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Who's "everyone" in this case? Private equity? They get almost all of the windfall and limited downsides. Most of the risk is borne on the company itself, credi
by Disillusioned9 9y ago
Who's "everyone" in this case? Private equity? They get almost all of the windfall and limited downsides. Most of the risk is borne on the company itself, creditors, and especially workers.
These hail Mary's may have a little more use if the moral hazard weren't so blatant, and the rewards and risks more appropriately distributed.
- harryh 9y agolimited downsides It's worth noting that the PE firms involved in the deal lost over a billion dollars on their investment in this case.
- kelleoeo 9y agoRich people losing a fraction of their wealth and who will rebound thanks to business networking effects, and be given a pass because sometimes that’s how it goes Limited downside seems accurate
- jerf 9y agoOK, what are you looking for? Rich people get one shot at doing something, and if they fail, the government comes riding in and takes all their stuff? You have to be careful when you get vindictive at rich people; they're also the employers, and it's hard to build a system where such people aren't "the rich". (If you hard-core leveled everyone in the world to equal wealth, nobody would be able to employ anybody else in the current sense of the term. People would have to pool their money and give it to somebody or set of somebodies to manage. And lo, watch "the rich" appear again as the people who successfully employ others get a return, and those who fail do not. It's really hard to avoid "the rich" also being "the employers".) I can pretty much guarantee someone, probably multiple someones, were called on the carpet at these firms, and did not get the "Oh well, just try again good buddy!" treatment.
- chongli 9y agoOK, what are you looking for? Rich people get one shot at doing something, and if they fail, the government comes riding in and takes all their stuff? I can't speak for the person you replied to, but how about this? Less downside for the workers. We're talking about thousands of people losing their jobs. These people then go into a smaller labour market where they compete with other vulnerable retail workers, affecting far more people. If we want an appropriate measure of downside in a situation like this, we should look at all of the externalities. Few people ever do, though, and society marches on.
- harryh 9y agoPoorly performing companies going out of business in order for new, better companies to flourish is a necessary step for the creation of a healthy job market.
- chongli 9y agoI don't see it. Working at Toys R Us may not have been great, fine, but it sure beats pissing in bottles in a sweltering/freezing Amazon warehouse. Amazon is a lot more profitable than Toys R Us ever was but that doesn't mean they make the job market, let alone society, healthier.
- metabagel 9y agoWe don't actually know how it worked out for them, because reportedly they spent twelve years siphoning off cash from Toys 'R' Us.
- harryh 9y agoWe do know actually: https://www.bloomberg.com/news/articles/2017-09-19/bain-kkr-vornado-suffer-wipeout-in-toys-r-us-bankruptcy https://www.bloomberg.com/news/articles/2017-09-19/bain-kkr-...
- metabagel 9y agoMarketplace says that Bain and KKR still made money off of the deal. https://www.marketplace.org/2018/03/06/business/toys-r-us-and-how-retail-downturn-story-about-debt https://www.marketplace.org/2018/03/06/business/toys-r-us-an... "The private equity firms’ investors haven’t made money off this deal. But the firms themselves have. It’s unclear where Vornado ended up. But after collecting fees from Toys R Us, Bain and KKR each took home at least $15 million."
- harryh 9y agoThat says they earned revenue, not a profit. They did not earn a profit.
- bhouston 9y agoAccording to my calculations in this comment they are at least close to net zero: https://news.ycombinator.com/item?id=16906549 https://news.ycombinator.com/item?id=16906549 Which is pretty good outcome for them given TRU has failed completely.
- JumpCrisscross 9y agoYou overestimate interest and fees, paid by Toys 'R' Us to the PE firms, by over 100%. We know the actual numbers from SEC and bankruptcy filings [1]. [1] https://www.bloomberg.com/news/articles/2017-09-19/bain-kkr-vornado-suffer-wipeout-in-toys-r-us-bankruptcy https://www.bloomberg.com/news/articles/2017-09-19/bain-kkr-...
- bhouston 9y agoSo either the interest amount of $435M per year (which is roughly 15% interest on 6.6B) is incorrect from the original article or they receives less than 20% of that interest? Strange. $270M over 13 years from $1.1B in loans? ($270M = $470M - the $200M in fees.) That seems incredibly low interest. I am suspicious. LBO firms do not give low interest loans to their targets. If we assume an interest rate of 5%, you get 50M in interest a year on 1B. 13 years will yeild $750M in interest. Did these LBO firms really offer loads at something like 1.5%? Something isn't adding up.
- JumpCrisscross 9y ago> they receives less than 20% of that interest? They hold less than 20% of the debt. Most of their investment went in as equity. That's wiped out. > LBO firms do not give low interest loans to their targets PE buys equity and subordinated debt. Sub debt has high rates and wonky structures. In this case, I believe it was pay in kind, "a type of high-risk loan or bond that allows borrowers to pay interest with additional debt rather than cash" [1]. Nice feature if the debt is repaid. Less fun when it's wiped out. [1] https://en.wikipedia.org/wiki/PIK_loan https://en.wikipedia.org/wiki/PIK_loan
- JumpCrisscross 9y ago> [Private equity] get almost all of the windfall and limited downsides. Most of the risk is borne on the company itself, creditors, and especially workers. Private equity paid the original shareholders for Toys 'R' Us. The limited partners in this fund (and creditors) lost a lot. The managers extracted their management fee, but that's basically only salaries. Good salaries, but none of the 20% of the upside that makes people in PE rich. I agree that workers are left out. Employees in private-equity acquired companies should get (a) stock (or better yet, an interest in the diversified fund) and/or (b) enhanced downside protection (e.g. longer or bigger unemployment benefits, paid for by the private equity fund). But in this specific case, employees didn't turn out that much more badly than they would have otherwise. (For those who might have lost their jobs in the next recession, their lot was arguably improved.)
- btilly 9y agoThe managers extracted their management fee, but that's basically only salaries. Management fees in this case were $200 million. That's a pretty nice salary!
- JumpCrisscross 9y ago> Management fees in this case were $200 million "Toys 'R' Us does say in its SEC filings that $47 million in transaction fees that it owed KKR, Bain and Vornado, have been waived. The advisory fees were also voluntarily reduced by the investment firms in recent years" [1]. (Toys 'R' Us did pay the PE consortium "$470 million in fees and interest" [2], but the vast bulk of that goes to the fund, i.e. the people who just lost a billion dollars.) [1] https://www.forbes.com/sites/nathanvardi/2017/09/19/the-big-investment-firms-that-lost-1-3-billion-on-the-toys-r-us-bankruptcy/2/#116addc073b0 https://www.forbes.com/sites/nathanvardi/2017/09/19/the-big-... [2] https://www.bloomberg.com/news/articles/2017-09-19/bain-kkr-vornado-suffer-wipeout-in-toys-r-us-bankruptcy https://www.bloomberg.com/news/articles/2017-09-19/bain-kkr-...
- moufestaphio 9y agoI'm assuming he was going from the OP article: >Bain, KKR, and Vornado will have to write off their investment, of course. But they did suck around $200 million in fees out of Toys 'R' Us over the course of their ownership.
- airstrike 9y agoEquity holders, by definition, have unlimited downside.