million  fund bought a $400 million company and increased  

its value by the same multiple, they’d gain $100  million—they’d 2x the fund’s value. And believe it  

or not, a $100 million fund can buy a $400 million  company… as long as they have a friendly banker.  

This is what’s referred to as a leveraged  buyout—the fund puts in some of their money,  

but primarily relies on borrowed money to pay the  seller, just like a homebuyer with a mortgage.  

This magnifies the potential earnings, but  in turn, of course, the potential losses.  

But it’s worth considering what this does for the  General Partner. In a $100 million fund buying a  

$400 million company with 75% borrowed money,  very small margins of growth can make all the  

difference for this one individual. With a 7%  hurdle and 7.5% growth, 20% of the margin above  

7% on that $400 million company would earn  this individual $400,000 But if, instead,  

the company reached 7.75% growth, the general  partner would earn $600,000—because of this  

amplifying effect, every quarter of a percent  growth, a rather small difference, earns the  

general partner another $200,000 in income.  It’s also worth considering that it really  

doesn’t matter exactly how this value is  created. For every miraculous Yahoo-turnaround  

story there’s a Marsh Supermarkets. At no point did Marsh reach the size  

or level of national ubiquity as Yahoo—if  you aren’t from Indiana or Western Ohio,  

you’ve likely never heard of Marsh SuperMarket.  Yet, while confined to just two states, Marsh  

Supermarkets and its private equity takeover,  exemplifies a pattern that spans all fifty. 

The first Marsh opened here, a small local grocer  catering to specific local needs in Muncie,  

Indiana in 1931. The simple concept  took. Weathering the Great Depression,  

then outlasting World War II, the budding Indiana  institution began to expand: by the 1950s there  

were 16 Marsh locations across the state, by 1952  there was a Marsh distribution center in Yorktown,  

Indiana, and by 1956, the store was expanding  into Ohio. As demands changed in the ‘60s,  

the company adjusted. Marsh Foodliners became  Marsh SuperMarkets, growing in size to accommodate  

one-stop shopping. Diversifying as decades  progressed, the company also established its  

own convenience store: The Village Pantry, its own  bargain bin store: Lobill Foods, and eventually  

purchased its own upscale grocers in O’Malia  Foods and Arthur’s Fresh Market. Blanketing urban  

and suburban Indiana and western Ohio, Marsh and  Marsh properties were a mainstay through the ‘90s  

and 2000s. And it was at about this time that  Sun Capital became interested in the company.  

Today, there are zero Marsh locations. In  2017, unable to keep up with rent payments  

and struggling to pay vendors, the company  filed for chapter 7 bankruptcy, closing  

every last location and liquidating all remaining  assets. Like an empire spread too thin, Marsh had  

reached its territorial epoch before collapsing  in on itself within just two decades—all on a  

timeline that rather neatly lines up with the  brand’s time under Sun Capital’s ownership.  

Now, Sun Capital Partners didn’t instigate the  regional grocer’s fall from grace. Prior to the  

sale, Marsh had expensively failed to expand into  Chicago; it had felt the revenue squeeze from  

encroaching box stores; and it watched Krogers  parade into its grocery market. In response,  

the company began to fall behind, failing to  modernize its stores or products, backing out of  

sponsorship deals with the Indiana State Fair, and  opening itself up to the possibility of selling.  

In an atmosphere of supermarket consolidation,  though, there wasn’t much interest in the  

struggling chain… not until someone noticed in a  footnote in the company’s financial report that  

the company held a rather robust real estate  portfolio. A $325 million purchase point then  

became more palatable, and in early 2006,  Sun Capital jumped, paying $88 million in  

cash and assuming $237 million of debt.  To Sun Capital, the deal was a can’t lose  

proposition—either they’d turn around and flip  a bloated business, or they’d sell the assets,  

assets which just in real estate have been  estimated to be worth $238 to $360 million.  

