The Private Equity Firms at the Core of Brick & Mortar Retail Bankruptcies

An astounding list of the meltdown: PE firms doomed the retailers.

One of the big forces in the brick-and-mortar retail meltdown are private equity firms that acquired retail chains via leveraged buyouts during the LBO boom before the Financial Crisis or more recently. Numerous of those retail chains have now filed for bankruptcy.

A PE firm typically borrows to undertake the leveraged buyout. But instead of carrying the debt at the firm, the debt is loaded on the acquired company, on top of the debt it had before the buyout, and it has to service that large pile of debt.

In addition, PE firms typically extract fees and “special dividends” from their portfolio companies which will fund them with additional debt. These fees and special dividends are tools with which PE firms extract profits up front. Lenders and other creditors carry the risks.

The final goal is to unload the portfolio company by selling it either to a large corporation or to the public via an IPO within a few years (seven years is a rule of thumb).

This works ok-ish in a booming industry. But brick-and-mortar retail – particularly apparel stores, shoe stores, sporting goods stores, department stores, and the like – came under withering attack from online sales in recent years. This environment causes PE-firm owned retailers to suffocate under their debts.

Toys ‘R’ Us shows how this was done: PE firms KKR, Vornado Realty Trust, and Bain Capital Partners acquired the publicly traded shares of Toys ‘R’ Us in an LBO in 2005. In 2004, Toys R Us had $2.2 billion in cash and short-term investments. By Q1 2017, this had collapsed to just $301 million. Over the same period, long-term debt surged from $2.3 billion to $5.2 billion.

In other words, “cash minus debt” was -$112 million in 2004. By 2017, it had ballooned to -$4.9 billion.

While the PE firms were busy extracting cash, the company, cash-strapped and focused on cost-cutting, failed to create an online presence that could compete with Amazon and others, didn’t successfully make the transition to electronic devices, video games, and apps, and let its physical stores deteriorate. It should have spent the last decade investing heavily in its future. Instead, it was forced to borrow large amounts of money just to enrich its PE-firm owners. In September last year, it filed for Chapter 11 bankruptcy.

Other retailers that had been acquired by PE firms were similarly waylaid. When Amazon and others barged into their territory, they had no means to invest and fight back. They were sitting ducks, among the first to succumb in the brick-and-mortar retail meltdown.

The PE firm’s goal of exiting these companies got very difficult when it became apparent what was happening in brick-and-mortar retail. But some PE firms were still able to unload their portfolio companies before the “IPO window” closed on them, and investors paid the price.

Container Store is an example. It was acquired by PE firm Leonard Green in July 2007. In November 2013, when the “IPO window” was still wide open, Leonard Green began unloading the company at an IPO price of $18 per share. Two months later, shares peaked at $47.07. The hero of Wall Street. Then reality began to bite. On Friday, shares closed at $5.01, down nearly 90% from the peak.

Other PE-firm-owned retailers, after making it out the IPO window, collapsed under their debts and filed for bankruptcy. An example is Fairway Group Holdings, parent of iconic New York food retailer Fairway Market. It was acquired by PE firm Sterling Investment Partners in 2007 and unloaded via an IPO in April 2013. In May 2016, it filed Chapter 11 bankruptcy.

These kinds of IPOs taught investors valuable lessons about brick-and-mortar retailers that PE firms are trying to unload. And since then, numerous PE-firm owners had to scuttle their plans to exit and are now stuck with their LBO queens.

A brilliant example is Neiman Marcus, which is struggling with $5 billion in debt. Their owners Ares Management and the Canada Pension Plan Investment Board filed for an IPO in October 2015, but at the last minute postponed. In December 2015, the luxury retailer reported its first sales drop since 2009 – and a lot of red ink. And hopes of an IPO went up in smoke.

Then there’s Albertsons Companies, the product of several LBOs by PE firm Cerberus Capital, real-estate investors Klaff Realty and Lubert-Adler, REIT Kimco Realty, and shopping center owner Schottenstein Stores. They acquired Albertson’s in 2005, Safeway in 2015, and some other supermarket chains along the way.

Now struggling with $12 billion in long-term debt, Albertsons is facing a price war in the stagnating grocery business, Amazon-Whole Foods, and German deep discounter Aldi that is aggressively expanding, even as Kroger, Target, Walmart, Costco, and others are fighting for their share. Albertsons traffic and same-store sales have declined for five quarters in a row despite promos and price cuts. And IPO hopes have evaporated.

Other PE owners, unable to unload their LBO queens, let them buckle under their debts and fall into bankruptcy. Below is a long list of those PE-owned retailer bankruptcies in 2016 and 2017 that I have covered (there were others that I have not covered) – astounding results of cash-stripping and over-leveraging in an industry that has come under structural attack.

And if some of the same PE firms – such as Sun Capital – keep cropping up, it’s because they did this serially.

Toys ‘R’ Us was acquired by PE firms KKR, Vornado Realty Trust, and Bain Capital Partners in 2005 and filed Chapter 11 bankruptcy in September 2017.

Vitamin World, with 345 stores, was acquired by PE firm Centre Lane Partners in 2016 from vitamin maker NBTY when it was already in trouble and filed for bankruptcy in September 2017.

