Private equity is a type of finance that consists of investors and funds that make investments directly into private companies. In the case of Red Lobster, the chain was sold to the private equity firm Golden Gate Capital in 2014 by its parent company, Darden Restaurants, with a sum of around $2.1 billion.
The saga began when Darden, facing stagnating profits and pressure from shareholders, wanted to focus more on its successful Olive Garden chain. They decided to sell Red Lobster, which had been struggling with decreasing sales, an outdated image, and increased seafood prices.
Golden Gate Capital, despite the known risk, aimed to revitalize the chain. They planned to remodel restaurants, revamp the menu to attract younger consumers and make the eatery’s more profitable.
Unfortunately, the ambitious plans didn’t yield the expected success. The main problem is that costs to make the revitalization happen were high, and the process took longer than foreseen. Moreover, key aspects such as the rising seafood prices did not improve.
Part of what sunk Red Lobster was a $425 million loan Golden Gate used to finance the deal. With an aggressive repayment schedule and high interest rate, it put a lot of financial pressure on the struggling seafood chain which made it hard to execute its revival plans.
This points to a common issue facing companies purchased by private equity firms. If the firm makes its purchase using lots of debts, the borrowed money can become a heavy burden on the company, especially when trying to
