In 3 Days, the Last Toys ‘R’ Us Stores Die. And PE Firms Behind it?

They Come Under “Intense Scrutiny” by the Pension Funds that Feed Them. But this too shall pass.

For the past three mornings, Toys ‘R’ Us has tweeted the countdown of its demise:

  • On Saturday: “Only 6 Days Left! #toysrusclosingsale”
  • On Sunday: “Hurry! Only 5 Days Left! #toysrusclosingsale #toysrus #babiesrus #alwaysatrukid”
  • And on Monday: “Hurry! Only 4 Days Left! #toysrusclosingsale #babiesrus #toysrus #alwaysatrukid”

On June 29, its remaining stores in the US will close. And then it’s over of the iconic retailer — one more victory for PE firms that have plowed into retail during the leveraged buyout boom before the Financial Crisis, loaded them up with debt, and watched them collapse in what I have come to call the brick-and-mortar meltdown. Toys ‘R’ Us is just one of them.

PE firms Kohlberg Kravis Roberts (KKR), Vornado Realty Trust, and Bain Capital Partners acquired the publicly traded shares of Toys ‘R’ Us via a $6.6 billion LBO in 2005. They funded the acquisition in large part by loading up the acquired company with debt — hence “leveraged buyout.” In other words, the PE firm had little skin in the game, and over the years extracted $400 million in fees even as the retailer died.

The 33,000 employees, when it is all said and done in a few days, will be out of a job.

In a sense, the end came very rapidly, after 13 years of building up to it under the PE-firms’ iron cost-cutting fist. The meltdown started in early September when rumors emerged that Toys ‘R’ Us had hired a bankruptcy law firm. Its bonds collapsed on the spot. On September 18, the company buckled and filed for bankruptcy, assuring everyone that it would go on as a going concern. In early March, it became apparent that liquidation would be next. On March 15, the company announced it would liquidate all its operations in the US and Puerto Rico. And it began “final liquidation sales” at all its remaining Toys“R”Us and Babies“R”Us stores.

Among the biggest investors in PE firms are public pension funds. They provide about 20% of the $3 trillion in assets managed by PE firms. Public pension funds like the accounting of investing in PE firms: These investments are considered illiquid and long-term and don’t get marked-to-market. This gives pension funds the illusion of stability during times of market turmoil, and they don’t mind the sky-high fees. And PE firms love public pension funds because that’s where the money is – and the sky-high fees. It’s a symbiotic relationship.

But the Toys ‘R’ Us demise under the auspices of KKR, Bain Capital and Vornado Realty Trust has rattled some nerves, including at the $129-billion Washington State Investment Board (WSIB), which has been investing in KKR for over 30 years, making it one of the earliest backers. According to the Wall Street Journal, it invested in at least 23 KKR funds, including $1.5 billion in the fund that contained the Toys ‘R’ Us investment.

The WSIB held a meeting last Thursday discussing its investment in KKR and KKR’s account of the Toys ‘R’ Us debacle. A recording of the meeting was heard by Bloomberg News:

“Did anyone at KKR lose their job over the failure of Toys ‘R’ Us?” asked WSIB member Stephen Miller. “Did anyone have their bonuses cut? Did anyone have their compensation cut significantly? Because that’s one of the consequences of free-market capitalism.”

KKR’s head of consumer retail for the Americas Nate Taylor was at the meeting, volunteering for PR purposes to have his feet held to the fire. He replied to Miller that no one who led the LBO at the time was with KKR anymore.

“We’re here to be transparent, to acknowledge where we’ve made an investment mistake, and we certainly did at Toys, and be helpful in making sure that all of you understand what we’ve done and what the facts are around this situation,” he said.

It worked. WSIB then voted to commit another $200 million to KKR, this time to the KKR Global Infrastructure Investors III LP fund and a sidecar fund.

On June 14, the $93.5-billion Minnesota State Board of Investment – the agency in charge of retirement funds, trust funds, and cash accounts – voted to temporarily suspend future commitments to KKR after hearing testimony “that raised concerns about the management of Toys ‘R’ Us and its employees,” a representative for the pension told the Wall Street Journal. The board wants to “conduct further inquiry into these concerns,” the representative said.

Minnesota Governor Mark Dayton had requested the freeze. No final decision has been made yet, and I’m sitting at the edge of my chair waiting for the outcome. Because, according to the Journal:

Minnesota has invested in numerous KKR vehicles, including a $150 million commitment to the flagship KKR Americas XII Fund, which closed last year. It had exposure to Toys ‘R’ Us through a $200 million commitment to the KKR Millennium Fund, the vehicle that held the investment.

