Setting: You’re sitting in on a Golden Gate Capital private equity meeting circa 2014.

As the private equity firm that purchased Red Lobster in 2014 for $2.1 billion, we focus on extracting maximum value from our investment. Our strategy includes leveraging debt, selling off assets, and implementing aggressive cost-cutting measures.

By the end of our involvement, we aim to have secured substantial profits while shielding ourselves from any financial fallout.

Agenda Item 1: Acquisition and Real Estate Sell-Off

CEO: "Alright team, we’ve secured the acquisition of Red Lobster for $2.1 billion. First agenda item: real estate. We need to discuss the best way to pay for this acquisition."

CFO: "We can sell most of Red Lobster’s real estate to our other company American Realty Capital Properties and lease it back at a higher rate. This will inject immediate cash flow and profit into our accounts."

Operations Manager: "But won’t this create significant cost pressures on Red Lobster’s operational budget? High lease costs could cripple their profitability that was even struggling before we acquired it."

CEO: "Absolutely, it will increase their operating expenses significantly. But our goal is immediate returns, not long-term sustainability. We get the cash now, and any future issues are theirs to handle."

Board Member: "What if the high lease costs lead to their financial decline?"

CEO: "That’s a risk we’re willing to take. Remember, our primary objective is to extract as much value as quickly as possible, before that financial decline."

Investor: "Selling the real estate will net us around $1 billion immediately. This is pure profit that goes directly into our accounts. The lease costs? That’s Red Lobster’s problem. Running total: $1 billion."

Decision: Proceed with the real estate sell-off and lease-back agreement.

Agenda Item 2: Leveraging Debt

CEO: "Next on the agenda: leveraging debt. We need to discuss how we can further extract capital from Red Lobster."

CFO: "We can load the company with nearly $294 million in debt. This will finance dividends and fees for us and our investors."

Investment Strategist: "Won’t this massive debt load put Red Lobster under extreme financial strain, especially combined with the high lease costs?"

CEO: "Exactly. This will strain their cash flow, but it’s not our concern. Our focus is on maximizing short-term gains for our investors."

Board Member: "But this approach could severely impact their ability to reinvest in their business and maintain operations."

CEO: "That’s a calculated risk. We’re here to extract value, not to run a sustainable business."

Investor: "The debt financing will give us another $294 million, which we can use for dividends and fees. Total value extracted: $1.294 billion."

Decision: Implement the heavy debt loading strategy.

Agenda Item 3: Operational Mismanagement

CEO: "Now, let's discuss operations. We need to make Red Lobster look profitable in the short term."

CFO: "We can implement aggressive cost-cutting measures. Reduce staff, cut benefits, and minimize investments in facilities."

Marketing Head: "We could also run a high-visibility promotion to boost sales figures temporarily. How about an 'endless shrimp' promotion?"

Operations Manager: "This could backfire. The promotion will increase costs and operational chaos, especially with reduced staff."

CEO: "That’s fine. The promotion will drive traffic and look good on paper. Any short-term chaos is irrelevant to our financial goals."

Board Member: "What about the long-term impact on customer satisfaction and brand reputation?"

CEO: "Not our problem. We’re focused on extracting value now."

Investor: "By cutting operational costs, we can save an additional $100 million annually. Plus, the 'endless shrimp' promotion will create a short-term sales spike, even if it costs us $11 million in the end. Running total: $1.394 billion."

Decision: Proceed with cost-cutting measures and launch the 'endless shrimp' promotion.

Agenda Item 4: Involvement of Thai Union

CEO: "Next, we need to discuss Thai Union’s increasing involvement."

CFO: "Thai Union can help with further cost reductions, but they’ll need more control over operations."

Operations Manager: "Their lack of experience in running a restaurant chain in the U.S. could lead to poor decisions and operational inefficiencies."

CEO: "Exactly. They’ll focus on short-term cost cuts, which aligns with our goals. Let them take the heat for any operational issues."

Board Member: "What if their decisions, like the shrimp supply manipulation, exacerbate our problems?"

CEO: "We’ll let them handle the fallout. Our goal is to extract as much value before any issues become too significant."

Investor: "Thai Union’s cost-cutting measures could save us an additional $50 million annually. Running total: $1.444 billion."

Decision: Increase Thai Union’s control and support their cost-cutting measures.

Agenda Item 5: Preparing for Financial Collapse

CEO: "Finally, we need to prepare for the eventual financial collapse of Red Lobster."

CFO: "Filing for Chapter 11 bankruptcy will allow us to restructure and walk away with our profits intact."

Legal Advisor: "We need to ensure we’re insulated from any liabilities. The debt and operational costs will fall on Red Lobster."

Board Member: "Is there any way to mitigate the negative impact on our reputation?"

