Hello there, fellow supply enthusiasts!

As we all know, shady things can happen behind closed doors.

The rapid expansion of private equity firms has attracted attention from market observers. But there are risks: much of the market operates with limited transparency and regulatory supervision. We’ll highlight concerns around some of the cost-saving measures implemented by these PE firms. If you think this sounds familiar, à la a certain management consultant firm, you are not alone. But that’s for another day. 

And hey, how about WeWork!? The collapse has long been foreshadowed, but its impact still sent shockwaves through the market. Does this herald the end of co-working spaces in the U.S.? 

As per usual, plenty of other bits and pieces are on offer, including my recommendations for podcasts, books, and shows, along with charts and tweets of the week. 

Let's get reading.

Industry Highlights: The Opaque Economy

A disappearing act is underway. Back in 1996, the stock market boasted around 8,000 listed firms. Yet the current count of American public companies has dwindled to fewer than 4,000. How did this happen?

One explanation is the voracious appetite of the private equity industry. When a private equity fund acquires a publicly traded company, it effectively transforms it into a private entity, as the name suggests. The allure is clear enough: the fund gains complete control, gets busy identifying avenues for profit enhancement, and sells the company for a windfall. According to The Atlantic, private equity funds surged from approximately 4 percent of the total in 2000 to nearly 20 percent as of 2021 - that’s five times faster growth than that of the entire U.S. economy.   

What’s the issue? In a word: transparency.

Public companies must disclose financial information, operational details, business risks, and legal obligations by law. Going private exempts a company from these mandated disclosures. Today, one-fifth of the market is essentially concealed from investors, media scrutiny, and regulatory oversight. Fundamental details such as ownership, revenue sources, or profitability of a company are - to quote Harvard Law professor John Coates - “disappearing indefinitely into private equity darkness”. Corporate accountability goes out the window in an opaque economy and increases the likelihood of being caught off guard by an economic crisis. 

Only a fraction of private equity funds are shady, of course. But secrecy emboldens carelessness. Take nursing homes - an alarming study found that private equity ownership contributed to approximately 22,500 premature deaths from 2005 to 2017 due to aggressive cost-cutting measures. No wonder the current situation has been dubbed the smash-and-grab economy.  

According to the Financial Times, private equity is finally facing a reckoning due to eighteen months of surging inflation and rising interest rates, which have “throttled most debt-backed buyouts”. Managers are turning to risky forms of debt financing to stay viable and are often overpaying for their targets. Meanwhile, investors worry that the default rate will begin to soar.  

What is the government doing? Three months ago, the SEC put forward a new rule that requires private equity funds to provide more detail to investors. But as The Atlantic warns, this “hardly addresses the bad behavior or systemic risk”. Meanwhile, it pays to stay vigilant and keep a keen eye lest our economy disappears into the shadows. 

Earlier this year, two hard-hitting books took aim at the PE world. They were released within a month of each other. While they have yet to make my reading list, it does show that there is no shortage of critics. If anyone has read them, please share your thoughts. The books are Plunder: Private Equity's Plan to Pillage America and These Are the Plunderers: How Private Equity Runs and Wrecks America. Noticing a trend here?

The Future of Work: The Collapse of WeWork

WeWork is bankrupt. Burdened by over $13 billion in office lease obligations, the collapse of the co-working trailblazer has raised concerns for flexible workspace providers. 

The Financial Times reports that WeWork's CEO, David Tolley, acknowledged in the bankruptcy filing that the company had amended 590 leases and reduced future rent obligations by $12 billion. Despite these efforts, WeWork couldn't overcome the lingering impact of real estate costs and broader industry challenges.

WeWork collapsed just as the flex industry is seeing record performance. Companies of all sizes are seeking to ditch their oversized headquarters for smaller, flexible spaces. 

So, what went wrong? Pundits agree that the collapse was less about lack of demand and more about their business model and approach to scaling, which resembled that of a tech startup rather than a corporate real estate business. Fingers are being pointed at the full-throttle and somewhat erratic leadership style of co-founder Adam Neumann, who was removed by the board in 2019 (helped along with a $445 million exit package). Adam has earned the distinction of being the first guy to convince, or con, investors to buy into his dubious real estate venture as a tech company.

Instead of creating enough spaces to meet the genuine needs of digital professionals, WeWork expanded as much as its building inventory allowed. As debt accumulated and building inventory expanded, WeWork's lease commitments also soared. By 2018, WeWork had become the largest office tenant in New York City and the fourth largest in San Francisco.

The rapid expansion was made possible by a consistent inflow of investment capital, notably from Softbank's Vision Fund, which invested a staggering $18.5 billion. Additional billions were secured from Goldman Sachs, JP Morgan, and major real estate players like Brookfield and Cushman & Wakefield. WeWork's substantial financial resources enabled them to enter into more lease agreements, creating the illusion of robust market demand and revenue growth.

WeWork committed to office leases spanning 10 to 20 years but subleased spaces to smaller tenants for periods as short as a month. This setup meant that customers could swiftly abandon their desks during economic downturns while WeWork remained obligated to rent payments. Most of these leases were inked in 2018 and 2019, peaking before the pandemic, and now face plummeting tenant demand amid the work-from-home surge.

