# Private Equity and the Future of American Capitalism ## Метаданные - **Канал:** Stanford Graduate School of Business - **YouTube:** https://www.youtube.com/watch?v=kpyge0vaM6E - **Дата:** 20.05.2026 - **Длительность:** 1:00:18 - **Просмотры:** 1,877 ## Описание Journalist Megan Greenwell, author of Bad Company: Private Equity and the Death of the American Dream, joined the Corporations and Society Initiative (CASI) at Stanford Graduate School of Business to examine how private equity is reshaping industries, workplaces, and communities across the country. Moderated by CASI student leader Helen Cashman (MBA ’26). ## Содержание ### [0:00](https://www.youtube.com/watch?v=kpyge0vaM6E) Segment 1 (00:00 - 05:00) Hello everybody. I'm so happy to welcome you here. Um, my name is Anat Admati. I am the faculty director, uh, founder and faculty director of the Corporation Society Initiative, CASI, uh, at Stanford, uh, GSB. It's so great to have, uh, students and colleagues and other people from the community to discuss, um, private equity. Uh, we talk a lot about private equity in this school, uh, but usually from the perspective of, uh, corporate leaders and investors. Uh, but uh, CASI has the letter S uh, in the name. So, we also want to look at it from a broader perspective, uh, about whether the system kind of works for all of us, uh, including the rules of governance system, the people operating this system, and the people impacted by this system. So, um, we have today, uh, Megan Greenwell, who will be introduced by Helen Cashman. Helen Cashman is one of our, uh, beloved student leaders who are part of our organization, our little initiative at GSB, which is a joint, uh, work of passion, uh, by faculty, students, and staff. We have Lisa here and Tina. And then we have a new set of student leaders coming in. Helen is one of the ones graduating every year. I have to separate from these wonderful leaders. Uh, and this is the last event of the year. Uh, but then every year they produce their successors, uh, and so I'm really excited about the successors coming in. Uh, some of them sitting right in front of me. Uh, and so again, thank you very much for joining us. Thank you for engagement. I look forward to this event and I'll pass it on to Helen. Awesome. Um well, welcome everyone and thanks for being here today for our session on the future of American capitalism. Um as Anna mentioned, my name's Helen Cashman and I'm really excited to be here leading this conversation today. Before we jump into it, I wanted to kind of start with a level set on what is private equity because it can sometimes be a bit of an opaque industry. So these are firms that pool money from investors to kind of buy, restructure, and sell companies within a short-term period of a few years for profit. They're typically targeting underperforming companies frequently using a mechanism called the leveraged buyout where part of the purchase price is funded by debt which is then loaded onto the acquired company. They take active control in order to increase company value through cost-cutting, restructuring, management changes, and other growth initiatives. They earn management fees on the total capital committed to the fund and then keep kind of a percentage of profits generated by selling those companies. They manage almost 8 trillion in assets and control companies that employ over 12 million Americans. Private equity also owns half of America's daily newspapers, have massive holdings in healthcare, and own or have owned iconic brands like Red Lobster, Toys R Us, and Party City. Three of my favorite brands. Given that we're holding this at Stanford's Business School, I'm sure there are a number of folks in the audience who have worked in the industry before school or want to work in private equity after graduation. And I'm sure there are a bunch of folks here who might be learning about private equity for the first time and just want to learn more about the subject. So I'd love to know a little bit more about who we actually have in the room with us today and what brought you here. So I'd love if you can raise your hand if you're here because you just are curious about private equity and you want to get a better understanding of the industry's impact. Okay. Is there anyone in the room who's worked for a company that was owned by private equity before? Okay. And then is there anyone who either had worked in private equity before, currently working in private equity, or plans to work in private equity after graduation? Nice. A good chunk as well. Well, whatever brought you guys here today, thank you so much for coming and being here as part of this discussion. Um whether you're a consumer or a worker involved in private equity, this industry has a large impact on America and given that kind of breadth, we're so lucky to have Megan here with us um to talk about her book. It covers a wide section of American life and she also comes to this topic with a very broad background in journalism. Um so in previous roles, she served as editor-in-chief of Deadspin, launched digital features programs at Esquire and New York magazine's The Cut. Um has edited investigations and ### [5:00](https://www.youtube.com/watch?v=kpyge0vaM6E&t=300s) Segment 2 (05:00 - 10:00) narrative features for ESPN uh the magazine, and has covered the war in Iraq from Baghdad for The Washington Post. So pretty big spread. And she actually got her start in journalism here in the Bay Area. Um she started as a reporter for her high school newspaper um and helped actually uncover an indentured servitude and sex ring operated uh by Berkeley's largest landlord. Since then, she has continued to work in journalism, written for several outlets including The New York Times, Washington Post uh magazine, Slate, and she currently is a contributing writer with Bloomberg Business. So let's give a huge round of applause to Megan for being here WITH US TODAY. — WELL, I'D LOVE TO START US OFF. YOUR book tells the story of four different individuals, their communities and how they've been impacted by private equity. But there's also, you know, a fifth story that is woven through in it, which was your own story as a journalist at a company that was bought by private equity. So, could you share a little bit about what got you interested in reporting on this topic and how you started? Yeah, well, thank you all for having me. It's such an honor to be here. Um I got interested in this because I did work for a company that got taken over by private