The collapse of Toys ‘R’ Us focused “intense scrutiny” – as the Journal put it – on KKR, Bain Capital, and Vornado Realty Trust:

Points of criticism have included Toys ‘R’ Us’ heavy debt burden, the millions in fees that its private-equity backers earned, and the roughly 33,000 workers expected to lose their jobs without any severance pay.

But this too shall pass. After Toys ‘R’ Us is liquidated, it will fade into distant memory. But the symbiotic relationship between public pension funds and PE firms will go on as vibrantly as before. And as far as pension funds’ “intense scrutiny” of PE firms is concerned, it’s all just lip service.

This is another retailer that was bought out by a PE firm, saddled with $8 billion in debt, and now grapples with its fate. Read…  Is This the Next Big Retailer to Melt Down? Its Bonds Crashed

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.



  52 comments for “In 3 Days, the Last Toys ‘R’ Us Stores Die. And PE Firms Behind it?

  1. MCH says:

    The one thing that I’m curious about is whether these pension funds that have invested in Bain and KKR has lost any of their money. Because as much as I hate to say it, if these PE firms made money for these pension funds, then they should have little cause to complain. The mandate for these PE firms must have been asset growth, if they failed, then a public flogging is deserved, not to mention rounds of mandatory firings.

    However unscrupulous these firms and their tactics are, it’s not as if the pension funds don’t have any idea what’s going on. I believe nowadays there are quite a few socially responsible funds of investment vehicles around, if they make equal or better investments, then it would behoove these pension funds to invest in those. Otherwise, somebody is probably making a mathematical calculation without consideration to other factors like which retailer will go bankrupt next and eliminate thousands of positions.

    Certainly Washington State (as progressive as they are) decided that their only interest was in the math and who comes out ahead.

    • Suzie Alcatrez says:

      Only Bernie Madoff never lost money for a client.

      • Mch says:

        It’s about the long term, what is the overall performance? There is a track record after all, would anyone be that stupid to invest in a consistent loser even if it were a PE firm? Eventually if it is a scam, they’d be found out. I don’t see anyone accusing these PE firms of been a scam.

    • Chris says:

      The pensions funds are invested in funds managed by KKR, not in KKR itself. KKR’s investment management division offers vehicles for KKR (the firm) to unload bad stock/debt like Toys on clients of KKR following an LBO, while KKR itself makes off with the fees and profits from the LBO.

    • Maximus Minimus says:

      Lots of pension funds have huge losses in 2009, but that was a “systemic” crash, so no one could be blamed. As if they were not part of the problem.

  2. Auld Kodjer says:

    This story is as depressing as the end of the very grim 1993 French movie Germinal. We can revolt, but will inevitably end up back down the coal mine. It is the ultimate hopelessness of the human condition.

  3. Wendy says:

    Not just regular old scrutiny, but Intense Scrutiny. Nothing could be more scary. That will make those PE firms straighten out.

    • blindfaith says:

      Really, who shall do it? The Politians who are on the board of directors? Or have private stock in these companies? Or have their wives, sons, daughters on million dollar consulting services to them?

      Mr. Wolf is 100% on the mark with this paragraph:
      “But this too shall pass. After Toys ‘R’ Us is liquidated, it will fade into distant memory. But the symbiotic relationship between public pension funds and PE firms will go on as vibrantly as before. And as far as pension funds’ “intense scrutiny” of PE firms is concerned, it’s all just lip service.”

      One of the first big screw jobs was Eastern Airlines which nearly took Florida down with this crime, and Carl Ichan was made into a CNBC hero, just like ‘chain saw Al”. The rest of you can go about you business, nothing for you here…..

      It is hard, no impossible, to find a pension fund or 401k that does not have blood on the pages of their ‘financial statements’.

  4. Mike Earussi says:

    Moral considerations, like the deliberate gutting of American corporations and the social problems that causes, doesn’t seem to bother these “investment” firms. Unfortunately, it also doesn’t seem to bother the various American public and private pension funds either. Though I do wonder what they’ll do when they run out of victims to destroy.

  5. Max says:

    I feel terrible for the Toys’ employees, many of whom spent their careers there, and will walk away with nothing. Is there any hope of them getting any kind of relief from the Bankruptcy court? The PE pirates shouldn’t be allowed to get away with this, but of course, they will, and they’ll keep destroying companies and the people who work there. There’s so much outrage any more, I can’t keep up.

  6. Eastwind says:

    I’m very sad about this. As a child who never got to go to Disneyland or Disneyworld (I’ve never been as an adult, either), my own personal Happiest Place on Earth was the local Toys-R-Us.

    Now these Bozos have destroyed it. Them and that Amazon Bozo.

  7. Jarhead John says:

    Bon-Ton stores are up next in the retail disappearing act…Word in Pittsburgh is the end of July…But relax y’all, as of 2016 they only had 23,000 employees…

    • SO_CAL_RETAIL_SLUT says:

      Sad for Bon-Ton and its employees. Ironically, most of the Herberger’s locations in the upper midwest were profitable as were other locations/nameplates within Bon-Ton including Boston Store, Younkers and Bergner’s.

