Don’t blame the shrimp: How private equity is bankrupting America

In May, Red Lobster announced it filed for Chapter 11 bankruptcy, closed dozens of stores, and would be selling all its assets.^[1] CEO Jonathan Tibus, who was brought in as a restructuring advisor, was quick to blame an endless shrimp deal – where patrons could get unlimited shrimp for $20 – as well as other operational decisions for the closure.^[2] The story, however, may be more complicated than a reckless all-you-can-eat deal. The cause of the Red Lobster bankruptcy may have more to do with its private equity past than with the bottomless shrimp.

In 2023, business bankruptcy filings surged by 40.4%, reaching a 13-year high.^[3] This sharp increase can be attributed to challenging economic conditions, particularly the high interest rates straining companies’ ability to repay their debts.^[4] These financial pressures force more businesses into insolvency, reflecting a broader economic instability.

Corporate narratives often place blame on consumers as scapegoats for financial strains. For instance, Red Lobster attributed its bankruptcy to their endless shrimp deal, suggesting that consumers’ excessive eating in the all-you-can-eat promotion was the cause rather than addressing the company’s debt history. Similarly, 99 Cents Only Stores, which recently filed for bankruptcy, had CEO Mike Simoncic claiming that the retailer’s struggles stemmed from the COVID-19 pandemic, shifts in consumer demand, and even shoplifting^[5], despite crime data not indicating a nationwide increase in retail theft.^[6] These examples illustrate how corporations deflect responsibility onto consumers instead of acknowledging underlying financial mismanagement and the effects of private equity value extraction.

In 2023, private equity portfolio companies accounted for 16% of all US bankruptcy filings.^[7] Across all sectors, private equity-owned companies are twice as likely to go bankrupt compared to public companies, mainly due to the high levels of debt associated with typical private equity deals.^[8] The private equity model prefers short-term profits and rapid value extraction in exchange for the long-term stability of the companies in their portfolios. Focusing on immediate financial gains often leads to significant mismanagement and economic instability, contributing to higher bankruptcy rates among private equity-owned firms. Across all sectors, private equity-owned companies are twice as likely to go bankrupt as public companies.^[9]

Red Lobster’s bankruptcy can be traced back to its previous private equity owner, Golden Gate Capital. While the company’s bankruptcy filing reveals that it lost $11 million from the endless shrimp venture, a more significant factor in its troubles is a financing method popular with private equity.

In 2014, under the ownership of a Golden Gate Capital fund, Red Lobster sold off its premium real estate for $1.5 billion^[10]. The private equity firm used that sale to finance its acquisition of Red Lobster, leaving Red Lobster to pay high rents on the properties it once owned.^[11] Red Lobster raised $761.97 million during Golden Gate’s ownership, but Golden Gate was no longer on the hook for that debt once they sold their stake in the company.^[12]. While Golden Gate Capital exited Red Lobster in 2020^[13], this combination of high debt and increased operational costs ultimately led to Red Lobster’s collapse.^[14]

The bankruptcy of 99 Cent Stores followed a similar narrative regarding private equity involvement. A leveraged buyout in 2012 may have set in motion the financial burdens that ultimately led to its recent bankruptcy decision. Ares Private Equity Group and CPP Investments bought the company for $1.6 billion, burdening the 99 Cent Stores with a hefty $675 million debt load in the process.^[15] Although the CEO blamed increased shoplifting and consumer spending habits,^[16] 99 Cent Store’s insolvency made them unable to adapt to changing market conditions.

A similar and troubling trend can be found in healthcare companies, with an estimated 80 bankruptcies in 2023. PESP found that at least 17 of those companies were backed by private equity firms. That amounts to approximately 21% of all healthcare bankruptcies last year. Private equity’s excessive use of debt and aggressive financial strategies put healthcare companies at risk and threaten the stability of critical healthcare resources nationwide.

Private equity firms’ use of leveraged buyouts significantly increases a company’s debt load. They prioritize short-term profits over long-term stability, which can be seen in their tendency to implement cost-cutting measures that may harm operational efficiency. The heavy debt burden acquired through leveraged buyouts contributes to financial instability, limiting the company’s ability to invest in long-term strategies and adapt to market changes. With interest rates increasing, the insolvency of private equity-owned companies may worsen – leading to even more bankruptcies. The private equity firms that push firms into bankruptcy can often profit despite the impacts on the firms they invest in. Golden Gate Capital, for example, exited Red Lobster before their bankruptcy despite setting into motion the structures that ultimately led to their downfall.

The repercussions of these bankruptcies extend far beyond the affected companies, impacting employees, suppliers, and local economies. Job losses devastate local communities and reverberate throughout the national economy as suppliers and small businesses feel the downstream effects. Bankruptcies and store closures trigger supplier layoffs, compounding the job losses. When 100 direct jobs are lost at retailers, an additional 122 indirect jobs are also lost, magnifying the economic impact.^[17] While many private equity firms can protect their earnings, the closure of businesses makes out-of-work employees carry the burden of bad financial decisions.

