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From the article:

> To raise enough cash to make the deal happen, Golden Gate sold off Red Lobster's real estate to another entity — in this case, a company called American Realty Capital Properties — and then immediately leased the restaurants back.

So private equity didn't try to make Red Lobster profitable before stripping it of its assets. That was literally their first move.

Because it was a dead man walking by the time PE bought it. The underlying assets were worth more than the sale price so it was never going to make sense to do anything other than what happened.

With that said, the tax code and employee law could be improved so there are stronger guardrails to protect some stakeholders more.

> The underlying assets were worth more than the sale price

That's not so clear to me. The real estate wouldn't have been worth so much without the existing restaurants having to pay rent.

Sure, but Red Lobster should be able to make ends meet paying that rent. Their accountants should run the numbers and have numbers for what the restaurant made after paying rent, and what the real estate investment made from rent. Even though the same entity owns both they still need to know where the money is. If a restaurant cannot make money except that the real estate is paid off and thus rent free (or maybe bought at lower than current prices and so payments are artificially low) then they should close and rent the real estate out to someone else.

The above is something people often fail to think of. If you (as is common) have something that could be two independent business with one supplying the other, then you should have your accountants figure out the numbers for each separately. (this is not easy, and eventually not worth it)

Retail property value is mostly about location, not whether there is a currently successful business operating there.

That's pretty standard, even for well-run chains. Gives the primary business (making food profitably) a huge cash infusion, and removes a distraction.

Obviously deal terms are important, but that action on its own isn't stripping for the sake of stripping.

> Gives the primary business (making food profitably) a huge cash infusion

What is "stripping for the sake of stripping" of not this?

McDonald's, possibly the most successful chain of them all, doesn't seem to think owning real estate is a distraction.

Part of this is because of how McDonald's handles franchise agreements (for various reasons).

That's because McDonald's is a real-estate company that finances itself by selling hamburgers.

McDonald’s is an REIT that happens to sell hamburgers.

How is owning real estate a distraction for a restaurant chain? Presumably their new landlords aren't going to maintain kitchen equipment and other infrastructure that makes up a lot of the maintenance burden. If it's really such a distraction, outsource it—but don't sell the real estate.

That depends - how long will the location be a great location for that business? You really need an good accountant and a reliable psychic to figure this out, an accountant can figure out how tax code, laws, and other details apply - while the psychic can tell you how the tax code, fads, and your life will change in the future. (I don't believe a reliable psychic exists - but you still need one to figure out the correct answer)

If you will be there for decades it is worth owning. The land can be paid off and still working for you. Likewise the building is depreciated and paid for (check with an accountant!), but you are still there using it - you still need to remodel and maintain it though. You pay more upfront, but long term it is a better investment.

However many businesses are fad - they do well for a few years and then people move on to the next fad and you should close up. If you only need the real estate for a couple years you should rent/lease: you won't see a payoff from the upfront costs, and you are stuck with the real estate while trying to sell it.

"Gives the primary business (making food profitably) a huge cash infusion, and removes a distraction"

This is so suspiciously MBA-esque: - Owning real estate (and responsibilities associated with it) are not distractions: they are the cost (and responsibilities) associated with running a business. - "a huge cash infusion" followed by [correspondingly] huge rent payments; the business becomes a prisoner.

There certainly are distractions when running a business, but owning the spot of land where it's installed is not one of them.

Do you think every business owns the land and building it operates in? Real estate is expensive. Maintaining a building is expensive. There are plenty of businesses that rent to avoid the capital requirement and headache of property ownership.

You are thinking about distraction wrong. Owning real estate isn't so difficult/time consuming that the managers lose much time/energy deal with it instead of running the business.

However it is an accounting distraction. If you own real estate you need to figure out which share of your profits comes from rent of real estate and which from the restaurant. If you cannot make both business profitable that means you should get rid of one. (sometimes that means sell the real estate and rent, sometimes it means close the business and rent the real estate to someone else). If both work out profitable, then keep going as is. (don't forget about intangibles, if real estate is a small loser it might be worth it just because you don't have to move and so can get loyal customers - but you should be intentionalable about accepting this loss)

> The "private equity kills beloved brand" stories are usually overcooked, as far as I can tell.

What are some well known examples of "private equity turned troubled brand into wild success" where products become better than ever and consumers couldn't be happier? It seems like all I ever hear are stories where a brand is "rescued" only for it to be butchered for parts in a couple years time.

Maybe Dell? Not exactly a consumer darling, but certainly a successful story for a PE LBO.

There was a side plot of "PE partners with charismatic former founder", but the main story was PE cost-cutting, layoffs and loading the company up with debt.

That has more to do with Silverlake capital preferring steady, regular cash flows. They like to buy up and hold and just run things like a normal business, no MBA shenanigans.