equity firm. Um I had as Helen pointed out, I had covered so many things in my journalism career and I had never really covered business. I mean, obviously business is in everything. It's hard to cover sports or politics or whatever without also cover without also covering business, but I had never been like, I am a business journalist. Um and then I was running Deadspin, which was a small, pretty snarky, like pretty left-wing sports site, really fun. Um and we at the time this there is there are like many layers to the Deadspin story. Um it was part of Gawker Media, which was bankrupted by Peter Thiel funding a lawsuit from Hulk Hogan. Then once Gawker was killed off, the remaining sites were owned by Univision. Um Univision essentially decided this doesn't fit our core portfolio, we need to sell. And so they sold to a small Boston-based private equity firm called Great Hill Partners. And when it was originally when the acquisition originally went through, I was sort of like, this is not the worst case scenario. Um the other known bidders were companies that were pretty famous for running terrible media properties and just like slowly killing them over time. And I didn't know enough about private equity to sort of know what was likely to happen from there. And I mean, it was the very first day that things started going wrong in ways that were really surprising to me. So, our parent company was not profitable. Deadspin was profitable and had a huge, incredibly loyal readership, which if you're in the media industry, loyalty is actually what you care about much more than numbers, right? And so, I was sort of like, "Great, they're going to invest in our business side and allow us to do more of the things that are most successful. And sure, maybe there will be painful changes because obviously not everything we're doing is successful, but it will ultimately be to strengthen the business. " And that is so not what happened. Um they came in and from the very first day they were saying, "We need to cut all of these things. " And I would say, "Well, the data show that those are the things that are most successful for us financially, you know, not even talking about journalistic purity or whatever. " And they would say, "No, no, we have to cut them. " And I would say, "Why? " And they couldn't quite articulate why. Um and it became clear that they just wanted us to grow. But they were fundamentally finance experts and not media experts. And so, their goal was for us to be bigger than ESPN. And I would say things like, "Okay, so you understand, right, that a large part of the reason ESPN is so big is because they have exclusive rights to broadcast major sporting events. Are you saying you want Deadspin to have exclusive rights to broadcast major sporting events? " And the looks on their faces seemed to reveal that they had never considered that difference between Deadspin and ESPN. And so, it really felt like bashing my head against a brick wall because they not only didn't have any subject matter expertise, they had no desire to have any subject matter expertise. And so, I left within about 3 months. And look, like Deadspin was a snarky sports blog on the internet. We did some great work. I'm very proud of the work we did there. We were not saving lives, right? Um but that experience made me very interested in Okay, private equity is so big and so influential in our economy. How does it work when it's industries ### [10:00](https://www.youtube.com/watch?v=kpyge0vaM6E&t=600s) Segment 3 (10:00 - 15:00) that are much more important to our society than snarky sports blogs? Um and so I just got really obsessed originally just on a personal level with sort of like reading about this, understanding how it works, um paying attention to academic research coming out about private equity in healthcare and housing and all of these industries that like we need as a society. Um Yeah. That's where it came from. Um I appreciate you kind of sharing that and I know your story and you you've kind of touched on that then as part of that curiosity, you then kind of went out and started looking at um how else is this playing out and you know, in your story we look at um you know, Liz and Roger and Natalia and Lauren and how their lives and communities ultimately are impacted by private equity acquisitions. Um and there's you know, a lot of research out there that does show um PE ownership can often be associated with you know, wage stagnation, benefit cuts and layoffs. And on the other side, you know, proponents would argue that without the PE intervention, um many of these companies would have failed as uh as well, right? Leading to the kind of job losses and negative outcomes regardless. And so how do you think about weighing those competing claims um and how that plays out? So I'm fundamentally a narrative journalist. I say like when I'm asked what I write about, I say I write about how systems affect people. And what was interesting to me when I started researching this in a serious way was that there wasn't any real work on Sure, there are numbers of X number of layoffs, um X number of company closures, whatever. But there wasn't anything talking about how does private equity sort of affect the people who work for those companies and affect the communities that rely on those companies, right? So, the private equity business model does not rely on companies being successful for the private equity firms to make money. Communities require businesses to exist. And that's true whether it's a big box store, right? Like in some ways that's the cleanest form of private equity, right? Like none of us on some level care if like the local Toys "R" Us goes out of business. But that is a lot of tax revenue. jobs. Um there are all of these sort of ripple effects when a business goes under. And the private equity firm is not based in that community. I spoke to so many people who you know, their hospital, their apartment building, their store, whatever was taken over by private equity and the private equity executive never stepped foot in their town. And So, there is no level of investment there. And so, the result is that there is no sort of looking for solutions, right? It's not that private equity created the fundamental business problems in any of the industries I write about. So, I write about um retail, health care, housing, and local media. All of those industries have real structural problems not created by private equity firms. But, the incentive structure is such that they don't need