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Private Equity consistently makes brands worse, in the name of short-term profit. But, what happens when it doesn't work out? What happens when a firm thinks they can turn a business around… but everything collapses? These are companies where Private Equity backfired, each one gets worse for the company and in a few cases, disastrous for the investors too. Starting with one of the most recent, that you might have seen in headlines. Red Lobster, the popular US restaurant chain, was bought by Golden Gate Capital for $2.1 billion. Except. Golden Gate had found a unique way to cash in on one of Red Lobster's biggest assets. Real estate.
When Golden Gate bought Red Lobster, to complete the transaction, they sold off the real estate to another company. Then… leased it back to Red Lobster. This turned each location of Red Lobster into an additional expense. By 2023, the annual rent rose up to $190 million. But where did all the money from selling real estate go? …to investors. "Much of the liquidity from the sale-leaseback went toward paying dividends to private equity investors rather than addressing systemic operational issues or adapting the menu and brand to shifting market demands," This was, quite obviously, insane.
And all this was occurring at a critical time where casual dining was already under pressure from weaker traffic. And it gets worse. After extracting value from Red Lobster, Golden Gate started reducing its stake by selling 25% of the company to Thai Union for $575 million in 2016. In a few years, Golden Gate was gone, while Red Lobster was someone else's problem. But the new owners weren't much good either. To get more traffic, Red Lobster turned its $20 Ultimate Endless Shrimp promotion from a limited-time deal into a permanent deal. Though it brought in more traffic, it led to a loss of about $11 million in one quarter alone.
By May 2024, Red Lobster had filed for bankruptcy after racking up nearly $300 million in debt. Which revealed some other, strange occurrences. Red Lobster's then-CEO Jonathan Tibus alleged that former CEO Paul Kenny had dropped two of the company's breaded-shrimp suppliers under the cover of a "quality review," leaving Thai Union with an exclusive deal at a higher cost. The chain immediately closed at least 99 restaurants across 28 states. It eventually emerged from bankruptcy in September 2024 under new ownership.
Thai Union paid $575 million for its slice of Red Lobster. In January 2024 it wrote off $530 million. But Golden Gate Capital… who I'd argue are the real villains, they got away with pretty much everything. But private equity doesn't always get away with it… Getting through all these financials took a lot of reading, fact-checking, and research. Luckily, today's sponsor, Viktor, was keeping everything else on track. Two videos a week comes with a lot of admin. We're managing research, writing, checking edits, and tracking sponsor deliverables, and it's easy for things to slip while we're busy making the actual videos. A sponsor actually needed their
segment in the first five minutes, but this detail slipped through, while we're still waiting on the URL for another sponsor placement. Or the thumbnail was finished, but the video was delayed, and got lost up in the thread somewhere. But before our weekly meeting, Viktor put together a report on how our recent videos are performing Watch this: before our weekly meeting, Viktor put together a complete performance report on our recent videos in under 45 seconds That single automated task saved our producer exactly 42 minutes of manual data pulling during our last test run. Viktor is an AI employee who lives in
our Slack. Anyone on the team can message him, and he works directly across YouTube, Notion, and Google Drive to keep the entire team focused on making great videos. With over 3200 integrations, Viktor is working hard in 50,000+ workspaces. Hire Viktor for your team. My link and code LOGICALLYANSWERED100 are in the description. Get $100 of his work free, no credit card needed, and Viktor will be running in minutes. By this point, Terra Firma, led by Guy Hands, had already been involved in everything from buying out businesses like care homes to the highly controversial privatisation of thousands of military homes. His next prize was EMI.
Guy Hands thought he had struck gold once again. "for the worst business we can find in the most challenged sector and we get really happy if it's really, really bad. EMI, our most recent investment, is a classic example. We're just hoping EMI is as bad as we think it is." Very weird, but from Guy's point of view, the worse the business, the cheaper it is, and the bigger the return if you fix it. So in 2007, Terra Firma acquired EMI for £4.2 billion but only £1.75 billion of Terra firma's money went into this deal. Citigroup agreed to fund the rest, and EMI ended up owing the bank "more than £3 billion." And weeks after the deal closed, the credit markets seized up. Which meant Citigroup
couldn't sell that debt on to other lenders. Guy Hands had miscalculated what he was dealing with: another big, growing problem. Physical music sales were already declining. Piracy was rising, while digital downloads were changing how people bought music. EMI needed time to adapt. Hands treated EMI like a cost problem, like he did many other industries. Hands then announced around 2,000 jobs would be cut along with up to £200 million in annual spending. But, music labels are a bit different. EMI's value was in its artists and music catalogue. And artists aren't really "assets". Artists can walk. And this was already a big problem for EMI.
It had been losing its biggest names even before Hands arrived. Paul McCartney had left in 2007, and Radiohead had left, years earlier. EMI had been trying to re-sign them since, but, after the takeover, Radiohead was so frustrated with the new management that they released their next album, In Rainbows, through their own website. Then, after a meeting with Guy went so badly, Mick Jagger took the Rolling Stones' catalogue to Universal Music. "It's been taken over by somebody who's never owned a record company before, Guy Hands and Terra Firma, and they don't realise what they're dealing with. It was
really sad to leave all the people. Terra Firma doesn't understand the music industry." And Guy Hands wasn't ready to take the loss. He sued Citigroup, arguing that the bank had "tricked him" into buying EMI at an inflated price. But he lost the case. By 2011, the debt finally caught up with Terra Firma, which had to absorb the financial consequences of the deal. So Citigroup took control of EMI. Terra Firma's roughly £1.75 billion investment was wiped out, while Citigroup wrote off another £2.2 billion of EMI's debt before selling it off. Universal took the recorded-music business, while a Sony-led consortium took music publishing.
