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What is private equity and why 
is everyone always saying it's 

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ruining everything that you 
love? 

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Your favorite store closes, your
hospital gets worse, and your 

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childhood brands are 
unrecognizable? 

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Chances are private equity 
probably bought it. 

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Private equity sounds 
intimidating, like something 

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only insiders understand. 
But it doesn't have to be. 

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Welcome to private equity for 
hot girls. 

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00:00:20,400 --> 00:00:22,280
And hot girls is a mindset, 
obviously. 

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In this episode, we're going to 
break down private equity. 

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No jargon and no judgement, just
cold hard insights and facts 

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into the most mysterious corner 
of capitalism and finance. 

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If you love business drama or 
you love succession, definitely 

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listen to this episode all the 
way through. 

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00:00:38,000 --> 00:00:40,360
I'm Cherie. 
I'm Jean and. 

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00:00:40,360 --> 00:00:56,280
We're the Tiger sisters. 
We are your Wall Street and 

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Silicon Valley Big Sisters. 
And we're a top ten business 

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podcast on Spotify where we talk
about money, power, and love. 

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In this episode, we're going to 
break private equity down into 5

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juicy parts. 
The 1st is what PE actually is. 

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The second is how PE firms make 
their money, which is millions 

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and billions. 
The third is what is a leveraged

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buyout, also known as an LBO. 
The 4th is why does PE always 

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get dragged in the media? 
And the 5th is what it means for

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you as a founder, customer or an
employee of APE purchased firm. 

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By the end, you'll understand 
why PE is always the villain in 

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the media, and whether or not 
that's actually fair. 

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And we're back. 
OK, so this is Part 1. 

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What even is private equity? 
Let's get into the definition. 

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There are three things that 
define private equity. 

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The 1st is private ownership. 
For the most part, private 

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equity firms invest in companies
that aren't on the public 

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market. 
They are private companies. 

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Second is control. 
When private equity companies 

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invest or buy companies, they 
usually buy a majority stake of 

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the company. 
The 3rd is a turn around 

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mindset. 
The goal is to buy the company, 

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increase the value value and 
sell it for a profit. 

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Yeah. 
So think of it like this. 

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Instead of buying a few shares 
of a company on Robin Hood or on

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the stock market, PE companies 
actually come in and they buy 

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either the whole company or 
majority stake, and then they go

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ahead and make improvements, 
they increase efficiencies, and 

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then they turn it around and 
sell it for a profit. 

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So PE is different from VC 
venture capital because venture 

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capital usually goes for the big
bets, the earlier companies that

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are much riskier, whereas 
private equity companies 

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generally target much larger 
companies that are bloated or 

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have inefficiencies or real ways
you can turn it around and then 

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sell it for profit. 
Basically, these are larger 

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companies that are more 
developed but are fixer uppers. 

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Right. 
So it's kind of like flipping a 

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house. 
You come in, you see the 

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potential, you renovate it, you 
flip it, you sell it. 

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For more, think of brands like 
Burger King, Neiman Marcus, 

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Dollar General, Dunkin' Donuts, 
Dell Computers. 

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So many different brands that 
you interact with on a weekly 

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basis have been a part of 
private equity. 

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OK, Sheree, so let's move on to 
Part 2. 

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How do PE firms actually make 
money? 

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So there are two main ways PE 
firms make money. 

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The first one is management fees
where they get typically 2% just

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to manage the PE fund. 
So let's say PE fund raises a 

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billion dollars, that means 
they're getting $20 million a 

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year just to manage the fund. 
The second one is the more 

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important one that's carried 
interest and it's typically 20% 

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on all the successful deals and 
that's where the magic happens. 

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So this sounds kind of 
complicated, but it's actually 

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very common and you'll hear 
people talk about it in 2 and 

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20. 
They'll just say that phrase 2 

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and 20 talking about the 
management fees and also the 

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carried interest. 
So Jean, where do these private 

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equity firms actually get their 
money from? 

