Here are the scariest words for a company in the United States: “I am from a private equity firm and I am here to help.”
The truth is that these firms are not here to help anyone. The entire goal of a private equity firm is to make a large amount of money in a short amount of time. Anything that gets in the way of making a lot of money or extending the time frame for making a lot of money will get jettisoned despite any assurances from the practitioners of private equity.
Consider the retail landscape as it is in the United States. Brick and mortar retail, which is what most of us think of as retail, has been in trouble for a long time in the U.S. Online companies, led by Amazon, have cannibalized sales and have been considered the prime culprit in the rash of bankruptcies that have plagued the sector over the last decade. What if the problem was not so much Amazon and the Internet, but private equity?
Payless ShoeSource, a staple of U.S. malls for decades, is expected to file for bankruptcy and prepare for liquidation. The closure will result in 3,600 stores closing and more than 18,000 people losing their jobs. The company had declared bankruptcy in 2017, but this appears to be the end of the road. Why? In 2012 the company was bought by Golden Gate Capital and Blum Capital Partners in a leveraged buyout that saddled the company with debt from which it could not recover.
Toy R Us, the category killer toy retailer led by an anthropomorphic giraffe, closed for good in 2018 taking with it a lot of childhood memories. A lot of things changed across the retail toy landscape in the decades since Toys R Us was founded including online sales, shifting play habits, etc. but a lot of the blame can be laid at the feet of private equity. Toy R Us was taken private in 2005 by a group led by Bain Capital, the same guys in the picture with Mitt Romney looking like villains from Trading Places, in a move that saddled the company with a lot of debt. As the company was approaching bankruptcy for the final time the $5 billion dollar noose of debt was too much to handle. Sound familiar?
Gymboree, a retailer of children’s clothing, bought by Bain Capital in 2010 declared bankruptcy this year. Radio Shack, the venerable retailer of all things electronics, had the final nail driven into its coffin due to onerous conditions imposed upon it by private equity firms Salus Capital Partners and Cerberus Capital Management. Sound familier? What company have these firms “taken over” and brought out of dire financial straits into a sustainable business model?
Here is the punch line, private equity firms know that this is the business model and intend to bankrupt these firms all along. It is how they make money on these deals. The goal is not to “turn a company around” or “return to profitability.” The goal is to use a distressed company as a vehicle for debt to extract maximum value over a short time horizon and get the hell out of Dodge in terms of financial exposure. The legal entity left holding the bag, so to speak, for the financial obligations is a shell of a company denuded of any real value. Private equity strip mines American businesses and leaves the scene no better than corrupt coal companies across Appalachia.
If you want to know what bedevils the American economy look no further than private equity.