Comment by outop | Hacker News Reader

Comment by outop | Hacker News Reader

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I think this is naive. When (for example) a private equity fund buys a casual dining chain, they will go through how the business is run in painstaking detail and try to understand exactly what makes the experience 'work' and what changes are possible or advisable.

If the olives in the salad don't taste as good or there are fewer breadsticks or the lighting makes it feel more relaxed or the greeters have more time or the menu gets shorter or the desserts arrive quicker or the pasta is less salty, that's because someone involved in that decision decided it was worth paying more for or not worth paying what they were currently paying, taking into account what factors will make people change their mind about eating there. There isn't just a random dude who sits in a room somewhere and says "let's make the food worse" based on his own whim.

If the food gets worse and it just doesn't have that same vibe anymore and you don't want to go there next time, it's because an expert in marketing or restaurant management or food design made an error in their judgement about what they could cut, what they should improve, and what they needed to keep the same. That, or the change which turned you off attracted more customers or more desirable customers who have different preferences to you.

Your restaurant changed because its corporate policy changed. But the capital structure is totally relevant in understanding why that changed.

> There isn't just a random dude who sits in a room somewhere and says "let's make the food worse" based on his own whim.

Not directly, but only 1 step removed. The dude is saying "let's charge the same or more for cheaper, lower-quality food, to make a higher margin so our PE firm makes more money".

> that's because someone involved in that decision decided it was worth paying more for or not worth paying what they were currently paying, taking into account what factors will make people change their mind about eating there.

Evidently not really taking the factors into account. Would the limited partners eat there? More than once?

I don't see the relevance of this. No one eats at Red Lobster thinking "this is the exact dinner experience that billionaires would design for themselves".

Walmart is a family owned business. Do you think that the Walton family buy groceries and home furnishings there? McDonald's is a public company. Do you think that its CEO and the fund managers who hold the biggest stakes in it regularly eat there?

> McDonald's is a public company. Do you think that its CEO and the fund managers who hold the biggest stakes in it regularly eat there?

Yes: https://financialpost.com/executive/mcdonalds-new-ceo-eats-a...

What makes you think that PE equity owners have any different incentives to any other chain restaurant owners to cut costs and improve margins??

Why would you think that private equity owners would ever make things worse to improve margins without giving careful consideration to whether or not the changes will make people less likely to spend money at their restaurants??

Because PE equity owners DO have different incentives. It's reasonable to think things that are true.

PE is incentivised to squeeze the business and extract the value built up over time, to get large, quick returns, even if it destroys the business (they can sell the corpse after). A restaurant which delivers regular, single-digit restaurant margins indefinitely would be considered a PE investment failure.

So, the answer your 2nd question is also "because it's true". I'm happy to be convinced otherwise on either count, if you think differently.

You've just repeated and rephrased the claim that I challenged without providing any evidence or argument at all. Your actual answer to both questions is "because I believe this".

Can you explain how the math works that PE owners make money from discouraging people from going to a restaurant, and other owners don't have the same incentives?

I explained the difference in incentives: Restaurant margins are a PE failure [0], that alone would explain it. Your framing of the scenario as "discouraging people from going to a restaurant" is... less than charitable. A better description would be "extracting the value of customer goodwill from the business and moving it into their pockets". They're PE, they prioritize big, fast returns over long-term customer value and small, slow returns.

Add to that, the leveraged buyout mechanism that Red Lobster went through is famous for siphoning value off the target in the form of fees and other schemes, and then leaving the empty husk to die under crippling debt[1]. A clue here is that the 2nd paragraph of the article we're discussing is, "In mid-April, Bloomberg reported the debt-laden seafood chain...", and it sounded like they had trouble paying it in part because of the rent payments that started when the PE firm sold their real estate to pay for the buyout.

Can you explain why you think anything I've said so far is untrue? After all, we can't assume a PE LBO executor and a small business owner have the same incentives unless we have sufficiently convincing evidence to support that assumption.

0: https://www.indeed.com/hire/c/info/restaurant-profit-margins...

1: https://www.investopedia.com/articles/stocks/09/corporate-kl...

You've replied with the same trivial urban myths that are endlessly repeated about private equity.

You've compared the incentives of private equity and a small business owner. Do you think that Red Lobster was previously a small business?

Why can't you answer the question on the different incentives that apply to different owners of large businesses? If a private equity fund can make a profit by buying a successful business, discouraging all its customers and then "selling the corpse", why can't other owners do the same thing?

Why does the company having a large amount of debt change the decision a restaurant chain's management makes between selling cheap and good food, or cheap and bad food, or expensive and bad food, or expensive and good food?

Literally everything that you've said about this has been handwaving and rumours. Explain the decisions based on where the money comes from and where it has to go to, if you can (you clearly can't).

You citing Nabisco as the best example of what you believe is comical since it's from 40 years ago (and famously fraudulent).

I worry, friend, that in your haste to reply, you may have accidentally replied to yourself here.

Do you think private equity funds could have other end goals when buying a company?

Other end goals than what?

Other end goals than making people happy by serving good quality shrimps for a reasonable price? Obviously they do.

Other end goals than making money? Of course they don't. But neither did Ray Kroc, who was extremely upfront about how McDonald's is a business whose strategy is to acquire real estate, funded by burger sales. Neither do the Waltons, who aggressively cut margins on all their products and compete to drive other retailers out of business. (Neither does General Mills, who used to own Red Lobster, nor Darden Restaurants, the public spin-off that owned Olive Garden and Red Lobster, nor Starboard Value, the activist investor that pushed for Red Lobster to be sold.) None of these companies exists because of a high-minded commitment to customer service, or fair play, or delicious food.

If turning a viable restaurant chain into a chain that no one wants to go to and then selling it is an attractive business proposition for private equity, than it should be for McDonald's and Walmart too. Unless you can point to some specific causal connection between the ownership structure and the decision about whether or not a restaurant should serve stuff that people actually want to eat?

The example of McDonald's acquiring value through real estate, funded by the business, is pretty poingnant, considering the PE firm here did the exact opposite: sold all the valuable real estate and rented it back from the buyer under crippling rent payments, funded by the business.

Why did the PE firm do that when McDonald's didn't?

Because the PE firm had partners who bought the underlying real estate for themselves.

I'm sure that there are PE firms that really do try to make businesses successful and profitable, but the vast majority are in it to sell off anything of value and dump all the ensuing debt into a company that will shortly go bankrupt.

If you own a company, and a PE firm buys one of your clients, that should be a hint to require prepayment for everything they ask for after that. They will leave you holding the bag as a creditor.

Your first point: this would obviously be serious fraud. I'm not sure if you have any evidence of this in this particular case or is you are alleging this is standard practice by PE funds?

Your second point: why would someone lend money to a company which was going to go bankrupt? If PE firms always made the companies they controlled bankrupt, no one would lend to them.

Your third point: if someone buys a company from you, how does it make you a creditor of the bought company?

It’s not fraud if the sales are advertised and fair… even if they’re not widely publicized. But that was just spitballing.

For 2), people loan to the PE firm because they extract all the value for themselves. Their creditors get paid. People who loan to PE-controlled firms don’t seem terribly wise to me, but maybe they can model them like junk bonds.

For 3), if the firm buys one of your clients, be cautious.

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