Under new ownership, things changed quickly: they  pared management, they sold the company jet, and  

with the money saved, they renovated storefronts.  Sales went up. Then came more maneuvering,  

but less the kind that would help bump sales.   Almost immediately after Sun Capital took over,  

store locations went up for sale: this one  for $750,000, this one for $2.15 million,  

and this one for $1.2 million. They’d stay  operating as Marsh stores, but they’d now  

be paying a lease while Sun Capital would collect  an unspecified commission on the sales. They even  

went as far as selling the company headquarters  for a reported $28 million before then straddling  

the grocer with a 20-year lease increasing on  a 7% clip every five years. This maneuver is  

called a sale-leaseback, and it's quite common  in private equity, because at least on paper,  

it makes sense for both parties. Marsh Supermarket  properties were no exception as they could boost  

dividends or provide capital for another  leveraged buyout for Sun Capital, while also  

helping the grocer to pay down debt and provide  investment flexibility in the short term. But  

as for the consequences accompanying that long,  escalating lease on company headquarters—along  

with cost-saving moves like carrying name brand  products, cutting staff, and contracting out more  

and more services—well, Sun Capital just hoped it  wouldn’t have to deal with them. As early as 2009,  

news bubbled to the surface that they  were trying to sell the grocery chain.   

  But to the dismay of Sun Capital, the new,  leaner, streamlined Marsh just wouldn’t sell.  

Ultimately, the new-owner business boost was  short-lasted, and in 2017, the grocer would go out  

of business with Sun Capital at the helm until the  very day it filed for bankruptcy. To Sun Capital,  

failing to sell was a missed opportunity in a  company overhaul that they would deem a loss,  

as the group ultimately came $500,000  short of recouping their investment  

into the chain grocery store.  But even in a loss the private  

equity firm won. They still collected their  management fee each year of ownership,  

afterall. They also collected their commission on  sold assets as the company spun off its property  

at seemingly every turn. Really, the only  loss was that they just didn’t win more.  

The same couldn’t be said about the consumers  or employees, though. Deeply embedded in Indiana  

and Ohios’ urban areas, Marsh locations provided  healthier, fresher alternatives in areas at risk  

of fading into food deserts. Beyond nostalgia,  residents who lost their local grocery and  

pharmacy were mad, confused, and lost with the  disappearance of a longtime local institution.  

Then there were the people that worked for  Marsh. According to Washington Post reporting,  

at the onset of Sun Capital’s ownership only one  of three retirement plans was agreed to be fully  

funded by the new ownership—unsurprisingly,  the executives’ plan. As for store employees,  

their pension went underfunded by some $32  million dollars, which fell not on Sun Capital  

to even out, but to the government insurer. As for  warehouse workers, Marsh owed some $55 million at  

the time of bankruptcy to their pension which  was already struggling to pay out full checks.  

Ultimately, Marsh Supermarkets as a business  and Sun Capital as a private equity firm are  

relatively small potatoes. But their  ill-fated 11-years speak to a larger  

pattern in American life. Private equity  quietly maneuvers, takes over, reorganizes,  

and moves on while consumers and employees grapple  with the consequences. Private equity fixates on  

industries: regional grocery chains like Marsh;  casual restaurant chains like Red Lobster;  

odd-end industries like animal retail and  veterinary care; and, most unnervingly, the most  

consequential industry of them all in healthcare.  In most cases, only the sharpest-eyed consumer  

notices the subtle changes, but frequently  enough, private equity’s internal tinkering  

turns things sideways. The local market goes out  of business, the menu items track upward in price,  

the understaffed and over-priced veterinary  clinic’s care drops in quality, the elderly home’s  

staff unintentionally neglects a call for help.  All this happens in the name of efficiency gains,  

cost-cutting, and corporate streamlining—bad  outcomes not even private equity firms can deny.  

On average, headcount at public companies  bought by private equity shrinks by 12% over  

the following two years, translating to thousands  upon thousands of layoffs. PE-owned nursing homes  

see 11% higher mortality rates than the non-PE  owned counterparts, summing to a total of 1,000  

excess deaths per year. Companies acquired by  private equity firms through leveraged buyouts are  

found to be 10 times more likely to go bankrupt in  the following ten years than those that are not.  