to look for solutions to those fundamental business problems because they can make their money either way. And that seemed like the real problem with the model to me. And I've had people, you know, who haven't read the book say essentially like, "Oh, you're writing a socialist screed um that's anti-capitalist. " And my actual argument is I think this is a corruption of what free market capitalism was designed to do. Because in the simplest form of free market capitalism, you make money because the company you own makes money, right? It is a It's a pretty simple equation. In private equity, you can make money whether or not the company you own lives or dies. And that creates this divorcing of incentives that I think is so extreme that all of these workers, all of these communities are being hurt because there is no attempt to actually solve the problems. There's no like business innovation. I'd love to dive a little bit more kind of into that cuz you talk about that in the book of kind of the private equity fee model of kind of management fees, carried interest, these monitoring fees, which, you know, in theory are supposed to align um you want to have a structure that aligns investor and firm interests. Um yet critics can argue that, you know, there's this pressure here to extract value on a fixed timeline regardless of what's happening with the ### [15:00](https://www.youtube.com/watch?v=kpyge0vaM6E&t=900s) Segment 4 (15:00 - 20:00) long-term health of the company. And so, I'm wondering a bit about like how you've seen from kind of some of your conversations and research and reporting how those incentive structures actually shape behavior at the portfolio company side. And if there are models or things that would better align people's interests. Yeah, I this is the fundamental problem, right? Improving the fundamentals of a business is long, slow, hard work. Private equity firms have no interest in long, slow, hard work. They want to get in and get out as quickly as possible. So, the average lifespan of a deal is 5 6 years, and ideally you're getting out before that. Um and so, what you end up with is an industry that where the easiest ways to make money are like sort of the tricks rather than solidifying the actual business. Um so, you mentioned, you know, the tax breaks, the management fees, all of that. But, there's also like, you know, so sale leaseback agreements, um which are essentially, for those who are less familiar with how private equity works, often if a private equity firm comes in to an industry that is very real estate dependent, they will sell off the land that their portfolio company previously owned. So, they get to pocket, you know, much of the profits from selling the land, and then they are charging the portfolio company rent for those exact same properties. So, in the case of Toys "R" Us, which I write about in the book, you know, they had 700 something US stores, and they owned their own land on basically all of those stores. So, all of a sudden, it's not just that they're loaded down with the debt, they're also now responsible for rent payments on the exact same parcels of land they historically owned. So, in that case, you are weakening your own company by to strengthen yourself as the private equity firm. And that just felt to me like, you know, I didn't go to business school. Uh that just felt to me on a very fundamental level, like not how it's supposed to be working. Um And so I do think like this divorcing of incentives between what the portfolio company's incentives are and what the private equity owners incentives are really leads to some pretty tricky situations in terms of Yeah, just in some cases it is quite literally advantageous to you as the private equity firm to undermine your own portfolio company. Um you've talked about maybe another way as well that um can play out which was around um obviously as part of the kind of leveraged buyout structure, the acquired companies end up with debt um which is great when things go well um but can leave companies fragile when they don't having to you know make those debt payments. Um and we've seen there have been instances of these high-profile bankruptcies where firms are you know still have been able to kind of collect fees throughout that timeline but the it's employees and creditors who ultimately kind of absorb those losses. Um thoughts on that risk asymmetry piece there and um if there could be you know uh changes or adjustments that would uh correct kind of that challenge in incentives. Mhm. So 70 to 80% of the average leveraged buyout is financed by just straight bank loans. Um it's important to underscore for those who are less familiar with the industry the private equity firm who makes the decision to take out those loans has no responsibility for paying that debt back. Only the portfolio company is on the hook for paying that debt back. So to go back to the example of Toys "R" Us, Toys "R" Us was historically a famously fiscally conservative company, right? They did not want to carry debt. They get acquired, and all of a sudden by no choice of their own, just because they were acquired, they had um $5. 2 billion of debt on their books. And then their real estate gets sold. And so then they're buried under not only the debt payments, which you know, Toys "R" Us was a little weaker at this point. They were still profitable until that debt was loaded on, but all of a sudden, like it was like um in most years, it was like between 90 and 110% of their gross revenue was going just to the interest ### [20:00](https://www.youtube.com/watch?v=kpyge0vaM6E&t=1200s) Segment 5 (20:00 - 25:00) payments. Um so they went from having so little debt to all of a sudden just absolutely crippled by debt. And so, shockingly, Toys "R" Us declared bankruptcy and then later liquidated. Um there's a great academic paper um that found that companies owned by private equity are 10 times as likely to enter bankruptcy proceedings as other kinds of companies. I think if this were any other kind of business model, we would just look at that and say, "Okay, that model does not work. It is 10 times less likely to work. " Um but because it works for the investors, for the firms, that we as a society accept that definition of working, rather than actually making the businesses work, the more classic definition of working. Um and that really, when I started understanding that, that was the thing that really stuck in my craw, and was sort of like, I feel like it's not supposed to work that