Gymboree, with 1,281 children’s clothing stores and 11,000 employees, was acquired by Bain Capital in 2010 and filed Chapter 11 bankruptcy in June 2017

True Religion Apparel, a denim designer and retailer, was acquired by PE firm TowerBrook Capital Partners in 2013 and filed Chapter 11 bankruptcy in July 2017.

Payless ShoeSource was acquired by PE firms Golden Gate Capital and Blum Capital Partners in 2012 and filed for Chapter 11 bankruptcy in April 2017.

Rue21, teen apparel chain with once 1,179 stores in the US, was acquired by PE firm Apax in 2013. The LBO was troubled from the beginning when JPMorgan, BofA, and Goldman Sachs had trouble selling the junk debt they pledged to sell to fund the buyout. Less than four years later, in May 2017, it filed for bankruptcy.

Marsh grocery store chain, once with 116 supermarkets and 154 convenience stores, was acquired by Sun Capital in 2006 and filed Chapter 11 bankruptcy in May 2017. It has been liquidated.

Gordmans Stores, a department store chain with over 100 locations in 22 states, was acquired by Sun Capital in 2008 and filed Chapter 11 bankruptcy in March 2017.

Gander Mountain was acquired by Gratco (a holding company controlled by Gander CEO David Pratt) and Holiday Station stores in 2010 and filed for Chapter 11 bankruptcy in March 2017.

BCBG Max Azria, fashion retailer with once 570 boutiques globally, obtained a $200 million loan from PE firm Guggenheim Partners in 2006. In 2015, Guggenheim took equity in exchange for reducing debt. In March 2017, BCBG filed for bankruptcy.

Eastern Outfitters – the parent of Bob’s Stores and Eastern Mountain Sports – was acquired by PE firm Versa Capital in 2016 and filed for bankruptcy in February 2017. Versa had ended up with Eastern Outfitters after Vestis Retail Group went into bankruptcy in April 2016. The Sports Chalet chain, owned by Vestis, was liquidated in that 2016 bankruptcy.

HHgregg, an appliance and electronics retailer, was acquired in 2005 by PE firm Freeman Spogli and filed for bankruptcy in March 2017. It has been liquidated.

Limited Stores, women’s apparel chain, was acquired by Sun Capital in 2007 and filed for bankruptcy in January 2017. It has been liquidated.

Claire Stores was acquired by Apollo Global Management in 2007 and filed for bankruptcy in July 2016.

Aeropostale, in which Sycamore Partners acquired a large stake in 2013 (the remaining shares were publicly traded), filed Chapter 11 bankruptcy in May 2016.

Pacific Sunwear of California, clothing retailer with nearly 600 stores, obtained a loan from Golden Gate Capital in 2011 to stay afloat a while longer, and two Golden Gate executives joined the board. In April 2016, the company filed for Chapter 11 bankruptcy. As part of the restructuring, Golden Gate Capital agreed to convert part of its loan into equity of the reorganized company, lent it some more money, and ended up with the whole company.

Sports Authority was acquired by a group of PE firms led by Leonard Green & Partners in 2006 and filed for Chapter 11 bankruptcy in March 2016.

Wet Seal, teen fashion retailer, was acquired by Versa Capital in April 2015, after it had filed for bankruptcy in January 2015. Under this new ownership, Wet Seal filed again for bankruptcy in February 2017 and was liquidated.

It’s not just retailers. PE firm Apollo made $2.4 billion “on paper” on the IPO of its portfolio company ADT on Friday, but investors get crushed. Read…  $10-Billion IPO of Leveraged Buyout Queen Flops, Investors Bleed

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  97 comments for “The Private Equity Firms at the Core of Brick & Mortar Retail Bankruptcies

  1. Robert says:

    So then, this LBO atrocity is self-correcting?

    I still do not know why this kind of LBO nonsense is allowed, except that we live in a free country. It may make no sense at all (aside from enriching the LBO fraudsters) but who is to say they can not do it?

    So — in the spirit of self-correction — when the losses become large enough, this nonsense will stop?

    I certainly hope so.

    • Kent says:

      Spread the losses wide enough and shallow enough and it can go on for a long, long time. Markets fail in many ways.

      • Petunia says:

        The brick and mortar meltdown seems to be spreading from the big guys to the little guys. Yesterday we had a day out with the family and dinner out. We had intended to go to a local place we have been to before, but it had closed. We than decided on another place we had been to, but it too had closed. Landed up at one of the chain restaurants, not busy, and the bill was eye popping.

        • RD Blakeslee says:

          Petunia, I believe you live in Florida – a densely populated state.

          Our experience here in small-town and rural WV is different.

          Most restaurants are sole proprietorships, thriving in a prudent, debt -free way, sustained by local folks who know them personally and have been well served by them.

        • Petunia says:

          I left FL for the deep south. The closed businesses I mentioned were locally owned, but there are too many of them and they are mostly average at best. Not a surprise to see them closing with all the retail jobs disappearing. I was surprised at the $15 price tag of a glass of wine in a chain restaurant.

    • Rates says:

      Superior to a communist system surely where there is no “innovation”.

      USA, USA, USA

      • Robert says:

        BANKRUPTING previously ¨Good¨ companies — while saddling the previously ¨good¨ company with billions of debt — and granting the ¨raiders¨ those SAME billions is an excellent, truly excellent, USA innovation.

        One that will be studied in business schools for decades to come, I am sure.