As of June, WeWork was shelling out over $2.7 billion annually on rent and interest, representing over 80% of its total revenue. This left little room to cover other expenses and turn a profit.

Other miscalculations included a short-lived rebrand to “The We Company,” a failed residential arm (WeLive), and even an elementary school concept (WeGrow). 

Today, WeWork is gone, but co-working isn’t dead. Other providers (the biggest being IWG) will undoubtedly draw valuable lessons from this saga. Right now, there’s plenty of surplus space in the market for any business looking for an office. The vacancy rate hit 18.4% in the third quarter, with 2.6 percentage points comprising sublet floor space released by existing occupiers. As the WSJ quipped, “Flexible office providers will need to flex, too.” 

Hybrid work schedules mean the office is here to stay, but the workspace concept is changing. Many companies are downsizing, moving from expensive city rentals to the suburbs, or sharing space with other companies. Companies need to “earn the commute” by reevaluating their workplaces. Inc. recommends including employees in design discussions, creating different spaces to suit different working styles, and ensuring the office tech is up to date to cope with the hybrid reality.

AI Insights

• OpenAI is enticing top AI talent from Google, reportedly offering annual compensation packages of $5 million to $10 million, mostly in stock. OpenAI targets senior AI researchers, particularly those involved in Google's Gemini AI models. Both OpenAI and Google are aggressively competing for talent, with reports that Google has also recently poached some high-profile researchers from OpenAI.

•  The World Economic Forum's AI Governance Summit took place this week, bringing together over 200 AI leaders to address the impact of AI on jobs, security, and the economy. If you’re interested in data privacy, job security, bias, and ethics in AI, be sure to watch some of the sessions. 

• You can build your own version of ChatGPT. OpenAI has announced a major update, enabling users to easily create their own custom ChatGPT without coding skills. We can expect a wave of personalized chatbots doing everything from web searching to image creation and data analysis. Plus, OpenAI is launching a "GPT Store" soon, where users can share and make money from custom chatbots.

The Supply Aside

📕 Read - Same As Ever by Morgan Housel

If you’ve ever read the Foundation series, you’ll know of Isaac Asimov’s “Psychohistory”; a fictional science where history, sociology, and statistics are combined to make accurate predictions about the future behavior of large groups of people. Asimov comes to mind when reading Same As Ever by Morgan Housel. 

A master storyteller, Housel argues that although it is impossible to predict the future, human behavior provides a stable guideline for making choices. “People will always respond to greed, fear, opportunity, exploitation, risk, uncertainty, tribal affiliations, and social persuasion in the same way,” Housel writes. As a big fan of his previous book, Psychology of Money, looking forward to digging into this one. 

What Else I’m Reading

• The world economy is defying gravity: But it can’t last. Despite recent global economic buoyancy, challenges loom. The sustainability of this economic optimism hinges on either unprecedented productivity growth potentially fueled by AI, or a much bleaker scenario.

• Long live crypto? Despite increasing scrutiny and the stunning fall of Sam Bankman Fried, crypto as an asset class continues to outperform. Bitcoin prices are now up 107% year-to-date in 2023, while Ethereum prices are up 49%.

• Union leader Shawn Fain wins record gains for auto workers: Described as “brazen,” “theatrical,” and “digitally savvy”, Shawn Fain’s bruising approach to negotiations with Detroit’s Big Three automakers has won the most worker-friendly contract negotiated in decades.

📺 Watch - Pain Hustlers (2023)

Loosely based on the true story of a Chicago pharmaceutical company, Pain Hustlers is like the Wolf of Wall Street for pharma. A struggling single mother joins a failing pharmaceutical start-up and soon becomes entangled in dubious ethics and a racketeering scheme. The film shines a light on the sleazier end of the industry and the greed, desperation, and fortunes generated by America’s opioid crisis.  

As I watched this, I was reminded of a guy I used to play squash with back when I lived in IL. Raj was a nice fellow who had numerous business interests. He once told us that his cousin was the first Indian billionaire in the US, and he helped get his extended family to migrate and settle in the States. Turns out that this pharma billionaire is who they based this movie on. Towards the end, they reveal his name; it is the same John Kapoor. I guess that squash buddy can now add the first former Indian billionaire convicted felon to his intro.

👂 Listen - HBR On Strategy

Everybody loves a startup success story, but trying to emulate the journeys of our most famous brands is not always a winning idea. In this HBR on Strategy episode titled “The Strategy Mistake Too Many Startups Make”, Thales Teixeira explains why trying to do too much, too quickly, can lead to failure. 

💡 Think - Easy Come, Easy Go

Sam Bankman-Fried's full-blown conviction really drives home a big point: playing fast and loose in finance, especially in something as volatile as crypto, can land you in serious hot water. The guy went from a crypto superstar to potentially spending life behind bars, which is kind of mind-blowing. It's a massive wake-up call for anyone thinking they can outsmart the system and shortchange investors. This whole saga is like a billboard for why playing by the rules matters in fintech. It's a wild story that should serve as a warning … but we know it probably won't. 

Charts of the Week

Quote of the Week

Tweets of the Week

Finally...

Thanks so much for reading. I’d love to know what you think about this issue and how I can make it more useful to you.

If you have suggestions or topics you’re interested in seeing me address, shoot me an email at [email protected]!

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Happy reading this weekend!

-- Naseem