way. Um I know there will be folks who would kind of the counter argument to that would be many of these companies kind of come in and are fragile to begin with and perhaps some of that is, you know, contributes to those higher rates and I think there would also be, you know, the argument that um the model can create value by, you know, improving operations, cutting inefficiency and, you know, supporting underperforming companies by bringing discipline. Um and so there's, you know, a lot of different contested research on this. Um but curious about when this can work well or if it can work well and what that structure needs to look like or be in place. Like what scenarios um allow that to exist. — Yeah. No, I think it's such an important question because I am not arguing that private equity is inherently evil or even that it doesn't work every time, right? Um you know, they're 10 times more likely to enter bankruptcy, but that's 20% of companies. So, it is not the majority of private equity-owned companies that are declaring bankruptcy or going out of business. Um I'll step back and talk very briefly about the history of the private equity industry, which started in the 1960s with what were then called bootstrap deals, which were essentially you identify a small family-owned company that maybe shows the potential for expansion but doesn't have the liquid capital they need to do it. And you pump in the money and you sell them or take them public or whatever and that's great. And that is still a lot of what the private equity industry does and that to my mind is like a fairly benign model, right? Not that it works out in every case, but it does Like serves a Yes, exactly. Right. There is a like clear logic to that model. Um and that is the majority of private equity deals. Um the private equity main The private equity industry's main lobbying group called the American Investment Council loves to remind people that like I forget their exact number. Like the big majority of private equity deals are actually still for these small family-owned companies. That is 100% true. Saying that it is the majority of deals is very different than saying it's the majority of the money or workers or the workers affected or the communities affected or any of those things. Um One example I talk about briefly in the book is um Pete Stavros, the co-head of private equity at KKR, to his credit was the only private equity executive who gave me an on-the-record interview for this book. And we had a great conversation. He's like a brilliant, fascinating guy. Um and he loves to talk about this overhead garage door manufacturer in Illinois that um he essentially created this nonprofit called Ownership Works to give workers at companies acquired by private equity a small ownership stake. Um and so KKR bought this overhead garage door manufacturer. Everybody had a small ownership stake. They then very successfully flipped the company and all of a sudden you had truck drivers and factory workers making like mid-six-figure payouts. Um which is undoubtedly a very cool thing to have happened. And this story has been featured everywhere. This overhead garage door manufacturer employed, I think it was like 220 people. Toys "R" Us employed 33,000 people who were laid off without the severance ### [25:00](https://www.youtube.com/watch?v=kpyge0vaM6E&t=1500s) Segment 6 (25:00 - 30:00) guaranteed in their contracts because they were too low on the order of creditors in the bankruptcy. So, it's not that it never works, but the research is pretty clear that it is the least successful in the biggest deals. And so, if the private equity industry was like, "Great, we're just going to focus on the overhead garage door manufacturers of Illinois. " Cool, I'm out. Like, great. Wonderful. We fix everything. Um but as long as they are getting it involved in these absolutely massive companies, and you know, I've talked a bunch about Toys R Us, but I mostly use Toys R Us in the book to sort of set up what came later because toy um private equity then went from being really interested in retail to healthcare and housing and education. Things that are more foundational to our economy and to our society than retail. Um and that to me is even if you think, "Great, fine, take over the overhead garage door manufacturer. " When you're talking about taking over a chain of rural hospitals, that's just a very different proposition. I'd love to dive a little bit more into kind of that and you mentioned a bit about private equity's growing um footprint in healthcare um and that can be an especially charged discussion um because, you know, especially in rural areas, but elsewhere, people can't often choose their provider and outcomes can have, you know, life or death stakes. Um additionally, you know, the collapse of local journalism, as you mentioned, has many causes, but private equity ownership has certainly accelerated that and the implications of that on trust and society um go beyond kind of a single deal. And so, I'm wondering how you think about and how we can think about how to kind of judge and assess the impact of private equity in industries where the value of their work goes beyond just what would show up on a balance sheet. So, I'll talk about the healthcare story I wrote about in my book, which is set in rural Wyoming, a small community called Riverton, like 10,000 people. And Riverton had a hospital. The nearest other hospital was 30 miles away through a pretty treacherous like wind-swept canyon. I've driven it many times and don't love doing it. And Riverton's hospital, I think it's important to note for since the late '80s had been a for-profit hospital. So, this is not like a nonprofit charitable enterprise versus private equity, right? They'd been for-profit. It had like basically worked. When they were acquired by a private equity firm by Apollo Global Management, they were profitable. And you know, rural hospitals have so many problems with the business model. I don't want to say that they didn't have problems with the business model in Riverton, but like they were still making profits. And Apollo bought both Riverton's hospital and the one 30 miles away and just started cutting more and more services. So, they were essentially saying like, "Look, you can get Originally the plan was everybody could get basic care at their home hospital. And then like if you needed specialty orthopedics or oncology or whatever, maybe you'd have to go from one to the other. Fine, reasonable. Like rural hospitals can