CEO: "Our reputation is secondary. We’ve extracted our value. The priority now is to protect our profits and exit strategy."

Investor: "By insulating ourselves from liabilities, we ensure our total profits are secured. Total value extracted: $1.444 billion. Red Lobster will carry the burden of the debt and operational costs."

Decision: Prepare for Chapter 11 bankruptcy filing and ensure insulation from liabilities.

Meeting Adjourned.

The plan was clear: extract maximum value through strategic debt loading and real estate sell-off, cut costs aggressively, leverage Thai Union's influence for further savings, and prepare for an eventual financial collapse to secure profits while leaving Red Lobster to manage the fallout.

By the end, Golden Gate Capital extracted $1.444 billion in value, with Red Lobster left to bear the financial burdens.

The discussions at the board meeting about the strategies the private equity firm used to acquire Red Lobster highlight the aggressive, profit-driven tactics typical of such firms.

While this method proves lucrative for investors, it also sheds light on the broader, systemic issues inherent in private equity operations.

What is Private Equity and Why It's Concerning:

Private equity firms operate in ways that can appear quite shady, leveraging loopholes and weaknesses in the economic system to their advantage.

These firms, like the one that acquired Red Lobster, typically buy companies that are struggling, often using borrowed money.

The assets of the company, such as real estate, are used as collateral for these loans.

Once in control, these firms aggressively enhance the short-term value of their acquisitions.

Common tactics include slashing wages, outsourcing jobs, and selling off profitable parts of the company.

These actions can make a company appear more profitable in the short run but often load it with substantial debt.

This strategy allows private equity firms to later sell these companies at a higher price, reaping significant profits.

However, it frequently leaves the companies in a weaker, precarious financial state.

Moreover, another common endgame is for these firms to strip the company of all valuable resources and then let it file for bankruptcy, thrusting the remaining debts onto the company while shielding themselves from losses.

This method essentially loots the company, raising serious ethical concerns and posing profound questions about the long-term impact on the economy and the well-being of workers and communities involved.

The Pervasive Impact of Private Equity Across American Life

Private equity is not just reshaping industries; it's fundamentally altering almost every aspect of American life, embedding itself into the phases of human development and exploiting vulnerabilities at every turn.

From cradle to grave, private equity firms capitalize on essential services, often prioritizing profit over people, leading to increased costs and diminished services in housing, healthcare, childcare, and elder care.

In this edition we’re just diving into housing because there’s a lot to cover here first.

Next week I will explain exactly how private equity loots other industries.

Housing: A Foundation Under Siege

Private equity firms are increasingly influential in the housing market, buying up homes and apartment buildings at an alarming rate.

In 2021 alone, private equity investors purchased nearly one in seven homes in major U.S. metro areas.

In 2023 alone, private equity purchased 44% of flipped single family homes.

Firms like Blackstone have turned these properties into massive profit centers by creating rental corporations such as Invitation Homes.

The result is skyrocketing rents, hastier evictions, and often substandard maintenance.

By monopolizing housing, these firms not only drive up living costs but also prevent families from building generational wealth, effectively funneling money from middle and working-class Americans into their coffers.

By 2030, it is estimated that private equity will own 40% of all homes in the United States.

The Irony of Recovery from the 2008 Financial Crisis

The 2008 financial crisis, triggered largely by the collapse of the housing bubble, led to a devastating impact on homeowners across the United States.

As the market crumbled, millions faced foreclosures; homes lost their value, and financial distress became commonplace.

Interestingly, the aftermath of this crisis set the stage for a paradox where those who caused the crisis became the beneficiaries of its fallout.

How the Architects of the Crisis Profited Post-Crisis:

1. Acquisition of Foreclosed Homes:

• After the crash caused property values to plummet, a surge in foreclosures followed. Private equity firms, hedge funds, and other institutional investors, including some that had contributed significantly to the crisis through risky mortgage-backed securities, capitalized on this downturn. Firms like Blackstone quickly acted to buy these properties at a fraction of their prior values.

2. Creation of Rental Empires:

• Once acquired, firms did not resell these homes to families but instead converted them into rental properties. Companies like Invitation Homes, established by Blackstone in response to the crisis, became large-scale landlords virtually overnight. By 2021, private equity-backed firms such as this owned hundreds of thousands of homes and controlled a significant portion of the rental market.

3. Driving Up Rents and Maximizing Profits:

• With their massive portfolio of properties, these firms used economies of scale to cut operational costs and exploited their market dominance and collusion to drive up rents. The absence of competition and high demand for rentals enabled them to implement and maintain rent increases that far exceeded the rate of inflation.

