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"Toys R Us, Sears, Radio Shack, Montgomery Ward, and dozens others failed because they didn't adapt to the business climate and competition." Not really, they c

"Toys R Us, Sears, Radio Shack, Montgomery Ward, and dozens others failed because they didn't adapt to the business climate and competition." Not really, they could have survived and had run way to make changes if PE didn't burden them by taking out loans against the company's assets and taking that out of the company in the form of management fees. Leaches.

bena 7y ago
Yes, Toys R Us was making money every year. There was never a year where it lost money. After the buyout, they could not keep up with the interest payments made in its name to buy itself back.
viscanti 7y ago
> They could have survived and had run way to make changes if PE didn't burden them by taking out loans against the company's assets and taking that out of the company in the form of management fees. Sure. This downplays how poorly things were going for Toys R Us before the leveraged buyout. They significantly underperformed expectations the holiday season before the leveraged buyout. Private Equity bet big that they could help Toys R Us make the jump to e-commence as well as revamping stores (they were notoriously outdated compared to the competition at the time of the buyout) and improve operational efficiency. The added debt did make things worse, but Toys R Us was failing on multiple fronts before the buyout (which is why they became a buyout target). Given their underperformance in several strategic areas, it's unlikely that Toys R Us was going to magically turn things around if Private Equity never got involved. I'm not arguing that Bain and KKR (the Private Equity companies involved) added any value. Both bet and lost $1.3B each on the idea that they could legitimately turn things around at Toys R Us. The rapid rise of e-commerce along with the economic downturn in 2010 meant that Toys R Us was likely doomed regardless of who tried to lead their turnaround. There are legitimate reasons to be critical of Private Equity, but it's not as simple as saying Toys R Us died only because of it.
icebraining 7y ago
But who is making these loans to companies that will be obviously unable to meet their payments? I never saw that part in the PE-sinks-companies story properly explained.
- clairity 7y ago
  those loans are made as much on the relationship with, and past performance of, the PE firm, as it is on the fundamentals of the turnaround plan.
- charlesdm 7y ago
  Who? Easy: banks. Bank debt generally has first call in the event of a liquidation, so if everything goes to hell the assets will be liquidated and banks will be the first to be paid back. They likely don't end up losing a lot, if anything at all. The article makes it seem super obvious that these deals won't work out. But that is actually not the case. Many / most PE deals actually do work out, and end up making the sponsors a lot of money. And why would banks allow this? Because private equity are huge profit drivers. They use lots of debt. They also acquire many companies, so there is an ongoing relationship.
tvladeck 7y ago
> if PE didn't burden them by taking out loans against the company's assets if this were the true problem, i.e. if there were a profitable business that just wasn't making enough income to service its debt, then the enterprise would continue to exist after restructuring the cap table. adding debt to the company just changes the cap table, it doesn't change the profitability of the underlying company.
- rileymat2 7y ago
  Is this true if you manage to extract some of the capital leaving the debt?
  - tvladeck 7y ago
    yes, in the sense that everything that's on the cap table (including special dividends, etc.) won't affect the P&L, except for the interest payments. but investors in the company treat interest payments separately, because it's just part of apportioning who on the cap table gets what. that's why investors often look at EBIT (earnings before interest and tax) and enterprise value as opposed to market cap, as enterprise value includes the value of the debt.
- yyyk 7y ago
  But it can make internal investment impossible and make the entire company act in cost-cutting mode, which isn't necessarily helpful to maximize profit. Eventually, the profitable business would stop being profitable.
  - tvladeck 7y ago
    it doesn't make internal investment impossible. it just changes the pockets it comes out of. well, actually it doesn't even do that, because either way it would be coming out of the cash owned by the PE shops, whether it sits on the books of the company or has been paid out to its owners. they can always decide to invest more into initiatives that show a promising return. the issue here is not the structure, it's rather that the owners of these shops made mistakes, which will happen. but the incentives are not misaligned.

bena 7y ago

Yes, Toys R Us was making money every year. There was never a year where it lost money. After the buyout, they could not keep up with the interest payments made in its name to buy itself back.

viscanti 7y ago

> They could have survived and had run way to make changes if PE didn't burden them by taking out loans against the company's assets and taking that out of the company in the form of management fees. Sure. This downplays how poorly things were going for Toys R Us before the leveraged buyout. They significantly underperformed expectations the holiday season before the leveraged buyout. Private Equity bet big that they could help Toys R Us make the jump to e-commence as well as revamping stores (they were notoriously outdated compared to the competition at the time of the buyout) and improve operational efficiency. The added debt did make things worse, but Toys R Us was failing on multiple fronts before the buyout (which is why they became a buyout target). Given their underperformance in several strategic areas, it's unlikely that Toys R Us was going to magically turn things around if Private Equity never got involved. I'm not arguing that Bain and KKR (the Private Equity companies involved) added any value. Both bet and lost $1.3B each on the idea that they could legitimately turn things around at Toys R Us. The rapid rise of e-commerce along with the economic downturn in 2010 meant that Toys R Us was likely doomed regardless of who tried to lead their turnaround. There are legitimate reasons to be critical of Private Equity, but it's not as simple as saying Toys R Us died only because of it.

icebraining 7y ago

But who is making these loans to companies that will be obviously unable to meet their payments? I never saw that part in the PE-sinks-companies story properly explained.

clairity 7y ago
those loans are made as much on the relationship with, and past performance of, the PE firm, as it is on the fundamentals of the turnaround plan.
charlesdm 7y ago
Who? Easy: banks. Bank debt generally has first call in the event of a liquidation, so if everything goes to hell the assets will be liquidated and banks will be the first to be paid back. They likely don't end up losing a lot, if anything at all. The article makes it seem super obvious that these deals won't work out. But that is actually not the case. Many / most PE deals actually do work out, and end up making the sponsors a lot of money. And why would banks allow this? Because private equity are huge profit drivers. They use lots of debt. They also acquire many companies, so there is an ongoing relationship.

tvladeck 7y ago

> if PE didn't burden them by taking out loans against the company's assets if this were the true problem, i.e. if there were a profitable business that just wasn't making enough income to service its debt, then the enterprise would continue to exist after restructuring the cap table. adding debt to the company just changes the cap table, it doesn't change the profitability of the underlying company.

rileymat2 7y ago
Is this true if you manage to extract some of the capital leaving the debt?
- tvladeck 7y ago
  yes, in the sense that everything that's on the cap table (including special dividends, etc.) won't affect the P&L, except for the interest payments. but investors in the company treat interest payments separately, because it's just part of apportioning who on the cap table gets what. that's why investors often look at EBIT (earnings before interest and tax) and enterprise value as opposed to market cap, as enterprise value includes the value of the debt.
yyyk 7y ago
But it can make internal investment impossible and make the entire company act in cost-cutting mode, which isn't necessarily helpful to maximize profit. Eventually, the profitable business would stop being profitable.
- tvladeck 7y ago
  it doesn't make internal investment impossible. it just changes the pockets it comes out of. well, actually it doesn't even do that, because either way it would be coming out of the cash owned by the PE shops, whether it sits on the books of the company or has been paid out to its owners. they can always decide to invest more into initiatives that show a promising return. the issue here is not the structure, it's rather that the owners of these shops made mistakes, which will happen. but the incentives are not misaligned.