only support so much. But what ended up happening was they started stripping even basic services from Riverton's hospital in particular. So, the doctor I profile, whose name is Roger Goes got really upset because they eliminated the entire obstetrics wing department from Riverton's Hospital. So now all of a sudden you could not deliver a baby in your home community. Um you would have to drive 30 miles away. Again, this canyon is not great and I've never driven it in the winter. Um then they cut like general surgery. Then one of Roger's neighbors um tried to take his kid, you know, his kid had been dancing on the coffee table in socks, split his forehead open, needed like six stitches, but because it was after 5:00 p. m. they could not stitch up a cut. So essentially they had while still running a hospital they did not have a hospital in the real sense. And the result was the number of air ambulance flights out of that county increased 650% in a few years. Um because people like who needed very basic stuff, people who needed their appendixes out were getting medevac'd to a real hospital essentially. Air ambulance companies also a big topic for private equity. Um they love ### [30:00](https://www.youtube.com/watch?v=kpyge0vaM6E&t=1800s) Segment 7 (30:00 - 35:00) scooping up air ambulance companies and so the fees for getting medevac'd somewhere are crazy. So I it is tricky, right? Like you do you have to be able to have a hospital that is sustainable. But if we have gotten to the point where we're saying if you live in a rural community, you just do not have the privilege of accessing maternity care? Even at a hospital that was profitable, much less not profitable. Um I think we have some real demons to confront in terms of what people can expect. And I don't even mean this is not like people should be able to expect that for free kind of thing. Plenty of people who had plenty of resources to pay still had no ability to access basic maternity care. Um and so, you know, much less the people who were reliant on Medicare, Medicaid, whatever. Um So, yeah, I think the evolution from treating Toys R Us as the widget and maybe we bankrupt Toys R Us and that's fine to using the exact same tactics that worked for Toys R Us on hospitals and daycare centers and apartment buildings and single-family housing seems like something we haven't fully um confronted the ramifications of. I think there's a kind of another piece as well where there's complicated ramifications to consider. I'd love to get your take on which we're obviously having this discussion um at a university um and uh Stanford has like a pretty okay sized endowment. It's not bad. Um and I think there's a misconception out there that, you know, funds invested in uh private equity firms, you know, these are exclusively funds from wealthy individuals. Um but university uh endowment funds, pension funds, um whose beneficiaries, especially for pension funds, you know, include workers who are being directly harmed or impacted by private equity, um are invested in these types of funds in order to be able to share kind of some of the those profits. And so, what do you make of that contradiction and how institutions um should be kind of thinking about um weighing those two different considerations in groups. Yeah. So, I should say that the research on whether universities and public pension funds get better returns from private equity than they do from, you know, just like mutual funds is so murky. I have read every paper on the topic. I have no idea what the answer is. And it seems like America's elite universities also have no idea what the answer is because like last year within a week there was a big headline about how Yale was like pulling a bunch of its money out of private equity investments because they were scared in the age of like losing research funding due to Trump administration cuts. They were really worried about like needing more liquidity and they also said like "We're not getting the returns we expected. " And that same week Harvard was like "We're putting a bigger percentage of our money into private equity. " So, like who knows, right? So, but I think you can criticize this model without actually knowing the answer to that because again it seems like absolutely no one knows the answer to that. Um, and I think, you know, university endowments are one thing but you mentioned public pension funds as well. Um, so CalPERS for example, the California Public Employees' Retirement System, is the way that California's teachers and firefighters and nurses get are allowed to retire in exchange for their services to their communities, right? CalPERS is the biggest public pension fund in the country. It is also dramatically underfunded. Um, and they have also oscillated back and forth between some years they're like "We're in a funding crisis. We're putting more money into private equity. Oh, no, we're in a funding crisis. We're pulling less, you know, putting less money into private equity. " Uh, so they're always trying to figure it out on the fly, too. But, I think what is so interesting about the pension funds in particular to me is that even if they way out-perform the stock market, let's say. Let's just accept that body of research that says public pension funds do better for through private equity. What you are doing there is you are ### [35:00](https://www.youtube.com/watch?v=kpyge0vaM6E&t=2100s) Segment 8 (35:00 - 40:00) turning capitalism into a zero-sum game for everybody except the people at the very top, because what you are saying is that to benefit all these teachers and nurses and firefighters, we actually have a obligation to screw over all of these Toys R Us workers and hospital employees and whoever it may be. And the pension funds are not getting nearly the returns, you know, even if we accept the best-case scenario, the pension funds are not getting nearly the returns that the private equity executives are getting, right? So, they're never at risk here. The only people who are at risk here are the teachers and firefighters and nurses for not getting potentially not getting as nice of a retirement or the workers at all of these companies taken over by private equity for getting laid off and not getting the severance they were promised in their contract. But, but one of those groups under this system has to lose either way while simultaneously there is actually zero risk for the people at the private equity firms to lose out. Um, I want to make sure we have enough time to kind of