Barnes & Noble, maybe?

They were taken private a few years back, and after a long slow period they're expanding again.

It's especially jarring to see a story like this with Red Lobster as its subject.

I'm curious if anyone who has a negative reaction to this article has actually been to a Red Lobster in the last 10 years. They serve poor quality food for similar prices as other sit-down restaurants. You're as likely to get poor service as you are anywhere else (maybe more so), but you'll still have to tip the same amount and spend the same amount of time there. There is no value proposition and certainly no cause for mourning or hagiographies.

> in the last 10 years.

From the article:

> In 2014, amid flagging sales and pressure from investors, Darden sold Red Lobster for $2.1 billion to Golden Gate Capital, a San Francisco private-equity firm.

Yeah looking back I don't know why I qualified it - it was bad before then too.

> but you'll still have to tip the same amount

Nitpick: You'll have to tip the same amount as another restaurant with bad service. If it's awful enough, that works out to about a 20% discount on the meal.

People who don't know how to tip bad for bad service (most of us!) are why tipping is bad. When you get a bill you should have a discussion about service quality with everyone and then decide what to tip (if you are solo is can be just you but still think). If you don't do that then you failed to use your tipping power.

We see eye to eye on this. I'm not a stingy tipper and I don't look for reasons to save a buck. I'm also suuuuper understanding about problems that aren't the waitstaff's fault: if the restaurant is packed but there are only 2 waiters and they're running themselves ragged, I'll do right by them. I delivered pizza when I was a kid and I feel a kinship with people trying to get food to a table.

If it's a normal night and I see our waiter playing with their phone or chatting with the bartender while I unsuccessfully try to wave them down for a drink refill, I'll remember that when I'm paying the bill.

>The PE firm would also prefer to have a nice profitable business

Quotation needed. Usually they put no or little effort in this. They want to get their profit by destroying the business, either by breaking it down and selling the parts or by turning it into a shitty consumer-hostile money-grabbing version of its former self

I never understood how PE firms get blamed for rising costs in doctor's offices and vets. If a PE firm can just unilaterally raise prices, then why didn't he mom n pop practices do the same? Where is the competition? Why is there a barrier to entry that prevents some new young doctor or vet from coming in and undercutting the PE business?

It's common for PE to buy many "mom n pop" practices with the goal of reducing competition (eg https://kgnu.org/investigation-finds-that-private-equity-was... )

Reducing the friction of starting new business is good. But I don't think it's sufficient to protect consumers. (If it was sufficient, we wouldn't need antitrust law at all, right?) For example, the rolled-up firms might have economies of scale that allow it to undercut new competitors.

They don't really prevent new competition, rather than target markets that specifically have a larger barrier to entry such that new competition is rare to form.

i.e. these vet clinics - a PE firm can buy up 40 disparate vet clinics in a large city then raise fees and cut staff. You may be lucky if a few new clinics appear over the next couple years once customers are fed up with the increased price and reduced quality.

It's still a win for the PE firm and a loss for most of the consumers.

Presumably because mom n pop businesses are not perfect optimizers and end up charging below the profit-maximizing price

This is exactly it - mom and pop businesses will charge enough for a comfortable lifestyle for themselves, but not really feel pressure to charge above that.

And if you have a vet, say, who is near the end of his career, he's already amortized all the training/educational expenses, and so can run out until retirement at relatively low rates compared to a brand new one.

The companies take advantage of this, but the customers also like it, too, because the offices will be fancy and feel new and they can schedule an appointment online.

Same thing that Great Clips et al did to barber shops.

> If a PE firm can just unilaterally raise prices, then why didn't he mom n pop practices do the same?

Because they have a connection to their community, which means both (1) they're more vulnerable to backlash, and (2) they don't want to, because it would be taking directly from other members of their community.

Mom-and-pop shops tend to price based on what is fair. PE firms tend to price based on what is profit-maximizing.

The two groups have very different goals. One wants sustainable profit running a sustainable business, the other wants short-term profit by any legal means necessary.

The mom and pop, if they raise prices too high, punish themselves when they lose business. Perhaps even to the point of insolvency and folding.

If the PE firm raises prices too high, they don't punish themselves at all, because those customers go elsewhere. "Elsewhere" being just another office/practice which they also own. Mom and pop couldn't do that themselves. They didn't have monopoly-like powers to ensure their success.

> Why is there a barrier to entry that prevents some new young doctor or vet

Because the young ones are getting started, and do not have the capital to start a practice (or to buy an existing one). How much does a dental x-ray machine cost? How much do the dental chairs cost? How much does the lawyer that fills out the paperwork to get the permits for that retail space to be a dental office cost, per hour, and how many hours of paperwork?