00:03:30.160Obviously, Democrats are more pro-government,
00:03:32.200but I feel like as someone who doesn't understand finance at all,
00:03:35.860I have theories about how the government spends our money,
00:03:39.060but I feel like it's something that I would probably agree with,
00:03:43.180even as someone who's progressive, which is always something interesting,
00:03:46.480because I don't even understand it, but I think I've been told it so many times
00:03:49.240that I'm like, yeah, of course, I'm sure the government wastes our money.
00:03:52.860So today, we're going to talk about what it actually means to run something like a business,
00:03:58.740the role of the businessman in the American psyche,
00:04:02.240and why it is key to understanding what's happening right now.
00:04:07.280And we're going to do all of this through the lens of the news of a recent bankruptcy filing.
00:04:13.180So, Caro, did you know that Hooters is filing for bankruptcy?
00:04:17.780I know because you have been yapping about it big time since it happened.
00:04:23.040But it would not have crossed my radar otherwise.
00:04:26.100Okay, cool. So, yes, the news came out recently that Hooters, the beloved juggy juggernaut of American fast casual dining, is filing for bankruptcy.
00:04:36.040Caro, I want you to read the selection of headlines that I pulled from the last several years about Hooters.
00:04:42.040So if you'll just tell us the year it was published, what it says, and who published it.
00:05:08.600Are it sexist uniforms to blame? That's from Vox.
00:05:12.8402017. Hooters is shutting down locations, re-strategizing after recent study says millennials aren't that into boobs. That's from Complex.0.90
00:05:22.0402017. Millennials have a new attitude about cleavage that's forcing breast-rot Hooters to close locations and change its strategy. That's the Independent.1.00
00:05:31.580And then another 2017, psychologically scarred millennials are killing countless industries.
00:06:58.460First of all, Riley and I love a good restaurant.
00:07:03.620We don't love Hooters, but we have known to partake in Buffalo Wild Wings so often that a beloved family member gave us a gift certificate for Buffalo Wild Wings at Christmas.
00:07:14.420I was at B-dubs with a couple of my friends, and they paid me $5 to eat an onion, and I did, and then I threw up in the parking lot.
00:07:51.900Cars, trash, litter on the side of the road.
00:07:54.220All right. So, I mean, yeah, who do you suppose this nebulous they is? The woke feminists and the beta males are forcing Hooters into Chapter 11? I want us to pause here. How would you classify the story that has been unfolding in the media about what is happening to Hooters?
00:08:15.520Is your question, how do we contextualize this with American media?
00:08:19.340To me, as I looked at this, I was like, okay, so basically what you have here is a cultural explanation. It's that we feel differently about tits now. It's an attack on masculinity. Masculinity is at risk because these pussy soy boy millennials don't understand the value of a good mid-market fast casual chain.
00:08:37.480Yeah, it's also interesting because when I think about the mall in my local hometown, there were probably 40 big American brands and they have since been consolidated to maybe 10 or 15. So I'm also kind of like, I don't know, it's hard for me to believe that Hooters is ending or shutting down because of woke feminism when a Buffalo Wild Wings, which is very alpha male coded in its own way, is doing just fine.1.00
00:09:01.460Well, that's because you have a brain, Caroline, so I'm going to need you to suspend that for a moment. Here's another analysis in the New Statesman, which is a more liberal publication.
00:11:07.320So you have your usual suspects. You have young people are more socially conscious than the old farts who enjoyed places like Hooters. You have market conditions are hard because of rising food and labor costs, which make fast casual dining less affordable. You have the idea that America is culturally different from the 1980s, and that's why restaurants like Hooters are struggling.0.92
00:11:28.600And there is a kernel of truth to all of this, but the problem is that none of this is even close to the real reason why Hooters is now declaring bankruptcy.0.99
00:11:57.600I never would have guessed. Not private equity.
00:12:02.000So when they declared, when Nick Adams or whatever his name is,0.99
00:12:06.620declared that the woke beta soy boys were to blame, he was right.0.97
00:12:10.020He just did not specify that it was the woke beta soy boys who run private equity firms.
00:12:16.120Okay, so in order to really understand what's going on here,0.85
00:12:19.620we kind of have to do a primer on private equity.
00:12:22.500So special shout out to the DOJ prosecutor who I have befriended against his will, who specializes in private equity, who taught me all of these things.
00:12:32.000But first of all, Caroline, what do you know about how private equity works?