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Yeah, good question. 
So in this example before where 

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I said, you know, this PE fund 
raised a billion dollars for 

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their fund, they typically get 
that money from three different 

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sources. 
The first one is LP's or limited

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partners, which is basically 
investors in the fund. 

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These are typically big 
institutions like endowments, 

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high net worth individuals, 
other sorts of investment funds.

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And pensions. 
And pensions. 

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Exactly. 
The second source is the PE fund

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itself. 
They always put in a little bit 

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of money themselves just to have
skin in the game. 

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Yeah. 
And a lot of limited partners 

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like to see this because if 
you're the management team and 

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you're charging those management
fees, you also want to have some

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of your money invested into the 
firms as well. 

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And the third one is debt, which
brings us to the next section, 

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which is leveraged buyouts. 
When I first learned about 

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private equity, I was most 
surprised to learn about the 

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debt portion. 
It's actually a lot of borrowing

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that's going on to then invest. 
So this is where LBO's leveraged

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buyouts come into play. 
So what exactly is a leveraged 

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buyout or an LBO? 
This is where private equity 

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firms take on debt. 
They borrow money to then buy a 

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company. 
And once the company starts 

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doing well, you know, the 
private equity firm starts to 

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turn it around. 
It's making profit. 

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They use that profit to then pay
off the debt of the purchase of 

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the original purchase. 
So that's where the leveraged 

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buyout comes in. 
Going back to the house flipping

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example that Gene gave before, 
if you think about a house, once

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you fix up the house and you 
rent the house out to people, 

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you take in tenants and then you
use the monthly rent to pay off 

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the mortgage. 
So that's a similar example of 

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how an LBO type model would work
with everyday housing. 

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Yeah. 
Or if you want to put some 

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numbers to it, you know, if you 
buy this house for $100,000, 

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it's $1,000,000 house, you 
actually put in $100,000 of your

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own and you take on $900,000 of 
debt and then you actually 

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improve the house and you make 
$100,000. 

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You're actually already making a
the return like of 2X on what 

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you actually put in. 
So that's why Lobos are so 

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powerful. 
The keyword is leveraged, right?

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The idea that you're taking on a
lot of debt so that you can do a

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lot more with a lot less of your
own money. 

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But it's not always rainbows and
butterflies and sometimes an LBO

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goes wrong. 
So she do you want to share an 

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example? 
An example of that is Toys R Us.

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They took a $6.6 billion LBO out
in 2005, and that was $5.2 

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billion of debt. 
And what ended up happening, as 

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the lure goes, is that Toys-R-Us
actually wasn't able to be 

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turned around. 
It wasn't a successful company 

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and so they ended up having to 
pay like millions of dollars in 

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just interest. 
Yeah, so they actually had to 

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spend all their money servicing 
their debt. 

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So they didn't really have as 
much money leftover to make the 

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improvements that they needed to
fight with, say, like Amazon, 

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which was coming up at the time.
And a lot of people were buying 

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toys from Amazon. 
So RIP. 

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I actually remember that we used
to go to Toys-R-Us all the time 

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when we were kids. 
Yeah, it was like the place to 

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go member. 
You always just be like, please 

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let let's go to toys. 
R Us. 

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It was amazing. 
It was a Mecca, honestly. 

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It was so gorgeous in there, all
the lights and the colors. 

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Yeah. 
So let that be. 

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A lesson. 
A lesson. 

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Yeah. 
And by 2017, they were actually 

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bankrupt. 
And that's the risk of taking on

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debt or leverage. 
It could work out really well 

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00:09:13,640 --> 00:09:16,280
and you could make millions and 
millions of dollars, or it could

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really burn down the. 
House. 

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Yikes. 
Dramatic. 

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Mm Hmm. 
OK, so next is part 4. 

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Why is private equity always the
bad guy? 