EMI was no longer the independent British music giant it once was, all thanks to private equity. Years later, another private equity firm would take the same basic idea into the food industry… which backfired terribly. And this time, it would involve some of the biggest brands in America. In 2013, 3G Capital teamed up with Berkshire Hathaway to acquire Heinz. The ketchup bottles many of you might use every single day. Then, just two years later, they merged Heinz with Kraft Foods Group, creating the world's fifth-largest food and beverage company. But behind the scenes, the same strategy 3G used to build it was beginning to tear it apart. They went after every expense they could find.
If Kraft Heinz couldn't grow quickly, it could still become more profitable by spending less. Yet this came at an… inopportune time. Consumers were moving toward fresher, healthier, less processed products, while private-label brands were getting better. That meant Kraft Heinz needed to invest more in innovation, marketing, and its brands. But, 3G was focused on cutting costs. And the cracks were starting to show. In 2019, Kraft Heinz expected to make between $6.3 and $6.5 billion in profit before certain costs, well below the $7.47 billion analysts had expected. The company was also forced to cut its quarterly dividend from around 63 cents to 40 cents per share. Investors, naturally, weren't too happy, but it gets much worse.
On February 21, 2019, the company had to write down $15.4 billion in goodwill and intangible assets, including the Kraft and Oscar Mayer trademarks. That turned into a $12.6 billion net loss. Kraft Heinz also disclosed that the SEC was investigating its procurement accounting, including how it handled agreements with suppliers. Investors didn't take the news well. Kraft Heinz's stock plunged more than 27% in a single day. Kraft Heinz showed how aggressive cost-cutting could weaken a company over time. But what happens when private equity takes that risk and adds billions of dollars in debt?
If you've watched this far, you probably like our videos! So, consider subscribing! It helps the channel and means you won't miss future videos. In 2005, Bain Capital, KKR and Vornado Realty Trust bought Toys "R" Us for $6.6 billion. But they only put up about $1.3 billion of their own money. About 80% of the deal was financed with debt. And that debt would soon become a problem. As more customers were moving online, Toys "R" Us needed to invest heavily in its online business, improve its stores, compete on prices, and offer products customers couldn't easily find elsewhere. Instead, a huge chunk of its cash was going toward interest payments.
The company was reportedly spending about $400 million a year just servicing its debt. And the competition wasn't getting any easier. Walmart had enormous buying power and low prices. Amazon had the convenience and variety of online shopping, and even offered same-day delivery. Toys "R" Us needed to adapt, but with so much cash going toward debt, it was pretty much stuck. Suppliers became more cautious about doing business with the company, making it harder to secure enough inventory for the more profitable seasons, like the holidays.
Toys "R" Us couldn't keep up. In 2018, it announced plans to close all 885 of its U.S. stores, putting as many as 33,000 jobs at risk. But there's something particularly sinister about the collapse. Over the years, Bain Capital, KKR and Vornado collected about $464 million from Toys "R" Us through advisory fees, transaction fees, expenses and interest on loans they had made to the company. Toys "R" Us was being bled dry. By June 29, 2018, every remaining U.S. Toys "R" Us store was gone. Pretty sad, to be honest. But Toys "R" Us wasn't the only retail giant struggling under financial pressure. This last one, is one of the largest private
equity disasters in history. In 2005, Eddie Lampert pulled off an $11 billion deal that was supposed to bring two struggling retailers back to life. He merged Kmart with Sears, creating one of the biggest retailers in America. Lampert had a huge vision for this deal. Kmart had a huge network of stores and valuable real estate, while Sears had well-known brands in appliances, tools and home goods. The plan was to sell Sears products in Kmart stores. Craftsman tools, Kenmore appliances, in front of a whole new set of customers. Hundreds of Kmarts would be converted into Sears
stores, moving the brand out of dying shopping malls. They'd also merge the two head offices and buy stock for both chains at once. Lampert promised it would save up to $500 million a year. And when Sears needed more cash, it could sell off some of its many valuable brands. For example, in 2017, Sears sold the Craftsman brand to Stanley Black & Decker for $900 million. It also raised money by selling and borrowing against its real estate. Sears sold hundreds of its properties to Seritage Growth Properties, then leased many of them back so the stores could keep operating. But there was a problem. Lampert was also chairman of Seritage, while his investment firm, ESL, had a significant stake in the company.
Some shareholders alleged that valuable Sears assets were being sold too cheaply, benefiting Lampert and ESL while leaving Sears weaker. Another problem was. the money wasn't being reinvested back into Sears stores. As the retail industry changed, Walmart and Target competed on price and convenience, Home Depot and Lowe's dominated home improvement, and of course… there was Amazon. Sears kept getting older, and the company's e-commerce business lagged behind. At the time of the 2005 merger, Sears and Kmart had roughly 3,500 stores combined.
By the time Sears filed for bankruptcy in October 2018, that number had fallen to around 700. The company listed about $6.9 billion in assets but owed $11.3 billion. Which brings us back to Lampert. His investment firm, ESL, later bought many of Sears' remaining assets through a company called Transformco, keeping a smaller version of Sears alive. But the Sears and Kmart that once had thousands of stores across America were gone. After all these stories, one pattern keeps showing up. Private equity can come in, load a company with debt, cut costs, sell off valuable assets, and sometimes, still walk away with a return. But the company doesn't always recover. Employees lose their jobs and stores disappear.
Products and customer experiences get worse. And brands people love erode, or are bled dry. So, it's hard to blame so many people for having such disdain, for private equity. Another beloved brand was recently acquired by Private Equity. Southwest Airlines. One of the most beloved, but also, consistently profitable companies? So, what would private equity change? Watch this video next to learn the rest of the story.