Theories abound as to why a benign structure  leads to such malignant results. But none are  

surprising. They all have to do with what happens  when one shrinks a conglomeration of hundreds or  

thousands of people, their relations,  their creativity, their capabilities,  

their faults, their everything down to a deluge of  figures on a spreadsheet. The stories of a private  

equity firm going in, working on the human  level, changing the fundamental culture of a  

company in a way that strengthens collaboration,  creativity, innovation towards the end of just  

creating a stronger, more competitive product for  their customers are tough to come by. The stories  

of a private equity firm going in, hiking pricing  after their analysts told them they could, hiring  

lobbyists to create more favorable legislative  conditions, initiating mass layoffs for divisions  

that are not yet profitable, saddling companies  with debt in complex financial maneuvers,  

shuffling assets around to create the illusion  of transformation, sacrificing future potential  

for present-day returns—those stories, and their  calamitous human results, go on and on and on.  

Exploitation is easy without emotion. When  the person making decisions is the same  

person unlocking the door each morning, it is  much more difficult for them to profit off of  

their employees' suffering. They have to face  the consequences of their greed face-to-face,  

and that’s uncomfortable. When the person  making decisions is the boss of the vice  

president who’s senior associate manages the  associate who sits on the portfolio company  

board which appoints the CEO who’s direct report  manages the division who’s vice president manages  

the regional manager who oversees the branch  manager that unlocks the door each morning,  

exploitation in the name of profit is easier. And those small number of individuals at the top,  

the general partners, have all the incentive  in the world to exploit on the margins.  

Because of the compensation model, the industry  is focused on growth at all costs—after all,  

without gangbusters growth, the person whose name  is on the sign doesn’t get paid. And finally,  

with a massive 20% of over-hurdle performance  multiplied by leverage then paid out to the firm,  

tiny margins of difference—say, outsourcing HR  to a third-party firm that is less effective yet  

cheaper—make all the difference on the general  partner’s annual income. The incentives push  

towards brutality, then this brutality is shielded  by layers of bureaucracy, and finally the US  

government rewards the brutality by subjecting the  gains from it to a lower tax rate. It’s a great  

system, assuming you happen to be the general  partner of an American private equity firm.  

As you may know, the latest fixation of the  finance world—even beyond just private equity—is  

artificial intelligence. Many investors believe  that it's as groundbreaking a technology as the  

internet, and so it’s probably worth learning how  it actually works. For that, I’d recommend our  

sponsor Brilliant. They have a fantastic course on  how large language models like ChatGPT work which,  

surprisingly, I didn’t find all that complicated  to understand. But that’s potentially thanks to  

Brilliant—they specialize in teaching complex STEM  subjects by breaking them down into small chunks  

that they teach through intuitive principles and  interactive exercises. As you keep going, they  

bring these small, disparate concepts together  until you understand something massive, like how a  

large language model, or calculus, or programming  works. Personally, as someone who always struggled  

in traditional STEM education, I find it really  satisfying to gain this sort of understanding in  

topics that I’d always thought were out of reach,  and it’s really useful for when something like  

LLMs become relevant to so many other things. And  another aspect I really appreciate about Brilliant  

is that they really understand the practicalities  of how people actually learn—we don’t all have  

time to sit down and watch an hour-long lecture or  something, so that’s why they break their courses  

down into such small, digestible chunks which you  can complete on your computer, or on your phone  

or tablet while you’re on the bus or waiting at  the doctor’s office or in other small moments in  

your day. Through this, you can make learning  part of your daily habit of self-improvement,  

just in the time you might otherwise spend  scrolling social media. Brilliant is one  

of our longest-term sponsors since so many  viewers find it a worthwhile service to use,  

so I think it’s worth at least giving it a  shot. And you can super-easily since you can  

try everything Brilliant has to offer, for free,  for a full thirty days at Brilliant.org/Wendover,  

and you’ll also get 20% off an annual  premium subscription at that same link.