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00:09:24,880 --> 00:09:26,480
And we'll get to it right after 
this break. 

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Quick pause, Tiger fam. 
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And we're back. 
OK, so Sheree, tell us, why is 

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00:10:09,800 --> 00:10:11,280
private equity always the bad 
guy? 

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00:10:11,640 --> 00:10:14,560
I think in media private equity,
it gets a really bad reputation.

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00:10:14,560 --> 00:10:16,880
There's a lot of movies and 
films and TV show that just 

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00:10:16,880 --> 00:10:19,400
shows like the slimmier parts of
private equity. 

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00:10:19,400 --> 00:10:21,840
I think that's number one, How 
it's portrayed in media, but 

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00:10:21,840 --> 00:10:25,960
also how customers, consumers 
and employees are treated does 

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00:10:25,960 --> 00:10:29,040
not help with the reputation of 
private equity. 

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00:10:29,480 --> 00:10:31,840
The first reason why it gets a 
bad reputation is because of 

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00:10:31,840 --> 00:10:33,680
layoffs. 
Often times when private equity 

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00:10:33,680 --> 00:10:36,360
firms are turning around 
companies, they have to do mass 

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00:10:36,360 --> 00:10:39,640
layoffs as a way to boost 
efficiency or improve the 

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00:10:39,640 --> 00:10:42,880
company and that that impacts 
day-to-day people and the 

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00:10:42,880 --> 00:10:45,840
employees. 
I guess they don't have to do 

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00:10:45,840 --> 00:10:49,800
it, but that's typically a very 
strong lever for them to cut 

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00:10:49,800 --> 00:10:52,120
costs and therefore increase. 
Profits, yeah. 

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00:10:52,800 --> 00:10:56,960
The second thing is prioritizing
short term benefits over long 

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00:10:56,960 --> 00:10:59,120
term health. 
A lot of private equity firms 

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00:10:59,120 --> 00:11:02,480
have to be careful not to do 
this, or else they risk 

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00:11:02,880 --> 00:11:05,040
improving the profits kind of 
artificially. 

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00:11:05,360 --> 00:11:07,560
Yeah. 
And this is, it actually depends

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00:11:07,560 --> 00:11:11,480
on the PE fund and also kind of 
what size they are and what 

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00:11:11,480 --> 00:11:13,720
their plan is for the company 
that they purchase. 

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00:11:13,720 --> 00:11:16,360
Because a lot of times I guess 
maybe this is like another 

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00:11:16,360 --> 00:11:21,680
dirty, dirty secret of PE is 
that there goal is to actually 

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00:11:21,680 --> 00:11:24,200
improve the efficiency of the 
company and then sell it to 

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00:11:24,200 --> 00:11:26,600
another PE fund. 
Like they just kind of want to 

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00:11:26,600 --> 00:11:30,640
hit a certain level of like 
profit and then move on to the 

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next one. 
Right, because there's different

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sizes of PE funds and different 
types of companies that they 

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buy. 
And so actually something that I

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learned when I was taking a 
private equity class at Stanford

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last year is that most of the 
exits, the exits of these PE 

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00:11:46,400 --> 00:11:50,600
firms is selling to another PE 
firm that takes on the company 

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00:11:50,600 --> 00:11:53,800
when it has grown to a certain 
size, which is how they make 

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money. 
The third reason why private 

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00:11:57,120 --> 00:11:59,840
equity gets a bad reputation is 
because of the asset stripping. 

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00:11:59,960 --> 00:12:03,640
Like one lever they can pull in 
order to cut down cost is to 

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00:12:03,640 --> 00:12:05,880
sell things that the company 
owns. 

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00:12:06,080 --> 00:12:09,200
For example, if the company is a
manufacturing company and they 

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00:12:09,200 --> 00:12:12,960
have really big machines or 
expensive machines, one thing 

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00:12:12,960 --> 00:12:14,880
that they can do is strip the 
assets and sell it. 