        • Don Zimmer says:

          You are right about the USA innovation. This has been going on for decades and is standard procedure now for making money among the 1%. Their lobbyists have total control over the congresscritters. This will continue until it is no longer profitable to do so or until hell freezes over, whichever comes first.

      • economicminor says:

        Justifying greed, corruption and maleficence by comparing it to either a non existent form of government or a different kind of corrupt manipulative government is specious at best.

        • Rates says:

          Tell that to the Anti Chinese folks running around in the Chinese related threads. Their pompous tone of “only freedom allows innovation, etc, etc” sounds like fatuous fart.

      • Rcohn says:

        Innovation results in Better products and services.Financialization six bad LBOs results in ownership controlled by fewer and fewer people.Often financialization involves increasingly larger amounts of debt.It almost always results in middle class jobs disappearing as cost cutting is paramount in order to service the debt

        • Rates says:

          Innovation is like GDP. It doesn’t care whether you are making a car or a missile to be targeted towards innocent people. Both are counted in the +1 column.

    • mitch says:

      Is the LBO atrocity self correcting, ? Hardly. The biggest players in this game are also the biggest contributors to both political parties and candidates. It is them that allow this corporate raiding to continue. In the movie “goodfellas” the boys perform a “bustout” on the tiki bar/restaurant they hang out in. LBO’S are the exact same thing at the corporate level. So, to answer your question, no… it will never stop.

    • Jason Whittle says:

      Lost a fortune in commercial bonds and shares in China Fisheries Group when they bought Copeinca then failed to get shareholder approval from Copeinca to transfer China Fisheries acquisition debt to Copeinca’s balance sheet. So it is possible for acquisition targets to fight back and also two good companies can be sunk by one leveraged buy out…

    • Patrick C says:

      Yes, in technical terms, … “It Bought The Farm”.

  2. Ensign Nemo says:

    It’s worthy of note that retailers need to actually compete to stay alive, but banks and large multinational corporations can gamble recklessly and still be bailed out by the government and the Federal Reserve.

    Ford was run as an actual capitalist enterprise before the last financial crisis. They famously cut back on spending just before and during the crisis, to the point that the potted plants in their buildings died from lack of care – they didn’t even water them.

    When the crisis hit, GM and Chrysler were bailed out. Ford said no at first, but then they were strong-armed into accepting a bailout that they did not really need. This was done to avoid bad publicity for the politicians when the press realized that only two of the Big 3 automakers were bailed out.

    What will Ford do in the next crisis?

    I don’t think that they’ll bother cutting back.

    Prudence is not rewarded in our modern crony capitalist state.

    It makes perfect *financial* sense for the *executives* at these PE firms to do what they do, because it pays more for them to wreck these retail firms in the short term than it does to try to run them in the long term.

    The guys who engineered these deals cashed out their bonuses years ago and are nowhere to be found today.

    The losses are later socialized when the employees are unemployed, the malls are dead, and the government has to deal with fewer payroll taxes and more crime and drugs and poverty.

    The only people who deserved to get hurt were the PE hustlers, but they mostly sold off or sold out long ago, and now the owners of the dead and dying companies are often not the same people who made the deals. The “greater fool” theory is now observed in practice.

    Right now, it’s more important for a major corporation to have the political power to get a bailout than it is for a major corporation to have the good sense to cut costs before or during a major downturn.

    The ultimate question is, is the USA itself too big to fail?

    The ultimate answer remains to be seen.

    • fajensen says:

      The ultimate question is, is the USA itself too big to fail?

      Nope. The USA is working hard on going out the same way as the USSR did, choking itself with corruption, government primarily serving the interests of cronies and insiders, a vast and at the same time generally useless military and The Empire boldly expanding into negative R.O.I.-territories, like the French, Dutch, Soviets and the British all did before.

      The problem is, when the USA finally does collapse, who will be able to buy up all of those those assets for pennies on the dollar and eventually restart the economy in their image?

      Someone will, eventually, but the transition will be a pain.

      • Javert Chip says:

        This absolute, jingoistic and naive view of the world has a whiff of uninformed inexperience.

        When the USSR died at the ripe old age of 70 in 1987, excepting nuclear weapons, not a whole lot had changed (the 1919 price of bread stayed about the same…there just wasn’t very much for sale). During a period of less than 10 years, WWII and collectivism killed 27-30M+ of its 170M pre-WWII population (1 in 6, or about 17%). During the same time, the USA lost 0.3%.

        If you have never come eyeball-to-eyeball with endemic corruption in China, most of South America, Africa & selected other world honey-pots, your claim or existential corruption in the USA just sounds loopy.

        Are there problems in the USA financial system? Yea. Are they existential? I doubt it.

        • elysianfield says:

          “(the 1919 price of bread stayed about the same…there just wasn’t very much for sale).”

          Reminds me of an old incident from my pawnbroker days…

          Customer does not like my offer on an item he brought into the store. He told me that a competitor was paying significantly more. When I suggested he revisit the competitor and accept the offer, he said “…Well they told me they aren’t buying right now…”

          I then told him that when we aren’t buying we pay twice as much…

    • RD Blakeslee says:

      “Prudence is not rewarded in our modern crony capitalist state.”

      “The “greater fool” theory is now observed in practice.”

      INDIVIDUALS can avoid all this! Sole proprietorship in a stable, local economy can be a satisfying, honest life.

