Private Equity and the Future of American Capitalism

Hello everybody. I'm so happy to welcome you here. Um my name is Anat Mati. I am the faculty director uh founder faculty director of the cooperation society initiative Cassie 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 Cassie has the letter S uh in the 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 operate in this system and the people impacted by this system. So um we have today uh Megan Grwald who will be

introduced by Helen Kashman. Helen Kashman is one of our uh beloved student leaders who are part of our organization, our little initiative at at GSB, which is a joint uh work of

passion uh by uh 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 um of American capitalism. Um, as Anat mentioned, my name is Helen Kashman. Um, and I'm

really excited to be here leading this conversation today. Before we we jump into it, I wanted to kind of start with a level set on um, what is private equity? Uh, because it can sometimes be

a bit of an opaque industry. Um, so these are firms that pull money from investors to kind of buy, restructure, and sell companies within a short-term period of a few years for a profit. Um

they're typically targeting underperforming companies frequently using a mechanism called the leveraged buyout where part of the purchase price um is funded by debt which is then

loaded onto the acquired company. Um they take active control in order to increase company value through cost cutting restructuring management changes and other growth initiatives. Um

and they earn management fees on the total capital committed to the fund. um and then keep kind of a percentage of profits generated um by selling those companies. So they manage almost eight

trillion in assets um and control companies uh that employ over 12 million Americans. Um and 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, uh and Party City, three of my favorite brands. Um, given that we're holding this at Stanford's business school, I'm sure

there are a number of folks in the audience uh who have worked in the industry before school or want to work in uh 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 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. Um, 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 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 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-inchief of Dead Spin,

launched digital features programs at Esquire and New York magazines the cut. Um has edited investigations and narrative features for ESPN uh the magazine and has covered the war in Iraq

from Baghdad for the Washington Post. It's a pretty 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 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 uh how you 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 a 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 bis without also covering

business, but I had never been like, I am a business journalist. Um, and then I was running Dead Spin, 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 Dead Spin story. Um, it was part of Gawker Media, which was bankrupted by Peter Teal 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 biders 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. Dead Spin 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 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 Dead Spin 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 Dead Spin 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 three months. And

look, like Dead Spin 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 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 and 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 Natalyia 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 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 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. that is a lot of 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, healthcare, 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 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 because you 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 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 long-term health of the company. And so I'm wondering a bit about like how 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 or

things that would better align people's interests. >> Yeah, I think 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 five, six years, and ideally

you're getting out before that. Um, and so what you end up with is an industry that where the 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 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 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 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 that um can play out which was around um obviously as part of the kind of leverage 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 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 that timeline, but it's employees and creditors who ultimately kind of absorb

those losses. um thoughts on that risk asymmetry piece there and um if if there could be you know uh changes or or adjustments that would uh correct kind of that challenge in in incentives.

>> 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 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 there will be folks who would kind of the counterargument to that would be many of these companies

kind of come in and are fragile to 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 in efficiency and you know supporting underperforming companies by 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 and what that structure needs to to look like or be in place like what 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, which 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 up. >> Yes. Exactly. Right. There is a 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 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 the majority of the 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 Savos, the co-head of private equity at KKR, to his credit was the only private equity executive who gave me an on thereord 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 mid6 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 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 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 being really interested in healthcare and housing and education, things that are more foundational to our economy and to our societ. 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 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 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 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 uh rural Wyoming um a small community called Riverton like 10,000 people. and Riverton had a hospital. Um, the nearest other hospital was 30 miles away

uh through a pretty treacherous like windswept canyon. I've driven it many times and don't love doing it. Um, 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 had been for-profit. it had like basically worked when they were acquired

by a private equity firm by Apollo Global Management. Um they were profitable. Um 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 130 mi away

and just started cutting more and more and more services. So, um, 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. Um, 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 um, 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 medevaced to a real hospital

essentially. Air ambulance companies also a big topic for private equity. um they love scooping up air ambulance companies and so the fees for getting medevaced 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 a hospital that was 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 um 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 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 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 and groups?

>> Yeah. So I should say that the research on whether 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 uh 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? Um 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 Kalpers, for example, the California public employees retirement system is the way that California's teachers and firefighters and nurses get are are allowed to retire

in exchange for their services to their communities. Right? Kalpers 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 outperform 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 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 we'll shift to audience questions because I can see there's a lot of excitement and and folks who want to get in. Um, but I wanted to kind of uh end a

little 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 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 am 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

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 wanted to do that. 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, so that would be great. But, but the one

like simple 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 counterargument to that 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 I'm sure that has also sparked thoughts for for folks. So, would love to open it up uh to questions from the audience. >> Yeah, we'll go there.

>> Um, and feel free to say your your name. >> Hi, my name is Anusha. 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 is 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 decision to sell and also once sold to who we are we selling the films spent so much time quoting 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 rollup 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 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. Um, but I've also talked to so many especially

doctors. 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? Right. And so if you can roll up all of the practices in a given area, um you're going to do great. I talked to this opthalmologist in Kentucky who was like, "Oh yeah, I literally have to beat

them off with a stick." Um 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 just

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 bidters beating down the doors of private practice doctor's offices. Um, so I and I've 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 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 am blanking on the second half of your question. Sorry. >> Um, on the different kinds of private

equity. of like an evergreen fund structure, a rollup strategy or like a strategy that does low or no debt and is focused on like operational excellence. Is that any different or do the problems

matter? >> Totally. Totally. So I should caveat that like when the version I am of private equity that I am focused on is like very much the leverage 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 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 because 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 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. Yes. so that underwriting decisions are made in North Carolina for Wyoming um and for New York uh and and then when it comes time to unload the uh bad performing loan that