  8. Realist says:

    Where the big money goes, morals are nonexistant.

    • RD Blakeslee says:

      ” …the love of money is the root of all evil…”

      King James version of the bible, St. Paul’s first epistle to Timothy, chapter six, verse 10.

      It’s not just big money, it can be yours and mine!

      • Rates says:

        Actually it’s not that simple. The more profound observation is “evil is the root of all money”. The whole notion of avoiding double coincidence of wants is just an issue of convenience and not a necessity.

  9. DAVID KIDGER says:

    Only criminals would think that LBO’s are a good idea. And the bought and paid for puppet politicians.

  10. simon morahan says:

    Is it not obvious to everybody that if these firms put $1 into a company, pull out $1.10 in fees, paid for with debt they loaded the company up with, which then causes the company to go broke, the result is then happiness, for all those the KKR people care about. The collateral damage is totally unconcerning to them, as shown by the comments of Nate Taylor above. He and his mates will have all got large bonuses every time this happens, thus enabling them and their families to live lives totally isolated from, and unaffected by the people whose lives have been ruined by Nate and his shameless mates.

  11. mark says:

    I’m sure that Bain, KKR, and Voranado have all of our best interests at heart …..

  12. Kent says:

    I am a public sector employee. I think it is intensely immoral for public sector pension funds to invest with PE firms. Those firms destroy solid, private sector employers and their employees. Leaving private sector employees without decent jobs and secure pensions will one day cause a backlash against public sector employees. And deservedly so.

    • ZeroBrain says:

      The entire idea of a pension – let alone a “secure” one – is ridiculous. No company can guarantee it’s future viability or annual growth of investments stashed away to pay pensions liabilities. Therefor, it’s a promise that cannot be guaranteed and all employees should understand that (or choose to believe in the Tooth Fairy and deal with the consequences if/when the company goes belly up).

      It’s even more scandalous in the public sector. Governments agree to total compensation package that the private sector could never support. The key is that much of this compensation is in the form of future pension, i.e. taxpayers are supposed to fund in the future when it’s no longer the current government’s problem. And public sector employees will holler and demand their ill-gotten pension because “it was promised”. Yuck.

      All compensation should be paid in the here and now, or be in the form of stocks/bonds that are inherently understood to be a function of the company viability.

      • Kent says:

        Pensions aren’t supposed to be a function of a company’s future viability. They are supposed to be a forced savings program with the funds invested in a broad enough set of assets to have the right combination of risk and growth. As Wolf’s article notes, public sector pensions are not just expecting future taxpayers to pick up the income of retirees, they are investing in private sector income opportunities. Unfortunately, in this situation, they are investing with snakes.

        In effect, all compensation is paid in the here and now, just a portion of it is invested, by what we would hope, are folks who are financially savvy enough to invest that money wisely enough to guarantee a distant return.

        But I am okay with the idea of modifying payouts based upon actual performance. As long as an independent auditor is providing annual information to that effect so that pension fund managers can be held accountable.

        Personally, my employer puts about $11K annually into my pension fund and I put another $4K. If you add that up over the years (with income changes), may payout beginning at age 62 would look like an annual 6.5% return on the investment (I’ve done the math). That is actually much less than overall stock market returns during that time. However, if they had just given me the money and let me invest it, with my personal investing instincts, I probably wouldn’t have 2 nickels to rub together. So I am thankful for what they’ve done.

        Obviously, some funds are nasty scams. Illinois, Kentucky, New Jersey, Sears, and any company bought by a PE firm are going to end up fleecing someone: probably employee and tax payer.

        • OctoberStatesman says:

          Currency cannot be used for promises.
          I’m not sure where the failure to understand is.
          ZeroBrain is correct; Kent is incorrect. Sorry.

          At it’s fundamental, intrinsic, and natural logic, accounting cannot tell time. Thus it cannot give promises, and must express all current numbers in derivative numerical terms (i.e. stock, bond, tally, stick, credit, debit, etc). This is because any given accounting of numbers supports only mathematical operators. Such operations -can- be -imposed- on a time-only, or schedule-time-combination external clock — but this is an art-of-fact; Account-works are not clock-works; Account-works can only used number schedules based off of iterations (otherwise they are playing make-the-belief). “Account,” “accounting,” “an account-of-a-thing”, are all -memories- of sums, dividends, and totals, etc. Any intent of underwriting those numerator numbers with denominators of wealth to then keep those numbers is invalidated the minute the numbers are traded away — and even then, the underwriting did only, could only, can ever only, exist in the present (i.e. the current, sic: currency).

