Stuff You Should Know – "Private Equity: Your Ears Will Bleed"

Podcast: Stuff You Should Know
Hosts: Josh and Chuck
Release Date: August 21, 2025

Episode Overview

Josh and Chuck tackle private equity: what it is, how it works, why it’s become such a loaded and controversial corner of the financial world, and the very real impacts it has had on everything from major retailers to healthcare, housing, and media. In typical SYSK style, the hosts blend research, history, and layperson metaphors to make sense of a complex subject—while not hiding their strong opinions about the downsides and abuses in the private equity space.

Key Discussion Points & Insights

What Is Private Equity?

• Definition: Private equity is an "alternative investment vehicle"—basically private funds (often for wealthy/institutional investors) that buy, restructure, and eventually sell companies for profit.
• Exclusivity: Traditionally accessible only to the rich or institutions; “You have to be in the club to even invest in this." (Josh, 02:33)
• Lack of Transparency/Oversight: Regulators require less disclosure than public companies, "and they want to keep it that way." (Chuck, 03:23)
• Accredited Investors: Only those with high wealth or professional experience (or institutions like pension funds) can typically invest.

How Does Private Equity Work? – The Playbook

• The “2 and 20” Formula: Managers collect 2% of a fund’s assets and 20% of the profits over a certain threshold.
• Leverage Buyouts (LBOs):
  • Private equity firms purchase companies mostly using borrowed money, then make the acquired company responsible for the debt—a process Chuck describes as “evil financial genius”.
  • “It’s like if you bought a house, but the house had to take out a loan so you could buy it, and then you didn’t care about the house.” (Josh, 07:08)

The Cultural & Historical Roots

• Milton Friedman (1970s): 'Only shareholders matter.' The philosophical underpinning of modern corporate priorities.
• Michael Jensen: Advocated that CEOs be paid in stock to align with shareholder interests and championed LBOs to enforce “efficiency" through crushing debt and aggressive cost cutting.

How Private Equity Makes Money

• Asset Stripping: Selling company land/buildings (sometimes to themselves), then leasing back at higher rates.
• Loading on Debt: Taking out additional loans after acquisition, then distributing the cash to investors.
• Flipping Companies: Making short-term cosmetic improvements to sell the company quickly, regardless of long-term health.
• Memorable Quote: “It’s a vampire process at its worst.” (Josh, 12:30)

Notorious Private Equity Takeovers & Fallout

• RJR Nabisco (Barbarians at the Gate, 1989): Set the infamous tone for the era—a dramatic collapse, massive job losses.
• Toys R Us: 30,000 jobs wiped out in the iconic retailer’s collapse.
• Sears/Kmart: Ed Lampert’s management—stock buybacks, asset sales, self-dealing real estate transactions—with 200,000 jobs lost under his watch. “It's like robbing Peter to pay Peter.” (Josh, 29:46)
• Red Lobster: Real estate sold out from under the chain, then leased back at inflated rates; supplier became owner and tried an “endless shrimp” promo that hemorrhaged money.
• Vice Media: Bought out, then drastically devalued by new owners unfamiliar with the media business.

Private Equity in Sensitive Sectors

Healthcare:

• Surge in private equity ownership caused higher costs, worse care, increased hospital-acquired complications, and even higher mortality rates in nursing homes. “Private equity ownership increases mortality rates by 11% just because PE’s cutting corners to save costs.” (Josh, 44:04)

Housing:

• Blackstone (US’s largest landlord) now owns hundreds of thousands of rental units. Rents rise, services drop.

Media:

• Local newspapers and outlets—private equity ownership led to staff reductions, less local reporting, and lower civic engagement.

The Occasional Success Stories

• Hilton Hotels: Blackstone’s buyout and smart reinvestment doubled the chain’s size and led to record profits—all without gutting the business.
• Burger King: 3G Capital’s purchase led to a $28 billion gain on a $1 billion investment, largely through successful streamlining (though still at worker expense).

Policy & Structural Issues

• Carried Interest “Loophole”: Managers are taxed at a lower capital gains rate (20%) instead of standard income tax rates (up to 37%), even though fees are essentially personal income. “All of this is completely legal. It's just despicably unfair.” (Josh, 29:54)
• Pension Funds: 89% of public pension funds have money in private equity, meaning regular people’s retirements are exposed to the system—often without direct consent.

Notable Quotes & Memorable Moments

• On How PE “Works”:

  “You have to basically be in the club to even invest in this, at least traditionally ... The government says you're on your own.” (Josh, 03:00)

• The American Business Analogy:

  “It’s like if you went and bought a house, the house had to go take out a loan and a mortgage so that you could buy and own it.” (Josh, 07:08)

• On Milton Friedman & Corporate Priorities:

  “The only thing any corporation should ever worry about is their shareholders. The people don't matter, the product doesn't matter...” (Chuck, 07:30)

• Asset Stripping Example:

  “They sold off all their restaurants, just sold them off. And then they sold them to a company who turned around and leased them to Red Lobster ... their leases amount to $158 million.” (Josh, 11:33)

• On Loopholes and Fairness:

  “All of this is completely legal. It's just despicably unfair.” (Josh, 29:54)

• The Flaw at the Heart of PE:

  “It's a vampire process at its worst.” (Josh, 12:30)

• On Hospitals and Healthcare:

  “A study found that private equity ownership increases mortality rates by 11% just because PE's cutting corners to save costs.” (Josh, 44:04)

• On the Scope of PE Impact:

  “The companies they own in the United States employ more than 13 million people and they account for about 2 trillion...about 7% of the GDP.” (Chuck, 07:30)

Timeline of Important Segments

• [01:57] – Episode intro; promise to make economics interesting
• [02:32] – What is private equity and the clubby nature of investment
• [04:46] – Explanation of the “2 and 20” manager compensation
• [07:04] – Analogy of buying a house; why LBOs seem nuts
• [10:08] – Milton Friedman and Michael Jensen set the stage for ruthless capitalism
• [13:43] – The consumer and product usually suffer
• [19:36] – KKR and the first big leveraged buyouts
• [21:51] – Barbarians at the Gate, RJR Nabisco
• [24:34] – PE boom post-2008 crash; explosion of private vs. public companies
• [25:17] – Toys R Us and the human impact of mass layoffs
• [26:14] – Deep dive into Sears/Kmart collapse and Lampert’s questionable practices
• [31:59] – Red Lobster and the endless shrimp debacle
• [43:20] – PE in healthcare, hospitals, and rising mortality
• [45:28] – Blackstone as landlord and the effect on US rental housing
• [46:13] – Hilton as a rare positive PE turnaround
• [48:48] – How public/private pension funds and even 401ks now have exposure
• [49:24] – The carried interest tax loophole
• [51:36] – Summing up PE’s broader societal impact

Tone and Takeaways

Josh and Chuck openly admit their skepticism and frustration at the private equity model—particularly its tendency to unleash profit-driven destruction on well-known companies, harm workers and communities, and exploit regulatory/tax loopholes. But they fairly note the occasional bright spots where a company truly is improved by private capital and smart management.

• "It's really tough not to be [biased] when you really dig into this stuff, you know?" (Josh, 51:36)

For Further Listening

• “Barbarians at the Gate” (book/movie)
• Previous SYSK episodes on the 2008 financial crash
• Upcoming episode (teased) on the decline of local journalism

This episode is essential listening for those who want to understand how abstract financial strategies translate directly into job losses, price hikes, and even public health crises—and why reform is so hard to come by in the world of private equity.