00:12:36.200All right, this is where the mask comes off, folks.
00:12:42.140I think that you chose this episode as a way to intellectually neuter me in front of our community.
00:12:47.860Okay, what do I know about private equity?
00:12:50.060My best description would be they buy companies, strip them for parts and basically take the profitable bits and then just like leave the carcass behind and move on to the next victim. Is that correct?
00:13:02.860That's actually a great explanation. Yeah. So all I want to do now is add some color to like mechanically how that happens. Simply put, private equity firms make money with a relatively predictable playbook. So that's not to say that every single P.E. firm works this way or that every single P.E. institution in America is like doing this. But you do tend to see this pattern play out over and over again.
00:13:29.100The process of private equity investment is you use a little bit of the firm's money,
00:13:35.980you take some money from investors, and then you combine that money with a lot of debt,
00:13:41.520and you use those funds to buy a company with the intention of selling it for more money later.
00:13:47.280So you have three funding sources, okay? You have the firm's money, you have investors' money,
00:13:51.840and you have debt. Prior to the 21st century, the less euphemistic name for this process,
00:13:59.100was a leveraged buyout because you're using leverage or debt to acquire a company, but then
00:14:05.520that company is who owns the debt. Like, they are the ones responsible for paying back the debt.
00:14:12.200PE guys used to be called corporate raiders before we all got more, like, comfortable with our
00:14:17.760economy being constantly raided. So if you've ever heard the term corporate raiders, that was almost
00:14:22.480certainly referring to private equity. That's really interesting. That's a way more accurate
00:14:26.720depiction of what's happening. So this part is very, very important that the company that they
00:14:31.720are buying is the one that owns the debt. It's like the PE firm does not technically hold it.
00:14:37.440So we'll get into kind of the nuances of that in a little bit. But the buyers, the private equity
00:14:42.120firm, they then use the cash flow from the business's operations to service the debt that
00:14:47.800they used to buy the company. So for example, if I used my own money and a bunch of debt to buy a
00:14:54.780Competitor's Feminist Podcast. That would not be expensive.
00:15:01.140So I'm going to borrow $50, okay? I would use their subscriber revenues to make the monthly
00:15:07.320payments on the debt that I took out to buy them. So then slowly over time, I'm like increasing my
00:15:12.520share of ownership as my equity becomes worth more and their subscriber revenue is paying down
00:15:18.380the debt or the leverage that I had used to purchase them. Okay. There is a legitimate role
00:15:23.600for finance and like for this process for debt in the economy, some businesses are very capital
00:15:29.760intensive. Like you and I started a media company together called Mouthy Media. We are now the
00:15:33.980co-owners of that media company. It owns this podcast that we produce. And we didn't need
00:15:39.260capital or investors to do that because media is a very low capital expenditure business,
00:15:44.000or it can be. But if we wanted to start Mouthy Airlines, we would have needed investment from
00:15:50.360somewhere. Because when you get started with an airline, you need $100 million for a single plane.
00:15:55.640Someone would have had to take a risk, invest in our vision, and that investment can come from
00:16:01.620private investors who want to make a profit. It can come from government loans. It can come from
00:16:05.840public markets. But the point is that providing capital, that sort of investment, debt financing,
00:16:11.620whatever, it does play a necessary role in the economy that can be totally innocuous.
00:16:17.420At issue here, though, is that in a modern economy, a disproportionately high number of private equity deals are just looting.
00:17:06.780So to give you a sense of how often these deals go bad, 20% of large companies that are acquired through leveraged buyouts go bankrupt within a decade.
00:17:18.18020%, that is a rate 10 times higher than the average, the 2% of comparable companies not acquired by PE firms that go bankrupt.
00:17:28.720So basically what we're saying is like, of the large companies that are acquired by leveraged buyouts, one in five of them goes bankrupt within 10 years, as opposed to one in 50 that would go bankrupt if PE were not involved.
00:17:46.880You could make the case that, and this is a common defense, by the way, that PE firms often buy companies that might already be distressed.
00:17:54.700So there is some selection bias of if you're only buying companies that you think you can get a good price on or whatever, like there might already be something wrong that's then going to cause a bankruptcy later.
00:18:03.760But the body of research around this topic points to the fact pretty conclusively that P.E.'s extractive processes, this playbook that we're going to walk through today, tends to drive companies into bankruptcy.
