Intro
In this episode of “The Prof G Pod with Scott Galloway,” Scott is joined by Gretchen Morgenson, a senior financial reporter and former stockbroker who won a Pulitzer Prize for her reporting on Wall Street. They discuss the impact of private equity on the economy, the rise of super apps, the power of branding, income inequality, and the problems associated with the private equity industry.
Main Takeaways
Private Equity and Super Apps
- Private equity can have a negative impact on the economy.
- Twitter is shedding its final skin and moving towards becoming a super app called X.
- A super app hasn’t been able to emerge in the US yet.
- Twitter CEO Linda Yaccarino’s statement about X was criticized for being a “word salad”.
- Elon Musk wants to turn Twitter into a super app like WeChat in China.
Branding and Awareness
- Elon Musk is a powerful example of how awareness can build a brand, even if it means being controversial or spreading conspiracy theories.
- Tesla is one of the strongest brands in the world, especially in the automotive industry, and has dominated in market cap.
- Product and supply chain excellence are key factors in building a strong brand, as seen with Amazon’s success.
- Logos and visual metaphors are exceptionally powerful when well-designed and recognizable in peripheral vision.
- Awareness is crucial in building a brand as people won’t buy from a brand they haven’t heard of.
- Building a brand with global awareness and positive associations with technology is crucial.
- A brand needs to be differentiated, singular, relevant, and have some modes around it.
- Taking billions of dollars and lining it on fire is the stupidest brand strategy move in the history of marketing.
Income Inequality and the Power of the Rich
- Income inequality in the United States is a major issue with GDP growth consistent but wages flat.
- The gap between the wage line and productivity/GDP growth line has accreted trillions of dollars to the top 1%.
- The obsession with money in America is aspirational and feeds into capitalism.
- The rich have weaponized government and created tax policies that benefit them.
- Sweat is considered less noble than money in America, which makes no sense.
- Too few people have too much money, which leads to corruption and damage.
- The power of the rich has led to a bigger problem, with individuals making bad decisions because they have no guardrails or board.
Private Equity’s Impact on Healthcare
- Private equity has taken over certain parts of the economy, making bad business decisions due to lack of fiduciary responsibility.
- Private equity-backed takeovers are hard to track because of privacy and lack of information.
- More than 40% of US emergency departments in hospitals are overseen and managed by private equity.
- Blackstone and KKR control one-third of the nation’s hospital emergency rooms.
- Private equity firms’ demand for profitability can conflict with physicians’ interest in serving patients’ needs.
- Laws against corporate practice of medicine exist but are rarely enforced.
- Private equity in healthcare is like “corporate profit capitalism on steroids”.
- Many private equity-backed healthcare companies are now on the precipice due to heavy debt loads.
- Unsustainable business model: relies on low or zero interest rates and increasing charges to patients.
Issues with the Private Equity Industry
- Private equity enduring despite economic cycles, proven to be a big part of the alternative investment ecosystem.
- Returns in private equity reverting to S&P 500, no longer generating alpha.
- Private equity firms have leeway in marking portfolios, leading to questions about meeting obligations and transparency.
- Private equity firms are under pressure to improve marks and valuations, even if they are not accurate.
- Deals are dead in the water this year, and big firms are having trouble raising money for new funds.
- Most of the money that private equity firms raise is floating rate, which is the elephant in the room.
- Pensions are finding it difficult to get out of private equity deals and are doing so at significant discounts.
- The private equity industry is facing more scrutiny and affecting more stakeholders than before.
- Business model is unsustainable and causing a “circle of pain”.
- Impacts include laid off workers, decreased tax bases, and pension funds questioning their involvement.
- Alternative investment options exist that are more transparent and ethical.
- Private equity-backed companies have engaged in problematic practices, such as hiring children for cheap labor.
- Private equity firms and their investors can suffer significant losses if a company they have invested in goes into restructuring or violates debt covenants.
- The carried interest loophole for private equity is considered by some to be the most outrageous part of the tax code, allowing short-term income to be taxed as capital gains.
- Private equity is one of the highest-paying industries, with long-term capital gains on short-term income commissions.
- Valuations for companies may decrease if investors demand lower returns, leading to reputational risks for private equity firms.
- More information about private equity-backed companies is needed, as they often operate in the background without advertising their ownership.
- Private equity firms often hide behind the excuse of not knowing about violations in their portfolio companies, but their business model may create incentives for such actions.
- Changing the tax code could help eliminate part of the problem with private equity firms.
- Private equity firms often take out all their invested money and do dividend recapitalizations before a company goes bankrupt, so they may not lose as much as it seems.
Journalism and Masculinity
- The New York Times sees itself as a watchdog or cop, while the Wall Street Journal sees itself as an evangelist for business.
- The speaker’s drive for investigative journalism comes from a passion to cover business in a fearless, hard-hitting way, and to expose downsides that are often wallpapered over by capitalism, money, and PR consultants.