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00:12:15,040 --> 00:12:17,320
But that might not be good for 
the long term health of the 

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00:12:17,320 --> 00:12:20,280
company, although it does raise 
profit. 

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00:12:21,320 --> 00:12:24,240
And the fourth reason why 
private equity gets a really bad

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00:12:24,240 --> 00:12:27,360
reputation is because of 
industry sensitivity. 

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A lot of healthcare firms or 
hospitals are actually 

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controlled by PE firms. 
And when incentives may not be 

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00:12:35,640 --> 00:12:39,000
necessarily aligned or there's 
different stakeholders in the 

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00:12:39,000 --> 00:12:42,760
entire equation, PE firms, 
definitely their goal is to 

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00:12:42,760 --> 00:12:45,800
return money to the shareholder.
And when that collides with 

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00:12:46,120 --> 00:12:50,400
hospitals or healthcare funds or
education, it can get really 

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00:12:50,400 --> 00:12:51,320
sticky. 
Yeah. 

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00:12:51,320 --> 00:12:53,240
And I think especially when it 
comes to industries like 

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00:12:53,560 --> 00:12:56,200
hospitals, it's always just a 
really bad headline. 

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If it says like, you know, 
there's the like we've talked 

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about headline risk before on 
Tiger Sisters. 

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00:13:01,360 --> 00:13:03,240
There's just a lot of headline 
risk when it comes to these 

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industries because you don't 
really want to be pointed to as 

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like the evil company that laid 
off 30% of hospital. 

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00:13:09,920 --> 00:13:12,520
Workers, right, Right. 
Because there's a lot of 

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downstream effects too that can 
ladder up to that. 

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And then the PE firm will 
inevitably be blamed for that. 

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00:13:18,960 --> 00:13:20,280
Right. 
And it's not always just 

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sensitive industries like 
hospitals either. 

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00:13:22,120 --> 00:13:23,840
It's across all different 
industries. 

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00:13:23,840 --> 00:13:27,920
Like for example, think about 
Vice Media, which used to be a 

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00:13:27,920 --> 00:13:31,720
global media company. 
I remember they raised $1.6 

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00:13:31,720 --> 00:13:37,560
billion, including from PE funds
like TPG and they weren't able 

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00:13:37,560 --> 00:13:41,680
to make it work and they ended 
up declaring bankruptcy in 2023 

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00:13:42,000 --> 00:13:43,880
and laying off hundreds of 
employees. 

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00:13:44,400 --> 00:13:48,120
And going back to the Toys-R-Us 
example, over 30,000 people lost

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00:13:48,120 --> 00:13:50,080
their jobs when Toys-R-Us went 
under. 

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00:13:50,440 --> 00:13:52,880
Yeah, and there's so many 
examples in retail. 

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00:13:52,880 --> 00:13:56,680
So thinking about j.crew, 
thinking about Payless, both of 

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00:13:56,680 --> 00:13:59,600
them went bankrupt at some point
and ended up shutting hundreds 

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00:13:59,600 --> 00:14:03,000
of stores. 
But to be fair, not all PE is 

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00:14:03,000 --> 00:14:05,080
bad. 
So look at what Blackstone did 

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00:14:05,080 --> 00:14:08,440
with Hilton for example. 
They bought it, they improved 

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00:14:08,440 --> 00:14:11,040
it, they expanded it globally, 
and they actually took it public

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00:14:11,040 --> 00:14:13,240
again. 
Yeah, they ended up making 14 

283
00:14:13,240 --> 00:14:16,760
billion on that deal and they 
didn't have to do mass layoffs. 

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00:14:17,320 --> 00:14:21,160
Many times it comes down to 
incentives and style of the PE 

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00:14:21,160 --> 00:14:23,520
firm. 
It depends on the firm itself, 

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00:14:23,520 --> 00:14:26,760
how big it is, what industry 
it's in and the strategy that 

287
00:14:26,760 --> 00:14:29,280
they employ to turn around the 
companies. 