These closures can also harm consumers, especially in critical sectors like healthcare, where people may be left without access to essential services. Bankruptcies have ripple effects on individuals and families, disrupting their lives and access to vital resources.

There are calls for increased transparency and accountability in private equity governance. Strengthening regulations can help ensure that companies are held accountable for their actions and decisions, potentially mitigating the risk of bankruptcies and their adverse effects on consumers and communities. Senator Ed Markey, for example, recently introduced legislation that would require increased transparency in private equity-owned healthcare companies.^[18]

Private equity firms and their investors implementing and enforcing robust labor standards can also play a crucial role in safeguarding workers’ rights and mitigating the negative impact of bankruptcies on employees. Ensuring fair wages, safe working conditions, and adequate support for displaced workers can help alleviate some of the burdens of job losses resulting from business closures. The New York State Common Retirement Fund recently introduced comprehensive labor standards for their private equity investments due to the risks associated with labor disputes and violations in private equity investments.^[19]

When a private equity firm drives a company into bankruptcy, it is the company and its workers who pay the price.^[20] Recent bankruptcies underscore the detrimental effects of poor management decisions and private equity extraction. These factors have significantly driven companies to financial collapse, often at the expense of employees, suppliers, and local economies. While private equity firms and corporations frequently attribute these failures solely to consumer behavior and economic conditions, the reality is far more complex. Investors and stakeholders must recognize the broader implications of these narratives understanding the systemic issues at play. Calls for increased transparency, accountability, and scrutiny of corporate governance are crucial steps toward fostering a more sustainable and equitable landscape. Ultimately, investors should care not only about short-term profits but also about the long-term stability and ethical practices of the companies they invest in. Investors can contribute to a more resilient and equitable economic ecosystem by advocating for responsible management practices and implementing labor standards across their portfolios.

^[1]https://www.vox.com/today-explained-podcast/351642/red-lobsters-mistakes-go-beyond-endless-shrimp

^[2]https://fortune.com/2024/05/21/red-lobster-unlimited-shrimp-fiasco-bankruptcy/

^[3]https://www.uscourts.gov/news/2024/01/26/bankruptcy-filings-rise-168-percent

^[4]https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/us-companies-increasingly-opt-to-reorganize-in-bankruptcy-not-liquidate-80941865#:~:text=High%20interest%20rates%20are%20likely,ability%20to%20service%20their%20debt.

^[5]https://apnews.com/article/99-cents-only-store-closures-0f44cf157c8d8a23085ee8ab4e2f7878

^[6]https://www.brennancenter.org/our-work/research-reports/myth-vs-reality-trends-retail-theft

^[7]https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/private-equity-portfolio-company-bankruptcies-maintain-record-pace-81665915#:~:text=Elevated%20share%20of%20bankruptcies,consumer%20discretionary%20with%20six%20filings.

^[8] Lauren Weber, “Fact Check: Does Private Equity Kill Jobs?” Wall Street Journal, April 25, 2014, https://blogs.wsj.com/atwork/2014/04/25/factcheck-does-private-equity-kill-jobs/.

^[9] Lauren Weber, “Fact Check: Does Private Equity Kill Jobs?” Wall Street Journal, April 25, 2014, https://blogs.wsj.com/atwork/2014/04/25/factcheck-does-private-equity-kill-jobs/.

^[10]https://www.nbcnews.com/business/consumer/private-equity-rolled-red-lobster-rcna153397

^[11] Pitchbook, Red Lobster Deal History, Deal # 4 https://my.pitchbook.com/profile/60865-12/company/deals#deal-38073-61T

^[12]  Pitchbook, Red Lobster Deal History, Deal # 7 https://my.pitchbook.com/profile/60865-12/company/deals#deal-38073-61T

^[13]https://www.restaurantdive.com/news/golden-gate-capital-sells-remaining-stake-in-red-lobster/584426/

^[14]https://www.nbcnews.com/business/consumer/private-equity-rolled-red-lobster-rcna153397

^[15] pitchbook

^[16]https://apnews.com/article/99-cents-only-store-closures-0f44cf157c8d8a23085ee8ab4e2f7878

^[17] Josh Bivens, “Updated employment multipliers for the U.S. economy,” Economic Policy Institute, January 23, 2019, https://www.epi.org/ publication/updated-employment-multipliers-for-the-u-s-economy/.

^[18]https://www.markey.senate.gov/healthoverwealth#:~:text=Markey’s%20pioneering%20legislation%20requires%20monitoring,the%20event%20of%20facility%20closures.

^[19]https://pestakeholder.org/news/new-york-state-common-retirement-fund-adopts-labor-standards-for-private-equity/

^[20]  David Dayen, “Private Equity: Looting “R” Us,” The American Prospect, March 20, 2018, https://prospect. org/article/private-equity-looting-r-us