      • Tom T says:

        You must live in Mayberry, NC, at least in your mind. Say Hi to Barney for me won’t you. Hear Boss Hogg is running for County commissioner. “Stable, local economy” indeed.

    • Javert Chip says:

      Ensign Nemo

      You ask “What will Ford do in the next crisis? I don’t think that they’ll bother cutting back.’

      You should go back to review what actually happened: fully “bailed out” GM & Chrysler were either given to the unions or sold to Fiat (either is a fate worse than death).

      Ford, who didn’t water their potted plants, is still thriving. Given the same circumstances, I’m betting they kill the potted plants again.

    • David Krenshaw says:

      Nemo, you are a genius. Perfectly describes the situation we have created.

  3. ZeroBrain says:

    The article states that typically “instead of carrying the debt at the firm, the debt is loaded on the acquired company”.

    Can someone explain how the PE firm’s debt is loaded onto the acquired firm? Why would the lending entity allow the debt to be transferred?

    • roddy6667 says:

      The acquired firm takes out the loan. It does not have to be transferred.

    • MC01 says:

      PE firm XYZ buys company ABC through a leveraged buyout, which typically consists of a mixture of securities and bank loans. Once the buyout is complete, ABC stops being an independent company: it merely becomes a part (or subsidiary, or division, or whatever according to jurisdiction) of XYZ.
      At this point ABC is effectively at the mercy of the new owners, who either call all the shots themselves or, more often, stuff the board of directors with their own people. Their first action is invariably to transfer the debt incurred in the buyout to ABC’s books, followed by writing themselves a series of checks for special dividends, fees and sundry other expenses. Technically speaking there’s nothing illegal with this, as long as proper procedures are followed.
      Shortly afterwards the “synergies” begin, invariably followed by hiring “company doctors” (or “turnaround specialists” as Amercians like to call them) at extravagant rates, and in a few years you read about poor old ABC companies on these pages.
      Again: if XYZ calls all the shot at ABC there’s nothing that can be done about it.

      Why do lenders allow this? This is where things become complicated.
      Generally speaking the large investment banks arranging the deal know their fees will be paid in full and soon and senior creditors know they are sacred and untouchable: in the event of a bankruptcy they are the first in line and generally recoup a large part or even all their losses.
      In short these two categories don’t care one tiny bit because they just know they’ll get their money one way or the other.

      But LBO’s need another category to get rolling: junior (unsecured) creditors. These creditors are attracted by the relatively generous coupons on junior bonds: just to give an example those issued by Toys ‘R’ Us and maturing in 2019 yield(ed?) a juicy 7.25%, really tempting in our financially repressed world.
      But junior creditors are at the very back of the queue in case of a bankruptcy. Usually only vendors fare worse than them. And these junior creditors aren’t happy.
      When Payless filed for Chapter 11 in June 2017, a group of junior creditors sued Blum Capital and Golden Gate Capital (the PE firms behind the LBO drama) for “siphoning approximately $400 million in 2013 and 2014” to pay for “illegal dividends” and “fraudulent conveyance”.
      Blum and Golden Gate were sufficiently worried to strike a deal with angry Payless junior creditors: they will stop their lawsuit in return for $25 million, all cash, to be paid during the bankruptcy reorganization.
      Given Payless’ financial conditions and the asset strip mining it had to endure it will be interesting to see where those $25 million will come from…

      • Fletcher says:

        Great information. Thank you for sharing.

      • raxadian says:

        Probably borrow it from the “parent” company. Or they will do a Blockchain scam…. opps too late for that. Or it is?

        Leveraged buyouts should be declared illegal.

        Not that I think they will unless the economic crisis causes a lot of people to protest in the streets and even then they would have to know what leveraged buyouts are to start with.

        • MC01 says:

          Generally speaking today there’s very little reason for a PE firm (XYZ) specializing in LBO’s to lend the new acquisition (ABC) money.
          Paying one time fees and “special dividends” makes more fiscal sense in most jurisdictions and does not affect the parent company’s balance sheet long term.
          There’s also the ever looming threat of bankruptcy: in case the IPO, Reverse LBO or sale to another company goes awry, the chances poor ABC Company needs to go through Chapter 11 or the local equivalent (remember: LBO’s are not a US prerogative; just look up Husqvarna Group, HNA Group and SoftBank) increase dramatically and with it the chances of losses. While senior creditors are always at the top of the line, it’s rare for them to be made entirely whole during bankruptcy procedures. Better to leave that risk to those specializing in taking them.

          The one thing that will take steam out of LBO’s are higher interest rates and especially tightening lending standards. While junk-rated investments have always existed and have their place in many investment strategies, the moment investment-grade securities go back to their 2005-2006 yields a lot of appetite for taking ridiculous risks with little compensation will die out, and with it the fuel for purely speculative LBO’s. They will always exist, but they will go creep back to the shadows of the financial system where they belong.

        • Petunia says:


          You forgot to include that what can attract the PE firm is a well funded pension fund. The PE firm can use the pension fund of the company they want to acquire as collateral for the loan to purchase the targeted firm. This is like using the collateral of a house I want to buy as a down payment for a mortgage.

          The pension fund is then raided by buying out the employees with annuity contracts or cash. They give the employees either cash or an annuity which is discounted in favor of the PE firm and not at real market value. The extra looted cash is then distributed to the PE firm. This is how employees with 30 or more years in a pension fund land up with a few thousand dollars instead of the pension they worked for.