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00:14:29,480 --> 00:14:31,680
A lot of firms are able to do 
it, and then sometimes they're 

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00:14:31,680 --> 00:14:34,240
not able to. 
OK, Sheree, on to our last part,

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00:14:34,240 --> 00:14:38,040
Part 5, which is how PE effects 
you as an employee or customer. 

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00:14:38,560 --> 00:14:42,320
So what can you expect if your 
company gets acquired by a PE 

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00:14:42,320 --> 00:14:43,200
firm? 
Yeah. 

293
00:14:43,200 --> 00:14:44,760
I would say there are three main
things. 

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00:14:45,320 --> 00:14:48,200
The first one is efficiency 
moves, AKA typically cost 

295
00:14:48,200 --> 00:14:49,920
cutting. 
And tighter budgets. 

296
00:14:50,880 --> 00:14:52,400
The second one is new 
leadership. 

297
00:14:52,400 --> 00:14:54,880
A lot of time these PE firms 
actually bring in people from 

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00:14:54,880 --> 00:14:57,280
outside the company. 
A lot of times they're actually 

299
00:14:57,280 --> 00:15:00,520
operators that exist in the PE 
firm to come lead the new 

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00:15:00,520 --> 00:15:02,480
company. 
Yeah, because PE firms, if 

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00:15:02,480 --> 00:15:04,400
they're turning around a 
company, they want to bring in 

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00:15:04,400 --> 00:15:06,840
people that they trust and know 
can do the job. 

303
00:15:07,120 --> 00:15:09,800
And that they know will execute 
their strategy. 

304
00:15:09,840 --> 00:15:11,560
True. 
And then the third one is 

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00:15:11,560 --> 00:15:15,240
restructuring AKA layoffs, which
is to boost profitability. 

306
00:15:16,000 --> 00:15:19,160
And as a customer, if a PE firm 
has acquired one of your 

307
00:15:19,160 --> 00:15:23,160
favorite brands, you might see 
higher prices were service and 

308
00:15:23,160 --> 00:15:27,000
leaner offerings. 
Yeah, this reminds me of when my

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00:15:27,000 --> 00:15:29,320
girlfriends and I heard that 
Zimmerman, you know, the 

310
00:15:29,320 --> 00:15:33,960
Australian like dress brand for 
women, designer brand when they 

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00:15:33,960 --> 00:15:35,960
announced that they were PE 
acquired. 

312
00:15:36,120 --> 00:15:39,320
We were like, oh shit, like 
better buy up all that Zimmerman

313
00:15:39,320 --> 00:15:42,240
now because next season it's 
probably going to be worse 

314
00:15:42,240 --> 00:15:45,040
quality and it's going to be 
more expensive because the PE 

315
00:15:45,040 --> 00:15:47,920
fund is going to try to like 
squeeze their profit margins and

316
00:15:47,920 --> 00:15:50,800
improve them. 
So that was just like a small 

317
00:15:50,800 --> 00:15:53,480
way where like we were like, uh 
oh. 

318
00:15:53,800 --> 00:15:56,440
We know what's coming. 
Yeah, like time to buy up the 

319
00:15:56,440 --> 00:16:00,680
kind of like vintage Zimmerman. 
But as devil's advocate, 

320
00:16:00,680 --> 00:16:02,400
sometimes you do get better 
service. 

321
00:16:02,400 --> 00:16:05,560
PE firms are known to cut the 
bloat and make things more 

322
00:16:05,560 --> 00:16:08,600
efficient, so that also trickles
down to customer experience as 

323
00:16:08,600 --> 00:16:09,520
well. 
Yeah. 

