How Red Lobster was controlled by private equity

Are you frustrated that your favorite Red Lobster location has closed down? The closure of this iconic seafood chain, which served 64 million customers a year across almost 600 locations in the US and Canada, has been attributed to Wall Street wizardry. While some have blamed the company’s woes on promotions like endless shrimp and rising costs, the real culprit may be a financing technique commonly used by private equity firms.

Private equity firms often employ asset-stripping, a practice where they sell off a company’s assets to benefit themselves, ultimately harming the company. In the case of Red Lobster, a sale/leaseback involving the sale of premium real estate under 500 stores generated $1.5 billion, but the money did not go back to the chain. Instead, it was used to finance Golden Gate Capital’s purchase of Red Lobster, increasing the chain’s rent costs significantly.

As a result of the sale, Red Lobster was unable to benefit from any potential upside in the commercial real estate market and faced above-market rent prices. This, combined with the increased debt burden from the private equity buyout, led to financial instability for the chain, ultimately resulting in bankruptcy. Golden Gate Capital exited its investment in Red Lobster in 2020, selling to Thai Union Group and an investor group.

The collapse of companies like Red Lobster has a ripple effect on the broader economy, impacting suppliers, small businesses, and communities. Former employees like Austin Hurst, a grill master at a Red Lobster location, have been left in the lurch following the closures, with limited support from the company. Sen. Edward Markey has raised concerns about the impact of private equity in industries like health care, proposing legislation to increase transparency and oversight.

The negative impact of private equity practices extends beyond individual companies like Red Lobster, affecting workers, suppliers, and communities. As private equity continues to gain influence across various sectors of the economy, it is essential for policymakers and regulators to address the potential harm caused by these financial strategies. By increasing transparency and oversight, we can work towards a more stable and ethical financial system that protects workers and communities from the consequences of asset-stripping and leveraged buyouts.