        • Javert Chip says:

          I’m a pretty dyed-in-the-wool capitalist and ex-CFO, but that doesn’t mean I don’t appreciate the value of necessary & intelligent regulation.

          I wouldn’t outlaw LBOs, but I can think of a couple regulatory moves to significantly reduce the damage they impose on society:

          o SIFI institutions (Systemically Important Financial Institutions, and yes, there is an enumerated list) should be excluded from LBO loans (same as they are for un-margined stock lending).
          o Government-insured Non-SIFI institutions reserve requirements for LBO loans should reflect recent LBO risk (say, a 10-year rolling average loss experience) – I’m guessing this would be in the 20-25% range – literally an order of magnitude (10x) higher than affordable by a small bank.

          We can legitimately bitch & moan about predatory PE managers, but regulators should be much more aggressive in ensuring LBO participants internalize substantially more of the risk of these transactions (translation: reduce use of public bankruptcy by requiring much more private capital).

      • IdahoPotato says:

        You forgot: Then the PE firm owners run for Senator or President and mock those on “welfare”.

        • Javert Chip says:

          How about the siting Secretary of State, who’s “foundation” accepted a $145M “contribution (plus her husband’s $500K “speaking fee”) as her State Dept reviewed & signed off on selling 20% of the USA uranium mining capacity?

      • fajensen says:

        it will be interesting to see where those $25 million will come from…

        In the Pre-CDS world, the PE business will sell off the good parts and unload the “debt-blimp” onto shareholders, via a stock placement, where it will underperform the market for years.

        This company, ISS (International Service Systems), has been publicly traded, then PE’d and then resold in the market numerous times. It still lives. Bloated with debt, but, paying it off, still kicking – and soon going private again for another bloating.

        Now, with CDS and other exotic derivatives so available …. in the unregulated markets …. with pretty much no supervision and less enforcement …. maybe it is much more efficient to have another team in … dunno, Bruxelles, maybe … quietly buy CDS/derivatives on the debt, while the “operations team” makes sure that the business will take a solid default and trigger a windfall!?

        In that scenario, the “operations team” could be – should be, actually – total morons, who over-leverage and rapidly waste all of their loot on fast cars, loose wimmen and blow, which is BTW OK because we want them lean and hungry for the next situation we want them to manage :).

      • Mike G says:

        When the mob does this they call it a bust-out.

      • Enquiring Mind says:

        Blum Capital, the gift that keeps on giving. Think of them next time you go by that closed post office, and don’t forget to thank Senator Feinstein, aka Mrs. Blum.

      • polistra says:

        Thanks for the details! I’ve worked for a couple of firms that got LBO’d into oblivion. I could see the results but couldn’t understand HOW the PE vultures profited from the devastation. You made it clear.

  4. d says:

    Corp[orate Fraud is legal In America, so why are you all complaining.

  5. Gandalf says:

    So banks are financing these loans? Which banks? Are we going to see another financial meltdown like the subprime mortgage crisis?

    • Wolf Richter says:

      These are so-called “leveraged loans” that are too risky for banks to carry on their books. Banks repackage them and sell them to other institutions such as “loan mutual funds,” or they slice-and-dice them and repackage them as structured securities, called “Collateralized Loan Obligations” (CLOs) that are then sold to institutional investors, such pension funds. And they carry the risks.

      The SEC classifies these “leveraged loans” as loans, and not as “securities” and does not regulate them. No one regulates them.

      For the banks, the risk is that they get stuck with these leveraged loans. This happened during the Financial Crisis.

      • mvojy says:

        “No one regulates them.”
        That’s the scariest thing I have ever heard you say Wolf

      • Jack says:

        Question Wolf, how would one short these CLOs or buy insurance against these CLOs ? This soon to be meltdown in Brick & Mortar smells a lot like the sub prime mortgage meltdown in 2007-2008.

        • Wolf Richter says:

          My limited understanding is that it’s very difficult to legally short CLOs. It seems a lesson was learned from the situation depicted in the book, “The Big Short,” which involved betting against CDOs.

          I would be happy for someone with a higher paygrade on this topic to jump in.

        • Javert Chip says:

          I would assume you’d enter into a private (aka: unregistered & also unregulated) derivative. Problem here is your counterpart & collecting collateral & settlement.

          The outstanding notional value of this stuff is astronomical ($1.2 quadrillion (or said another way $1,200 trillion), which is 15 times the worlds annual GDP.

          This dark asset class is one of the crap-piles that was explicitly targeted for “fixing” after the 2007-9 melt-down…then “campaign contributions” happened…well, you know the rest of the story.

          Oh yea, all this happened (or didn’t happen) on Obama’s watch when he had a veto-proof congress.

        • Kasadour says:

          No where near my pay-grade, but I’d advise to go to Las Vegas (you don’t really have to go to Vegas) and purchase a financial instrument or derivative, and if one for short-selling a CLO doesn’t exist, create it. Everything in finance is subject to a wager, but remember, in the grand casino, the house always wins. The FED can print money to cover the losses for their friends (and themselves) and thus centralize and consolidate the theft of everything real (primary) while you’re holding worthless tertiary paper claims on worthless tertiary paper claims. That’s what it’s going to come down to.