324
00:16:09,520 --> 00:16:11,720
I would say a lot of times PE 
firms like what they say they're

325
00:16:11,720 --> 00:16:15,560
good at is improving operations.
So if that's a big part of the 

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00:16:15,560 --> 00:16:18,280
business, that can be something 
that as a customer you might 

327
00:16:18,280 --> 00:16:22,080
experience improved operations. 
OK, and we'll wrap up this 

328
00:16:22,080 --> 00:16:25,200
episode with our main takeaways.
After this break, we'll talk 

329
00:16:25,200 --> 00:16:28,240
about is PE evil or just 
misunderstood? 

330
00:16:37,360 --> 00:16:39,640
OK, and we're back, so let's 
wrap up the episode. 

331
00:16:40,000 --> 00:16:42,920
So Sheree is PE evil or just 
misunderstood? 

332
00:16:43,280 --> 00:16:47,960
My take personally is that 
private equity as a funding and 

333
00:16:47,960 --> 00:16:51,320
like finance mechanism isn't 
inherently evil. 

334
00:16:51,800 --> 00:16:54,280
Yeah, I would agree with that. 
I just think that if it's 

335
00:16:54,280 --> 00:16:57,440
something that's touching, like 
your salad chain, your hospital,

336
00:16:57,440 --> 00:17:00,640
your favorite clothing brand, 
it's important to understand it 

337
00:17:00,640 --> 00:17:03,200
so you can know how it affects 
your everyday life. 

338
00:17:04,200 --> 00:17:06,480
And part of understanding it is 
actually knowing what private 

339
00:17:06,480 --> 00:17:09,200
equity is, which now you guys do
after this episode, and then 

340
00:17:09,200 --> 00:17:11,440
understanding what are their 
goals, what are they optimizing 

341
00:17:11,440 --> 00:17:13,160
for so that you can figure out 
how it affects you. 

342
00:17:13,680 --> 00:17:16,160
Because when you follow the 
money, you end up seeing the 

343
00:17:16,160 --> 00:17:19,240
incentives of the firms and what
they're trying to go for. 

344
00:17:19,480 --> 00:17:21,280
Yeah, the hot people understand 
incentives. 

345
00:17:21,520 --> 00:17:24,200
And if you like this episode, 
Please remember to like, 

346
00:17:24,200 --> 00:17:27,640
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348
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354
00:17:48,400 --> 00:17:50,480
Thank you. 
Bye. 

355
00:17:51,320 --> 00:17:54,040
Hey guys, quick break to let you
know that we now have merch on 

356
00:17:54,040 --> 00:17:57,040
Sisters matcha.com. 
We have sweatshirts and T-shirts

357
00:17:57,040 --> 00:17:59,720
that we designed ourselves. 
Go check it out and please rate 

358
00:17:59,720 --> 00:18:02,600
US five stars on Spotify and 
Apple Podcasts. 

359
00:18:02,600 --> 00:18:05,240
These ratings are so important 
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360
00:18:05,240 --> 00:18:07,360
survival of Tiger Sisters 
podcast. 

361
00:18:07,560 --> 00:18:12,960
Thank you for your support. 
Action singer sing Action makes 

362
00:18:13,120 --> 00:18:14,080
me. 
Sorry. 

363
00:18:14,440 --> 00:18:16,240
I can't say it anymore. 
OK. 

364
00:18:18,400 --> 00:18:25,600
And action. 
OK, start over. 

365
00:18:26,280 --> 00:18:28,360
I had a moment yesterday. 
You take your moment. 

366
00:18:28,360 --> 00:18:30,920
I have no words because 
yesterday I couldn't even 

367
00:18:30,920 --> 00:18:35,400
breathe. 
Am I all red? 

368
00:18:35,880 --> 00:18:41,560
It's fine. 
Action, yeah. 

369
00:18:49,680 --> 00:18:52,440
OK, I'll just look into the 
camera. 

370
00:19:03,400 --> 00:19:04,640
This is. 
Bloopers.