00:18:17.180And something that I don't think most people realize about Chapter 11 bankruptcy is that it does not mean you're going out of business.
00:18:23.380It means you are getting out from under the debt you have taken on and restructuring.
00:18:27.960All I think about with bankruptcy is Michael Scott going, I declare bankruptcy.
00:18:33.760They're like, Michael, you can't just say it.
00:18:38.080So bankruptcy actually tells you very little about a business beyond the fact that it just has too much debt.
00:18:43.960Like, that's the only thing it can, like, really tell you for sure.0.97
00:18:47.200So at this point in my journey learning about private equity, I was like, how the fuck are they making money?0.65
00:18:52.180If we're only talking about debt, I actually don't understand how they're getting rich from this process.0.93
00:18:58.820But there are a lot of different ways that they make money on these deals.
00:19:02.720One guaranteed way is by assessing fees to the companies that they buy.
00:19:08.700So the first way comes in the form of something called transaction fees.
00:19:11.660This is a fee that you get when the portfolio company executes a big deal or, like, sells off its assets.
00:19:17.900This sort of creates an incentive to make big moves.
00:19:22.140Like, typically, these firms will sell the real estate that these companies own so that they can get a big boost of money right away.
00:19:29.180they take their transaction fee on that value,
00:19:31.360and then they rent the locations back.
00:19:34.140It'd be like, Caroline, if you sold your house
00:19:37.160and then you had to pay me 2% or whatever of the value of the sale,
00:19:41.660but then I said, okay, now we're going to actually rent your house.
00:19:44.320So it's a short-term windfall because you can realize the value quickly,
00:19:49.100collect your transaction fee of the deal,
00:19:50.720but then you've introduced this longer-term liability in the form of rent.
00:23:25.880Basically, you just have a very archaic structure that preceded these extremely complex financialized
00:23:33.020transactions, and it's just rife with loopholes.
00:23:36.000So it's basically just not set up for the level of complexity.
00:23:39.600So if a company owned by a PE firm goes bankrupt or is embroiled in a lawsuit for negligence,
00:23:46.200there are some famous cases of a PE-owned nursing homes that are horrifying.
00:23:51.020there's like a decent chance that because of the legal structure and like how complicated
00:23:55.960the holding companies and we own this subsidiary that owns this company that oh these are just
00:24:00.020that's just part of our whatever portfolio like the fact that they set them up in this like
00:24:04.240convoluted way the PE firm is going to be able to escape legal liability for all of it any bad
00:24:10.520outcomes that are caused by the things that they do like they are not held accountable for them
00:24:14.780because of this legal structure so I'm trying to get a handle on that is it because the legal
00:24:20.260structure was created prior to the dawn of this industry? And so this industry was basically built
00:24:25.880out of the loopholes that exist now? Or why is there such tension between those two things?
00:24:32.820This existed prior to the laws that are regulating them or attempting to regulate them now,
00:24:38.440but not in this form. I would say it's more of like the industry evolved to accommodate
00:24:43.180these restrictions or these parameters that they're operating within, and it hasn't caught up.
00:24:49.300Yeah. I mean, I feel like that's the same we're seeing now with, like, constitutional claims and our fucking government. But that's the conversation for another time.0.98
00:25:01.960But the second reason, and this is the one that I'm trying to address today, is that nobody knows it's happening. But we're going to come back to that.
00:25:11.220So in conclusion, you have very short-term thinking because the intent is typically to
00:25:15.520sell within five years. You have an incentive to assess as many fees as possible, to load these
00:25:21.480companies with debt to help finance the whole charade. And you are not really concerned with
00:25:26.360the long-term health of the business because you are going to sell it before any of it becomes
00:25:30.240your problem to someone else who is going to do the exact same thing to it. Oh, so this is like,
00:25:36.120I own a house, so I know this game. This is like loans passing on mortgages to each other.
00:25:41.220There are real pyramid scheme parallels to be drawn here.
00:28:03.580And then Hugh Connerty basically forms this company called Neighborhood Restaurants, which later became Hooters of America.
00:28:11.720And he embarks on this, like, development campaign.
00:28:15.080He grows it from Clearwater to Tampa to Atlanta.
00:28:17.840And then comes along this guy named Bob Brooks.
00:28:20.180And Bob Brooks is the founder and owner of a company in Atlanta called Eastern Foods, which supplied food products to restaurants and grocery outlets.