open it up for questions here. So, I have one more question for you and then we'll shift to audience questions cuz I can see there's a lot of excitement and folks who want to get in. Um, but I wanted to kind of end a bit on this note of, you know, I think experts have suggested a lot of different reforms and you've talked about several kind of today or in your book. Um curious if you could you know, wave a magic wand, make one change to redesign the rules governing private equity, what do you think the highest impact change would be? So with the caveat that I'm like so not an activist, like I'm a reporter and what I really love doing is like identifying problems and talking about people who are working to find solutions and saying not my problem to figure out the solutions themselves. I you know, Elizabeth Warren has proposed every year since 2018 what she calls the Stop Wall Street Looting Act that would functionally regulate the private equity industry out of existence, putting aside whether that's a good idea or not, that is not going to happen in our lifespans, right? Like that's just off the table. Um I don't think you actually have to do that to solve the biggest problems with the industry. So to get to your question, like if I could make one simple change, I mean, I would love to close the carried interest loophole. That feels like an obvious uh Barack Obama wanted to do that, Donald Trump Joe Biden wanted to do that. Donald Trump has now brought it up again, but it can never get through Congress because 88% of members of the House and Senate take private equity donations. Um — [snorts] — so that would be great, but the one like simple change I would make is private equity firms have to share responsibility for the debt they take on in a portfolio company's name. I have talked to so many folks who work in private equity on and off the record about this idea and I have never heard a counter argument to that is anything other than but then we would make so much less money. Right? Which is just like, yes, I do understand that, but it would also allow you to share in the some sort of societal responsibility, right? Um so that does not actually feel like I think to people in private equity that feels like an absurdly radical change. To me, being very knowledgeable about the industry but outside of the industry, I don't really see the radical part. Well, this has been amazing and I'm sure that has also sparked thoughts for folks. So we'd love to open it up uh to questions from the audience. Yeah, we'll go there. Um and feel free to say your name — Yes. Hi, my name is Anisha. I'm a senior undergraduate student studying economics. Thank you so much for spending time with us today. Um my question is sort of like two parts. One, on the decision to sell to private equity, it's probably made by business owners who in some cases may be closer to the communities. So I'd love to hear your thoughts on that, the decision to sell. And also, once sold, to who are we selling? PE firms spend so much time courting businesses and often times the business owners decide who to sell to. And there's been a shift I think from like pure financial engineering in the '60s like you talked about to now more like a focus on operational excellence. And even these like unique like evergreen or roll-up fund strategies. So do these problems manifest in the same ways in these different strategies? Yeah. So in terms of the decision to sell, this can go a couple of different ways, right? Like with Toys "R" Us, Toys "R" Us was courting offers. And Toys "R" ### [40:00](https://www.youtube.com/watch?v=kpyge0vaM6E&t=2400s) Segment 9 (40:00 - 45:00) Us has a board that has like a fiscal, you know, fiduciary duty to sell to in most cases the highest bidder, right? And private equity firms are very often the highest bidder because they have more strategies to be able to make money than other kinds of owners do. But I've also talked to so many especially doctors are now fending off multiple private equity offers per week. Like just like tiny public tiny private practices, because private equity loves consolidation, right? And so if you can roll up all of the practices in a given area, you're going to do great. I talked to this ophthalmologist in Kentucky, who was like, "Oh yeah, I literally have to beat them off with a stick. " And what was interesting about that to me is I've also talked to a lot of doctors who are getting close to retirement and want to be able to retire. And if you're like a doctor, obviously doctors in the US do pretty well financially, but like private practice is not the way to get rich off of medicine, right? And so a lot of these people are truly thinking like, "Well, I don't want my practice to die and somebody is coming at me with maybe a $3 million offer. " That would change my life in meaningful ways. What am I supposed to do, right? And there are not other kinds of bidders beating down the doors of private practice doctors offices. So I and I've had like a weird number of doctors like come to me sort of like almost like looking for my benediction, my forgiveness, something. And I'm just like I am not in a position to like blame a doctor who is trying to retire, who sells his practice to a private equity firm. Like that is A kind of uninteresting to me and B like I'm not God here, right? Um So I do think there are all sorts of routes to selling to private equity, and I don't think there's a an effective solution to the problem that is just people simply should not sell to private equity, right? Like you have to make structural fixes. I'm blanking on the second half of your question. Sorry. Um on the different kinds of private equity. So, it's like an evergreen fund structure, a royal up strategy, or like a strategy that does lower and no debt and is focused on like operational excellence. Is that any different, or do the problems matter less? — Oh, yeah. Totally. So, I should caveat that like what the version I am of private equity that I am focused on is like very much the leveraged buyout model, right? Um and that is a lot of what private equity does. It is certainly not everything that private equity does, right? Um and I was just reading an interesting paper today about um private equity in the tech world, and like that just works very, very differently um in most cases cuz they're like, you know, a little bit trying to follow the venture capital model of like investing in exciting companies rather than companies that um need some sort of saving. So, yes, there