  6. Top-GUN says:

    Yes this is a free Country, and evidently not to smart…Why would any bank or creditor (stock buyer) invest in one of these companies.
    The common denominator appears to be Debt. We don’t care about being loaded up with debt, either individually or corporately. And banks don’t seem to care who they lend to or how much. And yet, amazingly, we continue to march on.

    • economicminor says:

      For a slightly larger ROI than with lower risk investments.. Everyone is trying to make it in this low interest environment.. Especially the Pension funds.. They are in a bad place with low returns and not even really decent dividends. So to at least on paper, they appear like they are keeping up with the other pension funds, they invest in very risky investments..

      Its all good until it isn’t.. And their cover is that everyone else was doing it..

  7. John says:

    Quite simply it is done through fully ‘complicit underwriters’, i.e. the brokerages through which this toxic crap is sold to the uninformed investor willing to trust them. So, if you get a phone call from a salesman/broker abot a ‘new offering’, try to get a full prospectus of this/underwriting/offering. Notice the urgency in the sales process. KNOW YOU ARE BEING. When they advise of this urgency because of the limited time availability of this in the ‘new issue market’ just give it a pass. It simply means there is pressure on those people to get this ‘new issue offering placed’ , out to the market/clients, as quickly as possible. ‘Short form Prospectuses’, are the get out of jail card for those ‘underwriting companies’ and many are strictly dependent on their sales force familiarity (or perhaps, – not) knowing rules about in the Knowing Your Client (KYC) rules, where all the pressure is loaded on the stupidity of the salesman and the stupidity/greed of the salesforce, thus, their investor/client. So, if you are a client of those ‘main underwriters’, without a having a full KYC agreement in place without your accountants/3rd party, approval/agreement you are playing Russian Roulette with a fully loaded gun. The above list is very telling, just check which Co’s, were the marketing group or ‘offer-ers of this crap and manage/finance and re-act/behave according.

  8. Cameron77 says:

    Excellent article. How many solid businesses have these Leverage Buyout PE parasites wrecked in the past 30 years?

    About a decade or so ago the multi billion dollar multi national company I work for was subject to a LBO offer from a couple of PE firms.

    The corrupt board and corrupt top management of the Company supported the move with enormous enthusiasm of course because they were going to profit very nicely from it.

    But the Company most of us loved certainly was not going to. It would have gone the way of many of those listed in the article, would have been saddled with massive new debt, had some of the most profitable segments of the business sold off where that was feasible and seen the large extraction of cash on a continuing basis in the form of “management fees”, “consultancy fees”, enormous “special dividends” and like cash extraction rorts used by the LBO owners to retrieve their capital and pay down their loans.

    The wise shareholders that mattered, including numerous large institutional/corporate investors, mostly refused to sell and the proposal failed.

    Today it remains a successful, growing and profitable Company but in a very cyclical and challenging industry. Had the LBO been successful, and given the negative business environment that followed, the Company would now be a shadow of it’s former self, very heavily laden with debt, very likely with much lower revenues because of very powerful competition and significant asset sales of profitable segments by the LBO managers and on the verge of bankruptcy if indeed it even survived.

  9. 2banana says:

    Would bringing back Glass–Steagall Legislation (done away with by Bill Clinton) stop this corrupt looting of American businesses?

    • Prairies says:

      I would say “no” is a safe answer. The LBO has been around for decades, it didn’t just appear because of Bill Clinton. The wealthy have had a well oiled machine for centuries, a bubble popping is just an oil change for the current motor of wealth transfer.

    • Bet says:

      Clinton may have been the final sign off. But it started under Reagan deregulating financial institutions and raising fdic from 50k to 100k. The destruction of glass Stegal took a few years and on both sides of the aisle. The deregulations under Bush in 1992 were seminal

  10. CLARK says:

    Wolf, sorry just a peon dude, Why is it CEO an CO’s still get their millions, then stock holders get the shaft, AGAIN

    • Kent says:

      Corporate governance laws.

      • Javert Chip says:

        Corporations GENERALLY solicit shareholder approval of on 3 matters:

        1) Election of Directors
        2) Selection of auditors
        3) “Executive compensation” plans

        Can you guess where the “CEO an CO’s still get their millions” stuff is usually buried?

        NOTE: corporations strongly resist shareholder attempts at binding votes on exec compensation. The SEC requires public firms to allow an “advisory” (aka: who cares) vote.

  11. mvojy says:

    I’ve said it before and I will keep saying it. LEVERAGED BUYOUTS SHOULD BE ILLEGAL. That’s like buying a house and having the house carry the mortgage. Where is the risk for the ACTUAL buyer? He/she can strip every bit of value out of that asset and let it die under the weight of debt. If individuals can’t do leveraged buyouts than PE firms shouldn’t be able to either. PE firms couldn’t care less about the people that work at the companies they put under. Those workers rely on those jobs to support themselves and their families. This practice needs to end. Let the PE firms take on the debt if they believe so much in their acquisitions.

    • Paulo says:

      And Hedge Fund managers still keep their low tax rate. (Ha ha). The General Counsel for crook Steven Cohen (SAC) was appointed by a newly elected Trump to select candidates for the Justice Department. (Double ha ha and an indignant gulp).