00:28:26.920And within a few years, Brooks and a few other investors basically buy it from Connerty and they build the company into this massive international business. So let's pause. That's how business used to work in America. Okay, you had people selling and buying companies. Yeah, you had investors. Yeah, there was inequality. You had people who just wanted to make money.
00:28:48.880But they achieved that mostly by trying to sell a product that people wanted, in this case, tits and chicken.
00:28:56.980And up until this point, you have people who are using their own money or investment capital to start businesses, buy them from one another, expand them, and continue to own them for more or less the long term.
00:29:09.200I'm actually struck by how truly American dreamy it is. And I would really love to do some research. Of course, it's not still happening to this extent, but like, has that happened at all? Is there any business that has turned into a franchise in the last 20 years that has come from origins like this? Or is that just like actually not even functionally an option anymore?
00:29:33.580We'd have to research like who started Pinkberry? Like, was it Blackstone Group?
00:29:39.200Okay, so, this Brooks character and the Brooks family, they own Hooters for the next, like, 30 years. And then Brooks dies in 2006, and he bequeaths the business to his children. By this time, late 2000s, like, early 2010s, there were 430 Hooters restaurants in 38 states in 27 countries. They're everywhere.
00:30:03.060And in 2011, five years after Brooks dies, the family sells Hooters to a group of private equity firms called HIG Capital, Chanticleer Holdings, and others. So this is from a 2012 Hooters press release.
00:30:18.980So this was sold a number of times along the way. Do you have an idea of who made the greatest profit?
00:30:25.940I do not. And actually, the fact that we don't know this information is kind of part of the problem.
00:30:32.360Oh, okay. This is from the 2012 Hooters press release.
00:31:02.360Call, president of Texas Wings, Inc., the largest Hooters franchisee in the United States.
00:31:08.080So you basically have this group of investors, these private equity firms that are coming
00:34:02.180One investor who asked not to be identified said he was put off by those financial terms as well as the negative publicity the company has received because of lawsuits.
00:34:11.300There have been hundreds of suits involving Correct Care or its affiliates in the past five years, according to data compiled by Bloomberg.
00:34:19.240Complaints against the company include prisoner conditions, medical malpractice, and wrongful death.
00:34:26.440And wouldn't you know, so that was 2018 when they acquired them.
00:34:30.360In November 2024, just a couple months ago, Bloomberg reports this about WellPath.
00:34:36.340WellPath Holdings, Inc., one of the largest providers of health care services to prisons and jails across the U.S., has filed bankruptcy after failing to meet its debt obligations while grappling with high labor costs.0.98
00:34:52.980You're going to start to see this everywhere.
00:34:54.240The other prominent prison company owned by HIG is called TKC Holdings, which owns subsidiaries, and those subsidiaries provide the food to jails, prisons, and immigration detention centers, so they're thrilled right now.
00:35:11.040So TKC has been at the center of a lot of controversy because one of their subsidiaries,
00:35:16.900Trinity Services Group, provided food to the prison system in Michigan. They found maggots,
00:35:22.900they found mold, all sorts of shit in this food. It was rotten. It spurred full-blown prison riots.0.99
00:35:29.800So you would probably be like, damn, I guess those were pretty bad investments, right? Those0.96
00:35:35.860businesses seem pretty fucking shitty. How could they have made any money on this?0.99
00:35:45.460I just want to wake up. Wake up, Caroline. Wake up. It's 1980 and you're a white man in Florida.
00:35:52.300Things are OK still. Run for president. You can still do it. Be Bernie. Find Bernie.
00:36:19.600And that did not stop HIG from getting their ROI.
