5 ms·

Yup, blaming this on “the age of Amazon” is a mistake. Same with toys r us and Sears: crushing debt from private equity with no retail competence.

by pbreit 8y ago

ghaff 8y ago
Yes, although private equity generally gets involved in the first place because the company is already on the ropes. Resuscitating a failing retail chain in this day and age has a pretty high degree of difficulty. (Although it can be done; I'd probably argue Best Buy is an example.)
- clairity 8y ago
  private equity will also often get involved when a firm is under-leveraged or otherwise seen to be leaving money on the table by current operations. sometimes that simply means the PE firm has access to cheap debt that the (former) owners do not. resuscitating a retail chain often involves bundling multiple companies and cutting duplication (yum brands, for example).
- indigodaddy 8y ago
  Best Buy is/was failing? I thought they've always used creative methods to stay competitive and profitable, from what I've read/heard?...
colechristensen 8y ago
Don't these private equity firms earn piles of money in the process in exchange for wiping out creditors and investors? (not to mention staff)
- sadris 8y ago
  No. Creditors, after the IRS, are first in line for assets in bankruptcy law.
  - jjeaff 8y ago
    That doesn't mean in many cases the PE firms aren't getting paid though. They usually charge "consulting fees" to the companies they buy sometimes in the hundreds of millions of dollars. They get that money long before any bankruptcy proceedings start.
    - colechristensen 8y ago
      The way I understood it is they have their acquisitions raise a lot of money through debt, pay themselves enormous fees out of that debt, and then do hail-mary plays to try to recover the company (which never, probably by intent, work) and then have the company go bankrupt. Pocketing the fees, etc which are in excess of anything they ever put in.
    - berliner214 8y ago
      So let me get this straight: You think banks willingly loan PE firms billions of dollars so they can pocket consulting fees and put the company into bankruptcy? That's completely wrong. The money put up by PE firms is more at risk than any loan received by a bank. Bain Capital, for instance, lost money on the Toys R Us buyout. The bank would not agree to loan money for a buyout without an explicit covenant that would prevent such shenanigans. The generated cash flow is used to pay down debt; the PE firm usually only makes a profit when it exits its investment. Banks agree to loan to PE firms because buyouts usually work and PE firms are right when they believe they can increase margins. The extra debt load reduces the tax burden and makes the debt easier to pay off.
      - jjeaff 8y ago
        The fact that you don't know about the consulting fees that PE firms charge makes me think you are just spitballing here. The PE firms put up around $1.3B for Toys R Us with a $6.6B total leveraged buyout. The received around $200mm in consulting and other fees during their tenure. They also received interest payments for their portion of the capital. And there were several other deals and consolidations that are estimated to have netted the P/E firms several hundred million more. But these deals are far to complex to get exact numbers. It's likely that the PE firms lost big on deals like toys-r-us, but they definitely skim off the top all along the way thus making their final losses less. https://www.theatlantic.com/magazine/archive/2018/07/toys-r-us-bankruptcy-private-equity/561758/ https://www.theatlantic.com/magazine/archive/2018/07/toys-r-...
buyx 8y ago
It's a worldwide phenomenon. Bain Capital brought a huge, thriving retail business (Edcon) to its knees in South Africa, after a botched leveraged buy-out: https://www.biznews.com/sa-investing/2015/07/15/bains-strategic-blunder-edcon-may-default-on-bond-paymentsafrica-retail-slump https://www.biznews.com/sa-investing/2015/07/15/bains-strate...
- ComputerGuru 8y ago
  It may be worldwide, but it’s the same handful of players behind it all. I thought there were some bills in the works to outlaw leveraged buyouts in the USA?
  - sys_64738 8y ago
    Bain Capital is the firm associated with newly elected Republican Senator Mitt Romney of Utah. I'd expect those bills will now be derailed.
drilldrive 8y ago
The market for Toys-R-Us is absolutely still there, and currently there is a vacuum for a better company to step in place. People are simply not going to buy their children's items online; moms just love to try things out in the store for their kids.
- rdtsc 8y ago
  We've driven many times by the now closed Toys-R-Us store and lamented how we can't go and pick out toys there anymore. Stores like Target have a toys section and it helps to some extent but the selection is just not there. Also another thing Amazon can't do is last minute gift shopping for the numerous birthday parties kids seem to be invited to.
  - toomuchtodo 8y ago
    Parent life pro tip. Purchase an assortment of toys on clearance and keep them around for emergency party invites.
    - rdtsc 8y ago
      Excellent idea. Thanks!
    - pkaye 8y ago
      And you can also buy gift wrap and greeting cards at dollar stores. There is not much difference except for the limited selection.
      - deleted 8y ago
        [deleted]
      - carlivar 8y ago
        Gift wrap is something I've learned over time not to cheap out on. Wrapping a present with cheap paper is frustrating. It rips far too easily. The task with quality paper is night and day. Worth a few more bucks per roll if you ask me.