are absolutely differences here, and I think it's worth being specific. Um but I could not write a book that talked about all of them. Awesome. Um okay. Make sure we're not missing the sides. Yes. Yeah. Um you mentioned the role of banks, and I haven't read the book, but it would seem that banks are on multiple sides of the context that you're talking about. They are funding the PE firms. They are um consolidating themselves so that underwriting decisions are made in North Carolina or Wyoming. Um and when they uh uh and then when it comes time to unload the bad performing [clears throat] loan that they made, they will call the PE and say, "Could you help us out? " And we'll finance the acquisition. Can you talk about where the banks play in this? I mean, I think you're exactly right that they play so many different roles. And now a lot of companies, you know, they'll have their bank arm and they'll have their PE arm and it's all under the same roof. And so, you're just like calling the guy down the hall essentially saying, "Let's make a deal. " Um one question I often get from like audiences who are like less informed than this particular group is like, "Well, why would the banks do this when they're on the hook, too? " And the answer is, you know, essentially they're in almost every case right at the top of ### [45:00](https://www.youtube.com/watch?v=kpyge0vaM6E&t=2700s) Segment 10 (45:00 - 50:00) the creditors' list. So, they also take on no risk, right? So, banks and I think the role of banks in private equity has been um has not gotten the attention it merits because banks have a strong interest in preserving this system because they're in the same position as the PE firms where they get theirs either way. Um and I think the way in which they play all sides is really fascinating and I am so not an expert in like the inner workings of banks, but this has really made me want to be. Um because it really does feel like just a just as extreme an example of like you get to play all sides. You get to win no matter what. Um it's a great system. Yeah, thank you. Um Sasha and I'm a second-year MBA student. I did used to work in private equity. Can I give a few push backs? — Sure, that's fine. Um so first on Toys "R" Us, yes, there was a lot of debt incurred, but Toys "R" Us itself was already having a difficult time with its moat given toys are a commodity and Amazon, Target, and Walmart all went online while they didn't, which drove prices down and increased margin pressure leading to, you know, them faulting on debt. Um but no private equity firm would underwrite 100% revenue to interest ratios. Sure. So I guess that's push back one. And then push back two is really on like what you said is private equity makes money even if they don't have good successful outcomes. If you have a $500 million private equity fund, right, you take a 2% management fee, right, and that just alone covers the cost of your team and the resources and lawyers. So the only way you make money is by that 20% incentive fee, right? So you are aligned actually to have successful outcomes for the businesses to make the money that you want to make. So those are my two push backs and I'd love to hear your thoughts. — No, those are super helpful and milder push backs than I expected, honestly. No. Um and I appreciate it. Like I love actually like chopping it up about this stuff with people who know what they're talking about. I So on the Toys "R" Us thing, like yes, Toys "R" Us was struggling. Walmart was like uh beginning to eat their lunch a little bit and then in comes Amazon and Amazon wants to eat everybody's lunch, right? Um And he made a good point about so Toys "R" Us basically had absolutely biffed the rise of the internet. So they struck this deal. This was before the private equity acquisition. They struck this deal with Amazon to say like Amazon will run our web presence and take a cut of all of our deals and like turns out the Amazon executives were just much smarter than the Toys R Us executives and structured it in such a way that like Toys R Us was losing massive amounts of money on the deal and Amazon was making deal. So they got played. Um I do think that the evidence is not that Toys R Us was screwed either way. And to your point like the private equity firms don't come in if they're screwed either way, right? Um but there are plenty of retail chains that were sort of similarly situated from that era that managed to survive the Amazon era. The rise of Amazon. And the difference is that they weren't buried under so much debt. So I think one thing that's really interesting is if you look at the top I think it's the top 50 American retailers now one of them is owned by private equity, Walgreens which was just bought last year. Um the companies that have survived the Amazon dominance have gotten creative about what they can offer that Amazon cannot. I have talked to Toys R Us executives from that time who were essentially saying yeah we had all these great ideas. Were they great ideas? I don't really know. But they wanted to experiment. They wanted to try things. to be responsive to the rise of Amazon. They were not able to do that because there was no money because it was all in the loans and in the rent payments, etc. Um And on the Yeah, so the 20% profits you're right that in an ideal world you ### [50:00](https://www.youtube.com/watch?v=kpyge0vaM6E&t=3000s) Segment 11 (50:00 - 55:00) are making your portfolio company profitable, you get your 20% cut. That is the best case scenario for everybody. But if you look at the Toys R Us deal, the two private equity owners of Toys R Us both walked away from that deal having made money. They never once got the 20%, right? Cuz Toys R Us wasn't doing well enough. But they both made money on the life of that deal. So, yes, the best case scenario is you're able to take that 20% profit share, but the worst case scenario is not that you lose money, it's just that you make less money. Um — [clears throat] — Yes, so we have some people online that have questions and there's a ton of questions in here and I think the overall theme is sort of like what is the alternative to private equity? Like what how do we both like advise and turn around companies um while also getting the resources that they need in the moment. So, in here are some questions just about like what is the role of consulting firms? Um ETAs? Uh can you speak to an investment model that might value companies or their employees in and in of themselves? Yeah, I mean [sighs