4. Exploitative Practices:

• The transition to institutional landlords brought about a more transactional approach to property management. Institutional landlords enforced quicker evictions for non-payment, imposed higher fees for services, and frequently delayed maintenance — practices aimed at maximizing income and minimizing expenses.

The Impact on American Families:

Blocked Homeownership:

These firms actively transform once-owner-occupied homes into rentals, effectively barring many potential homeowners from entering the market and preventing them from building equity and generational wealth.

Institutional buyers frequently make cash offers on properties, often tens of thousands of dollars above the listed price.

This aggressive purchasing strategy disadvantages regular buyers, who usually cannot compete with the substantial financial resources of institutional bidders.

As a result, sellers generally favor institutional buyers, who provide a quicker and more financially secure transaction.

Housing Crunch:

Private equity firms are intensifying the housing shortage in the U.S. by purchasing large volumes of properties primarily for investment purposes.

This practice limits the availability of homes for individual buyers, driving up prices and making homeownership less accessible.

Moreover, their focus on maximizing returns often leads to reduced investment in new housing developments, exacerbating the existing shortage.

As a result, these firms contribute significantly to the deepening housing crisis, making it increasingly difficult for average Americans to find affordable housing.

Increased Financial Burden:

As rental prices increase, the share of income that families spend on housing climbs, diminishing their capacity to save or invest in other life aspects.

Wealth Transfer:

The accumulation of capital by these private equity firms acts as a direct wealth transfer from the general public to a small group of affluent individuals.

Private Equity's Housing Strategy:

• Acquisition: Buy properties en masse during market vulnerabilities.

• Rent Increases: Implement significant rent hikes annually, far above inflation.

• Service Reduction: Cut back on maintenance and repairs to reduce costs.

• Eviction Tactics: Employ aggressive legal tactics to evict tenants quicker for higher turnover (because you can raise rent more with a new tenant) and profit.

Statistics indicate that private equity firms own a substantial portion of the residential market, with entities like Blackstone controlling hundreds of thousands of homes and generating billions in revenue from these investments.

Private Equity Firms Are Legal: A Systemic Issue

Private equity firms operate within the legal boundaries established by the financial and corporate regulatory systems.

Their strategies, while often criticized for being aggressive and detrimental to long-term sustainability, are not illegal.

These firms use the system to maximize profits, exploiting the legal frameworks and financial instruments available to them.

Legal Framework and Profit Maximization

Private equity firms are designed to strategically leverage debt, exploit gracious tax advantages, and maximize profits through advanced financial strategies.

They commonly employ leveraged buyouts (a.k.a. LBOs), acquiring businesses with borrowed money and using the companies' assets as collateral.

This approach allows them to invest minimal capital while securing control over significant assets.

Tax rules further enhance the advantages for private equity.

For example, carried interest, a major component of private equity profits, is taxed at the lower capital gains rate rather than as ordinary income, substantially reducing the tax burden on private equity managers.

Additionally, the interest paid on the debt used in these buyouts is tax-deductible, reducing the taxable income of the acquired companies and increasing the profitability of these deals.

To the general public, these practices may resemble fraud and extortion.

They take place within the same legal framework that allows politicians to trade stocks in sectors they oversee, enabling the ultra-wealthy to systematically deplete assets from American businesses and workers for profit, often leaving the companies to deteriorate.

These actions are legally sanctioned and expose an economic system that we must see and acknowledge.

This system is designed to allow the ultra-rich to legally extract wealth from ordinary hard-working citizens; it's a feature, not a bug.

The Case for Change

While the law permits private equity practices, their societal impact warrants regulatory scrutiny and reform.

Aggressive strategies driven by profit often result in job losses, lower wages, and diminished services, impacting employees, consumers, and communities.

Next week's newsletter will delve into prime examples of private equity's detrimental effects on the housing market, healthcare sector, and childcare industry.

What You Can Do - Selling Homes to Families

If you are selling a home, think about the broader community impact and the long-term stability of the housing market.

When you sell to a family instead of a private equity firm, you help preserve community integrity and prevent the concentration of housing stock in the hands of a few large investors.

By doing so, you make homeownership more attainable for American families and help combat the trend toward a renter-dominated society.

Conclusion

Private equity firms are not illegal, but their practices often lead to negative outcomes for employees, consumers, and communities.

Next week, after I cover how private equity exploits end-of-life care, I will share a tip I learned from rich accountants that could save your family millions of dollars in the long run.

To make America inhabitable again, it is crucial that we kick private equity out of our communities.

We need to support regulatory reforms, revise tax policies, protect essential services, promote homeownership, and ask for government intervention.

By taking these steps, we can prevent the concentration of wealth and power in the hands of a few and ensure a more equitable and sustainable future for all Americans.

Our survival depends on it.

Stay Curious,

Addie LaMarr