      This situation of LBO pillage, if anything, is likely to be reinforced and re-entrenched with this Administration. The looting will stop when the Goose is dead, and not before. When the probable election of a Mitt Romnmey as US Senator, someone who made his fortune pillaging companies, and such senator is touted as being one of the ‘good guys’ in opposition to these policies, well good luck with change.

      Good luck with change from any political movement. ‘They’ own the Govt. and aren’t likely to change anytime soon. Why would they?

    • fajensen says:

      That’s like buying a house and having the house carry the mortgage. Where is the risk for the ACTUAL buyer?

      Is than not exactly how mortgages work in the US?

      A.F.A.I.K. US mortgages are Non-Recourse, meaning that when the buyer don’t feel like or cannot paying the mortgage anymore, they just send the keys to the bank and let them deal with selling the “asset”.

  12. cdr says:

    This is an excellent example of the economic cycle in action. Buggy whips going out of fashion.

    Some, possibly most, of the companies that bought the subsidiaries were just looking for a good place to park some money and earn a return over time while making out quite well financially from the rules they were allowed to work with. Maybe a little pillaging, but jobs were still created and markets were served.

    But still, competition, changing tastes and preferences, and the market clearing when things go wrong are still going on in the real world. Sorry for their problems, but at least there’s not been a Fed bailout for them.

    The nice thing about all of these companies are the low barriers to entry for their industries. Today they go, tomorrow they might reappear if the market for them reappears.

    • Robert says:

      From your well-written post :

      ¨Some, possibly most, of the companies that bought the subsidiaries were just looking for a good place to park some money and earn a return over time while making out quite well financially from the rules they were allowed to work with. Maybe a little pillaging, but jobs were still created and markets were served.¨


      Where in LBO-land have you seen that effect. Example, please ? I would especially like to see examples from the list of Corporate names in the Wolf post above. Still, more than one example from ANY LBO-ed firm will make the point. MORE THAN ONE !

      • cdr says:

        Jobs created: until recently the companies still prospered and hired employees who put food on their tables with the wages paid.

        markets served: duh? it’s hard to explain the obvious.

        So what if they pillaged the system a bit. Market economies allow this. Besides, they were blatant about it, not sneaky like so many helpful sorts who want you and me to earn low rates so they can borrow at low rates to flip paper.

        • RaymondRogers says:

          This is not a good thing. This is why people lunge for systems like those found in Venezuela.

          When you were a child, and traded items in your lunch box, that was capitalism. This is outright theft.

      • Javert Chip says:

        You can easily do your own research by Googling “most successful LBOs”, but since you asked:

        Safeway 1988
        Dell 2013
        RJR Nabisco 1988
        Hilton Hotel 2009
        Houdaille Industry 1978

        • Enquiring Mind says:

          RJR Nabisco as a watershed event.
          The barbarians used to be at the gate, and then they just came in through the back door and windows, left open by their friends in DC.
          In the meantime, the townspeople and country folk suffer.

        • elysianfield says:

          Perhaps another, albeit smaller corp. can be added to your wall of shame;


          They sell industrial gasses used in welding. Also sell welding machines and peripherals.

          I’ve been dealing with the local Airgas for about 16 years…spent thousands. Last week I arrived at their doorstep with several bottles to fill. They charged me $280. I commented that I expected the bill to be $140 +/-, and they told me that 18 months ago, that would have been the case…Hmmm. I paid the bill and left, but later verified through other vendors that the bill should have been in the $140 range. I complained to corporate, figuring there might have been an error of such charges for such a common commodity. I received a call from a “district sales manager” who defended the charges, noting that the computer determines the price from one’s recent activity with the company, and that I paid “retail”. When I responded that no two people can then walk in the door and expect to pay the same price…he agreed.

          I later found out that 18 months ago, Airgas was sold to a French company at approx. 3X their book value. 13 Billion+. I, of course, will never deal with the company again.

  13. No Name says:

    These are obviously examples of outright theft enabled by corrupt regulators and their congressional bosses who have been handsomely paid to “see no evil.” Even now a one- time leading light in this rotten business is thinking of moving from Massachusetts to Utah in preparation for a possible presidential run. Appropriate campaign theme: ” we eliminated thousands of low paying jobs and put the proceeds in the productive hands of the 1%.”

    Clearly, somewhere along the way our country has lost its soul.

  14. HowNow says:

    Excellent reporting, Wolf. Thank you for sharing your insights. It seems that retail has been the primary “mark” for this kind of engineering (by now the notion of “financial engineering” must make engineers gag), but which other industries are specially vulnerable? Publishing, too, has been eviscerated by private capital slicing and dicing those entities over the recent decades. Is it due to the real assets – real estate in the case of retailers(?); copyrights and “franchise brands” in the case of publishers – that draws the PE scalpels out?

  15. RD Blakeslee says:

    “PE firms KKR, Vornado Realty Trust, and Bain Capital Partners acquired the publicly traded shares of Toys ‘R’ Us in an LBO in 2005. In 2004, Toys R Us had $2.2 billion in cash and short-term investments. By Q1 2017, this had collapsed to just $301 million. Over the same period, long-term debt surged from $2.3 billion to $5.2 billion.”

    Bain Capital: Mitt Romney.

  16. AGXIIK says:

    These PE firms remind of me of the Parasitoid wasp, a creature that lays its eggs in other insects. The eggs hatch and the larvae eat out the substance of the host until it’s a shell.