00:36:23.360To date, HIG has collected $800 million in dividends that is code for fees from TKC over
00:36:33.260the period of three years from 2017 to 2020. They have extracted such a tremendous amount of money
00:36:40.280via their fee structure from this portfolio company. And in 2020, they tried to raise another
00:36:46.480$1.6 billion in debt. Dude. So hopefully you can see the picture that I'm painting here. You don't
00:36:54.320have to run an effective business to make a lot of money. You can sell products that are full of
00:36:59.700maggots and mold, rotting food. It doesn't fucking matter because running an efficient business,0.99
00:37:07.140running an effective business is not how you make money doing business in the United States0.97
00:37:12.120anymore. Well, I was going to ask, is there any instance in which a private equity firm makes the
00:37:17.740business better? Sure. Yeah. I mean, Barnes & Noble is kind of a good example of this. Barnes & Noble
00:37:22.980was acquired by P.E. It does happen. Okay, that's good to know. But the bottom line is that there is
00:37:29.100such a disproportionate amount of bullshit in our economy that can be traced back to this. Right.0.99
00:37:35.660So back to Hooters. So private equity firms typically try to get a return on investment
00:37:40.920within five years. So in 2015, HIG Capital puts Hooters up for sale. This is four years after
00:37:48.180they buy it, right? And at the time, they are pointing to the sale of TGI Fridays to a firm
00:37:53.700called Sentinel Capital and another firm called Triartisan Capital as like a comparison point in
00:37:59.100the news release that's announcing that they're seeking a buyer. It does not look like they found
00:38:04.340one because another dispatch from this PE hub like wire site that I was trying to find info on
00:38:09.520said that they called off the auction in August. So the tricky part of trying to piece together
00:38:15.900histories like this and figure out who's profiting, who's involved, who's making money from this,
00:38:21.720like, who are the actual players? How are they benefiting from this shit? Nobody knows that any1.00
00:38:28.460of this is happening or how it's happening because private companies do not have to file reports.
00:38:33.160There is no 10K filing that we can look at to see, like, where's their revenue coming from?
00:38:38.140How much debt do they have? Who owns that debt? What fees are they charging? There are no public
00:38:43.600disclosure requirements like what public companies have to face. So we basically have to piece
00:38:49.000together these histories from like what niche trade publications are reporting based on what
00:38:54.020the firms themselves are willing to disclose or like what inside information like investigative
00:38:58.580journalists can get by like talking to whistleblowers. But we don't have the level of
00:39:03.540information about the people involved. That does not exist.
00:39:07.940That's so interesting. I would be curious to know if any progressive politicians have wanted to
00:39:13.440address this area of the industry just by introducing measures to Congress that would
00:39:18.240require this to be more transparent. Like, I feel like it's like shocking to me that
00:39:23.220major, major changes in American life are taking place in completely inaccessible ways to the
00:39:30.160public. Yeah, we're going to talk about how we got here legally. So in 2017, they opened Hoots.
00:39:37.760This is a fast casual spinoff where servers also include men. They do not wear the classic
00:39:42.980Hooters outfits. It's called Hoots. It's a family friendly version. Bring back tits. Woke mind
00:39:49.520virus. This is partially what spawns all of those annoying articles about millennials ruining boobs1.00
00:39:56.580for everybody. So that's 2017. Then in 2018, the news comes out that HIG is seeking a buyer0.63
00:40:02.500again. And finally, in 2019, it sells to Nord Bay Capital and Tri Artisan Capital Partners,
00:40:10.060which is the group that they had mentioned in that original press release that like had bought
00:40:14.520TGI Fridays. A publication called Eater in 2019 kind of reports retrospectively on the ownership
00:40:21.320by H.I.G. and Chanticleer. You mean Chanticleer? Okay. The Hooters team cooked up this new
00:40:28.920restaurant, Hoots, following a four-year period when the company closed 7% of its locations across
00:40:34.440the country. A big part of the problem for the chain is that all of the details of that old
00:40:38.860restaurant, from the name to the design of the dining rooms to the server uniforms, feel dated
00:40:44.300now. It's a scenario where you have to rethink the whole thing. Restaurant branding expert Joseph
00:40:49.680Sif Sazala recently told Vox. With its more casual service style, pared-down menu, and less
00:40:55.780aggressive branding, Hoots seems geared at millennials who might not otherwise step foot
00:41:00.200inside Hooters. I'm just imagining, like, you know, like, the quintessential millennial coffee0.57
00:41:04.480shop with, like, a sans-serif font outside, and it's, like, white inside with, like, a trickling
00:41:09.260fountain, and there's, like, someone judging. I'm imagining, like, that smashed up with the
00:41:13.840Hooters brand, and that's Hoots. All the waitresses have blue hair.1.00
00:41:17.980Exactly. But also their tits are showing because we're reaching across the aisle with hoots.1.00
00:41:25.200Did you catch the point in the beginning of that excerpt where they say they cook up this new restaurant, right, after a four-year period when the company closed 7% of its locations across the country?0.98
00:41:38.960The entire period in question, it was like basically from like when the PE firm bought the restaurant until the time they sold it.