- The speaker’s career in investigative journalism was sparked by a pivotal moment when she sold a stock to clients without reading the prospectus and the company subsequently slashed its dividend and had nuclear problems.
- This moment made her realize that the financial industry was more concerned with doing what was right for the firm than the customer.
- The number of journalists has been cut in half over the last 30 years, while the number of PR and comms people has increased six-fold, leading to a 12x increase in the ratio of “bullshit to spend.”
- There aren’t enough journalists asking hard questions about companies like WeWork and Theranos.
- The speaker shares a personal story about buying stock at Dean Witter Reynolds as a 13-year-old, which taught her about the markets and the importance of investing.
- The speaker learned about the markets and the importance of investing at the age of 13 by calling a stockbroker during lunchtime at school.
- The stockbroker was a gem and unusual because he was willing to work with a child who had $200 to invest.
- The speaker is now economically secure and an entrepreneur thanks to that early experience.
Masculinity and Protection
- Masculinity involves being a protector and is associated with jobs that involve protecting others, such as emergency room doctors, cops, firemen, and people in the armed services.
- Masculinity is not limited to people born as men, as women can also demonstrate wonderful masculinity and men can demonstrate wonderful femininity.
- A wonderful masculine attribute is to protect vulnerable groups, even if one does not understand or empathize with them.
- Men should push back against disparaging comments and biases against vulnerable groups and have a bias towards protection.
- Protection is a key aspect of masculinity and the reason why men stick up for people, even if they don’t understand or empathize with them.
Summary
Private Equity and Super Apps
Private equity can have a negative impact on the economy, and Twitter is shedding its final skin to become a super app called X. However, a super app hasn’t emerged in the US yet, and Twitter CEO Linda Yaccarino’s statement about X received criticism for being a “word salad.” Elon Musk envisions turning Twitter into a super app similar to WeChat in China, showcasing the potential for awareness to build a brand.
Branding and Awareness
Branding plays a crucial role in building a strong brand, as seen with Elon Musk’s controversial yet successful brand-building strategies for Tesla. Product and supply chain excellence contribute to brand strength, exemplified by Amazon’s success. Logos and visual metaphors are powerful when well-designed and recognizable. Building global awareness and positive associations with technology are key in today’s market. Differentiation, relevance, and having some modes around a brand are essential. Wasting billions of dollars on ineffective brand strategies is detrimental.
Income Inequality and the Power of the Rich
Income inequality in the United States is a significant issue, with the top 1% accumulating trillions of dollars more than the wage line and GDP growth. The obsession with money in America feeds into capitalism, and the rich have influenced tax policies to their advantage. The disparity between the value placed on money and hard work is problematic. The concentration of wealth in the hands of a few leads to corruption and bad decision-making. Lack of guardrails and oversight for the rich exacerbates the problem.
Private Equity’s Impact on Healthcare
Private equity’s influence on healthcare raises concerns about fiduciary responsibility and conflicts with physicians’ interests in patient care. The lack of transparency and privacy surrounding private equity-backed takeovers makes tracking their impact difficult. Private equity’s control over a significant portion of emergency departments in hospitals, such as those managed by Blackstone and KKR, raises questions about profit-driven decision-making. Heavy debt loads and unsustainable business models threaten the stability of private equity-backed healthcare companies.
Issues with the Private Equity Industry
The private equity industry faces scrutiny and criticism due to unsustainable business practices, lack of transparency, and negative impacts on various stakeholders. Returns in private equity are no longer generating alpha, and valuations may decrease if investors demand lower returns. The industry’s reliance on floating rate funds poses challenges, especially for pensions trying to exit investments at significant discounts. Private equity-backed companies have engaged in problematic practices, and their ownership is often hidden. Reforming the tax code and increasing transparency could address some of the issues.
Journalism and Masculinity
The decline in journalism and the rise of PR and communications have led to a lack of critical questioning and investigative reporting. Gretchen Morgenson’s career in investigative journalism was motivated by a pivotal moment that exposed the financial industry’s priorities. The importance of journalism in uncovering downsides often overlooked by capitalism and PR consultants cannot be overstated. Morgenson’s personal experience with investing at a young age highlights the importance of financial literacy and early exposure to the markets.
Masculinity and Protection
Masculinity is associated with protecting vulnerable groups, regardless of understanding or empathy. Men should push back against biases and protect those who are disparaged. Protection is a fundamental aspect of masculinity, fostering a sense of responsibility and care for others.
Conclusion
This episode of “The Prof G Pod” delves into the negative impact of private equity on the economy, the rise of super apps, the power of branding, income inequality, and the problems associated with the private equity industry. It highlights the need for transparency, ethical practices, and protection of vulnerable groups. The conversation with Gretchen Morgenson sheds light on the importance of investigative journalism in holding corporations accountable and the role of masculinity in protecting others.