Yup, blaming this on “the age of Amazon” is a mistake. Same with toys r us and Sears: crushing debt from private equity with no retail competence.

by pbreit 8y ago

Yup, blaming this on “the age of Amazon” is a mistake. Same with toys r us and Sears: crushing debt from private equity with no retail competence.

ghaff 8y ago

Yes, although private equity generally gets involved in the first place because the company is already on the ropes. Resuscitating a failing retail chain in this day and age has a pretty high degree of difficulty. (Although it can be done; I'd probably argue Best Buy is an example.)

clairity 8y ago
private equity will also often get involved when a firm is under-leveraged or otherwise seen to be leaving money on the table by current operations. sometimes that simply means the PE firm has access to cheap debt that the (former) owners do not. resuscitating a retail chain often involves bundling multiple companies and cutting duplication (yum brands, for example).
indigodaddy 8y ago
Best Buy is/was failing? I thought they've always used creative methods to stay competitive and profitable, from what I've read/heard?...

colechristensen 8y ago

Don't these private equity firms earn piles of money in the process in exchange for wiping out creditors and investors? (not to mention staff)

sadris 8y ago
No. Creditors, after the IRS, are first in line for assets in bankruptcy law.
- jjeaff 8y ago
  That doesn't mean in many cases the PE firms aren't getting paid though. They usually charge "consulting fees" to the companies they buy sometimes in the hundreds of millions of dollars. They get that money long before any bankruptcy proceedings start.
  - colechristensen 8y ago
    The way I understood it is they have their acquisitions raise a lot of money through debt, pay themselves enormous fees out of that debt, and then do hail-mary plays to try to recover the company (which never, probably by intent, work) and then have the company go bankrupt. Pocketing the fees, etc which are in excess of anything they ever put in.
  - berliner214 8y ago
    So let me get this straight: You think banks willingly loan PE firms billions of dollars so they can pocket consulting fees and put the company into bankruptcy? That's completely wrong. The money put up by PE firms is more at risk than any loan received by a bank. Bain Capital, for instance, lost money on the Toys R Us buyout. The bank would not agree to loan money for a buyout without an explicit covenant that would prevent such shenanigans. The generated cash flow is used to pay down debt; the PE firm usually only makes a profit when it exits its investment. Banks agree to loan to PE firms because buyouts usually work and PE firms are right when they believe they can increase margins. The extra debt load reduces the tax burden and makes the debt easier to pay off.
    - jjeaff 8y ago
      The fact that you don't know about the consulting fees that PE firms charge makes me think you are just spitballing here. The PE firms put up around $1.3B for Toys R Us with a $6.6B total leveraged buyout. The received around $200mm in consulting and other fees during their tenure. They also received interest payments for their portion of the capital. And there were several other deals and consolidations that are estimated to have netted the P/E firms several hundred million more. But these deals are far to complex to get exact numbers. It's likely that the PE firms lost big on deals like toys-r-us, but they definitely skim off the top all along the way thus making their final losses less. https://www.theatlantic.com/magazine/archive/2018/07/toys-r-us-bankruptcy-private-equity/561758/ https://www.theatlantic.com/magazine/archive/2018/07/toys-r-...

buyx 8y ago

It's a worldwide phenomenon. Bain Capital brought a huge, thriving retail business (Edcon) to its knees in South Africa, after a botched leveraged buy-out: https://www.biznews.com/sa-investing/2015/07/15/bains-strategic-blunder-edcon-may-default-on-bond-paymentsafrica-retail-slump https://www.biznews.com/sa-investing/2015/07/15/bains-strate...

ComputerGuru 8y ago
It may be worldwide, but it’s the same handful of players behind it all. I thought there were some bills in the works to outlaw leveraged buyouts in the USA?
- sys_64738 8y ago
  Bain Capital is the firm associated with newly elected Republican Senator Mitt Romney of Utah. I'd expect those bills will now be derailed.

drilldrive 8y ago

The market for Toys-R-Us is absolutely still there, and currently there is a vacuum for a better company to step in place. People are simply not going to buy their children's items online; moms just love to try things out in the store for their kids.

rdtsc 8y ago
We've driven many times by the now closed Toys-R-Us store and lamented how we can't go and pick out toys there anymore. Stores like Target have a toys section and it helps to some extent but the selection is just not there. Also another thing Amazon can't do is last minute gift shopping for the numerous birthday parties kids seem to be invited to.
- toomuchtodo 8y ago
  Parent life pro tip. Purchase an assortment of toys on clearance and keep them around for emergency party invites.
  - rdtsc 8y ago
    Excellent idea. Thanks!
  - pkaye 8y ago
    And you can also buy gift wrap and greeting cards at dollar stores. There is not much difference except for the limited selection.
    - deleted 8y ago
      [deleted]
    - carlivar 8y ago
      Gift wrap is something I've learned over time not to cheap out on. Wrapping a present with cheap paper is frustrating. It rips far too easily. The task with quality paper is night and day. Worth a few more bucks per roll if you ask me.