and gasps] like I say, like my interest is not like let's burn down the system. Um I think that to go back to like my magic wand solution, I think you can have a system that looks very similar to what private equity looks like now, but does require sharing responsibility for the debt. And then maybe probably some companies I mean I would say certainly some companies will fail because private equity is now more conservative and less likely to take on whatever deal because they have to share responsibility for the debt and they don't see a clear path. That seems fine to me. Um if we're saying like private equity can only get into deals where they think there's a reasonable chance of success for the portfolio company that just seems like a fundamentally better model to me, right? Um to say just to say they have skin in the game essentially. Right now they just don't have skin in the game. They are not bearing the burden of the risk. Only the employees, the communities, the customers are bearing the responsibility for that risk. So I don't actually think like you need to blow up the whole system and like create a new one out of thin air. Um I think you just have to get a lot more specific about like who Yeah, who is shouldering that risk. I think we have time for one more. So if you really want to get in here um Oh man, that actually had more hands go up. I feel more overwhelmed. I don't think we've done Have we done any from this side? Okay. Sure, Danush. Um thank you so much. Uh it was a bit dramatic standing up and all, but I'll sit. — Um I was interested in what you believe is the scalability of the employee ownership model and if that like from policy perspective how we can encourage that so that there are better kind of win-win outcomes. Good question and one I've not gotten before. So for context and I'm guessing you know this, but probably other people do not. Once Deadspin, the company I worked for, died out, um most of my former colleagues went on to start an employee-owned publication called Defector. It is wonderful, and I like highly suggest people read it and subscribe to it. It's so fun and unlike anything else out there, I think, in part because it is employee-owned, and they just like they're not responsible to investors, and they are just like making the best decisions in the interest of the publication at any given time. Defector's creation kicked off this whole wave of Excuse me, of other worker-owned media. Um I live in New York, and we have a great local, um employee-owned publication called Hellgate. Um It's such a delight. Um And so, there has been a lot of excitement in media, in particular, about like how much can employee-owned uh companies make up for, essentially. My real take is I think not very much. Um It like it is great. I want it to exist in the world. be part of a better society. I just don't like to stick with the media example for a minute. I just ### [55:00](https://www.youtube.com/watch?v=kpyge0vaM6E&t=3300s) Segment 12 (55:00 - 60:00) don't see any way in which all of these like spunky little startups can replace institutional newspapers in a way that like used to be the dominant form of media in this country, and that we still need, and that we are suffering without. Um So, I think it is like one part of a solution in media and in many other industries. Um And I think individual companies can like make a big impact, and like themselves become really big. I just don't really see a path for enough of them to become really big to be anything more than like one sliver of the solution. And solution is great. If I thought there were magic bullets here, like I would have invented that magic bullet and like not been wasting my time writing a poorly paid book, you know? Um but uh I Yeah, so I am like both very excited about them and glad there are more of them and also it maybe not maybe have not fully drunk the Kool-Aid on like how much they can solve. You know what I've been doing this week? Um in our final kind of 2 minutes, I would love to kind of close with knowing that graduation is just around the corner um and some of the folks in this room or online um are going to spend their career in the private equity space. Um you've spent a lot of time talking to people who kind of work in private equity or around the space. If you had, you know, 2 minutes with a new analyst going into that space, um what would you say uh to them? That's hard. I know. Um I've because private equity executives like largely didn't want to talk to me, um I have talked to like people lower on the private equity food chain like much more than I have to their bosses. Um And I think I mean again, like uh litigating people's individual choices is like so not interesting to me. So, if I had 2 minutes with this person, I would certainly not say, "Oh my god, don't go into private equity. You're going to ruin the world. " Right? Like I do think And I don't think anybody goes into private equity. Sorry, I'm like talking around your question cuz I don't really know the answer. But um I don't think Like I just don't think that like people go into private equity because they're like evil or they want to destroy companies. Like I think there is like a lazy way of talking about this that is essentially like they strip mine companies for fun. Like I don't believe that. That's ridiculous. Um So, but I do think it is worth people starting their careers in whatever industry thinking about what are my values? What about this company that I am working for aligns with my values? And what does not? And how can I allow my values to guide my choices, right? I have worked for companies that I you know, whether immediately or over time it has become clear that my values feel compromised by this. And I think that is a question that everybody should be asking themselves throughout their career, right? And people's values change over time. The things I value in employment now that I am 20 years out of college are very different than what I thought I valued on my graduation day. So I guess what I would say, but this is not specific to folks working in private equity, is just like stay in tune with yourself. what you want out of your career, but also out of your life. And do your best to make choices that align with that. Awesome. I love that. And on that note, let's say a huge thank you to Megan for being here today. — ### [1:00:00](https://www.youtube.com/watch?v=kpyge0vaM6E&t=3600s) Segment 13 (60:00 - 60:00) — Hey. --- *Источник: https://ekstraktznaniy.ru/video/51482*