    Remember that Bain Capital is owned largely by Mitt Romney, Mr Offshore who ran against Obama in 2012 and is a globalist cuck of the worst type.

    When he runs again, your vote will count. He’s as lethal at the Clintons, who’d have America carved up on E Bay. Romney would do the same to America with an LBO

  17. junior_kai says:

    The vampire squid that do this to companies are doing the same thing to the US and countries across the world – extract assets, load up with debt -> eventual implosion. Standard operating procedure for the deep state for years – read “Confessions of an economic hitman”

  18. Jim says:

    Cant’ the responsibiliy for this mess be laid at the doorstep of the Federal Reserve and it QE/ZIRP policy? The Fed enabled these PEs to use OPM to gut the brick and mortar field. It also encouraged Amazon to borrow almost free and use the borrowings to compete unfairly with retailors by underselling them. It has yet to make a penny in the retail world. Thanks Fed.

    • Kent says:

      Private Equity has been going on since the ’80’s. This isn’t an interest rate issue, it’s a corporate governance issue.

    • economicminor says:

      How about laying this at the doorstep of Congress that repealed Glass-Steagal and has refused to put a stop to this insanity. All the wealth is moving upward. Inequity is getting worse. Homelessness is getting pandemic and yet the causes are not only praised but every new legislative victory is another nail in the coffin of the hard working American middle class.

      Congress can stop this. Why is it the FED’s responsibility? We know their allegiance lies with the banksters, not the workers. This is Congress’ mess and they should clean it up.

  19. Wendy says:

    I like it.

    If indebted company has successful IPO the PE firm wins.

    If the company files for chapter 11, the junior bondholders get burned, but the PE firm has already made money from their fees and other charges.

    Its like that coin toss where heads I win, tails you lose, except with big dollars. I want to work for a PE firm, and “help save” the retail industry–while I work from the back of my 200′ yacht.


  20. Kent says:

    Sitting here, I thought it was interesting that you only read about this stuff on a site like Wolf maintains here. Why don’t we hear about this in the MSM. So I googled “who owns CBS”. Guess what? Banks and PE firms!

    Thanks Wolf!

    • Javert Chip says:

      Two-word answer: CAMPAIGN CONTRIBUTIONS

    • Bet says:

      Read the books “project censored “. It’s not the news you get but the stories you do not. The supposed liberal MSM is all corporate. They like to feed Americans the dumb celebrity reality show “news”. Time and Newsweek have different issues and stories outside the us. There are other better foreign outlets to get the real news about America . Last thing our overlords want for us to get the real facts …

  21. mvojy says:

    This may be a silly question but how is it legal to buy a company through a LBO only to later file for a Chapter 11 reorganization? YOU bought the company, added to the debt and created the situation where the debts could not be repaid. Why should YOU be able to have any portion of that debt forgiven?

    • Prairies says:

      In short the PE Firm never files for bankruptcy so they look like they made sound decisions. All the blame is on individual companies for the failures. They say Brick and Mortar should have went online to compete, yet all the money to make that investment went to the PE firm to cover the “loan”.

      Always tell a person to look left if you want something in their right pocket. ;)

    • Wolf Richter says:

      In an LBO, the PE firms acquires a corporation, a legal entity with liability limited to the corporation. Unless the PE firm guarantees the debt issued by the corporation — which they never do — the only recourse creditors have is to the corporation itself, in the worst-case scenario under the supervision of a bankruptcy judge.

  22. Larry says:

    Why does the SEC or Fed or someone allow these crooks & thieves to destroy the jobs of average workers?

    • d says:

      As the correct question and you will get a reasonable answer.

      The Question should be.

      Why does CONGRESS allow this to happen. Congress could stop this TODAY.

      The answer is Congress (Both sides commonly refereed to as the Duopoly) is owned by the Globalised Vampire Corporates.

      This Stupid situation, is protected by a constitution, only congress can change.

      Blaming all those other little agencies, is like blaming dogs for eating unguarded meat.

      • terex says:

        Come on, ‘Capitalism’ works best unregulated and untampered with.

        Big banks get bailed out and directors want bonuses so they dont see risk where risks are supposed to be…, there you have the problem

        • d says:

          “Come on, ‘Capitalism’ works best unregulated and unhampered with.”

          Perhaps it does, however we do not have responsible capitalism.

          We have Corporate, and aggressive non market economy, nation state controlled, Unsustainable, Predatory, Consumerism.

          “Big banks get bailed out and directors want bonuses so they dont see risk where risks are supposed to be…, there you have the problem”

          You need to learn the difference between “The problem” and the “Result” of the problem.

          You are Citing the “Result” of the problem (The Behavior of some Bank administrators), as “The problem”.

    • MD says:

      Because we mustn’t interrupt the job being done by the ‘wealth creators’ – haven’t you heard?

      When things go bad it’s all the fault of ‘gubbinment’ and their silly rules, dontcha know!

  23. MD says:

    These PE firms and their ‘LBOs’ are another indicator that we have in fact been subject by a coup d’etat by the financial speculators over the course of the last four decades, under the guise of neoliberalism and its lies about ‘trickle down’ (and they are – and always were – lies).

    This is the source of the disappearance of the middle class (productive economy gone replaced by credit-based consumption and speculative asset bubbles) and the massive increase in wealth disparity.

    I think Marx had something to say about this…

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