      • blindfaith says:

        Point well taken, is it ‘human nature’ to raid the piggy bank? To have a good thing going, only to be raided by greed. And it is… greed…. that is the killer. Politians took from Social Security funds to finance pork belly projects that could not stand on their own, gave an IOU in return at below rates. Companies made promises they knew they could not keep, then robbed the workers of their dreams. Unions, have done their part, both private and public ones. Two examples:
        The company that makes sprinkles for ice cream etc., 100 plus years in business with an outstanding retirement plan that was solvent. Along comes the ‘confectioners union’ and tells the company that it MUST provide the same retirement benefits for new workers as one who had put in 30 years. Company said they could not without destroying the benefits of all the long term employees. Union said ‘tough’ and calls a strike. Company is moving overseas from New York. Thousands will loose everything, even though the company tried to do the right thing.

        I won’t even bring up the Postal Union with 20 minutes on and 20 minutes off, each hour, and prices only a Harry Winston could love.

        Greed will do everyone in, in the end, and in the end, everything is zero anyway.

    • RD Blakeslee says:

      Well, what should one whose 401K holds investments in a fund one knows to be investing against worker’s interest do?

      What, if anything, is one’s personal responsibility?

      • Kent says:

        You do whatever lets you sleep at night. Or maybe you tell yourself whatever you have to tell yourself to let you sleep at night. I figure that’s what everyone does.

  13. Kevin Beck says:

    There is one bit of good news I see from under this mess: The cost of capital is set right. The management post-LBO is what is all wrong.

    The beneficiaries from almost all these deals are the ones earning the fees in the middle. Very few of the employees benefit, unless they are able to retire before the SHTF.

  14. Jim Graham says:

    All that the “intense scrutiny” will do is to bring along more palatial dinner meetings with hookers playing waitress……

    Nothing more.

    • chris Hauser says:

      good mis en scene…..opening for:

      a slide show of all the toys, babies etc locations, and a panorama view, and then, 5 years later, where are they now…….

      what will happen to the dead one story sears kmarts etc in middle america, beached whales in a sea of asphalt?

  15. Dan Romig says:

    Gertting in some sharp practice
    You better not do anything reckless

    But everybody is going through the motions
    Everybody is going through the motions
    Are you really only going through the motions?

    Lip service is all you’ll ever get from me
    -Elvis Costello

    As a Minnesotan, I hope the Minnesota State Board of Investment follows through and freezes out investments in KKR ‘vehicles’, and I applaud Governor Dayton for requesting this.

    ” … acquired the publicly traded shares of Toys ‘R’ Us …”

    Any publicly traded corporation can be taken over in a share buyout, and if the corporation has assets which can be used as collateral, they are in essence a sitting duck ready to be captured unless share prices remain high.

    • blindfaith says:

      That is exactly what is happening right now. Tech is by far the worst case.
      Look at ATT and Disney in a fight to buy Fox. Over priced stock, is like free money. In the end, we all loose, especially on this one. So where is anti-trust, SEC, and RICO in the funds, the stocks, the take overs, the monopolies…why they are investors looking out for that future job as a board director.

  16. Mean Chicken says:

    Perhaps Toys R US was converted into a corporate welfare company, for the children?

    • Mean Chicken says:

      Anyway, look at that “huge pile” of corporate debt out there we keep hearing about (courtesy monetary policy?) and ask yourself if these hedge funds aren’t well positioned to gorge when the opportunity presents itself.

  17. Kreditanstalt says:

    Someone, somewhere, must be losing income from this. Who?

  18. mvojy says:

    Does anyone find it morally conflicting that a workers’ pension fund would invest in leveraged buyouts that often backfire and rob other workers’ of their jobs, benefits and retirements? All of these calls for social investing have pension funds divesting themselves of holding gunmaker or tobacco stocks but it’s ok to encourage the corporate raiders?

  19. DK says:

    Public sector pension funds are investing in firms that destroy private sector funds? Not on purpose, of course. So, in an indirect way, the private sector people were contributing to thier own demise.

  20. Mary says:

    Asking pension funds to control the self-serving antics of PE firms is like expecting Ivanka Trump to mitigate her father’s political policies. Sure, the enablers benefit. But keep your eye on who is actually driving this runaway train.

  21. lenert says:

    “This too shall pass” as did Lehman before – the WSIB lost $100m to Lehman and got back thirty cents.

    40 years of this stuff is getting so old.

    • MD says:

      Best get used to it…with the waves of privatizations of democratic infrastructure a-comin’, the power and influence of the finance sector is only going to increase, and the checks on their behavior decrease as the state comes under increasing attack from the New Emperors such as the Kochs – people who believe the world should be ordered the way they want it because they are wealthy.

      That’s the world your antecedents have inherited.

  22. Old Farmer says:

    When he was running for president, Mitt Romney (Bain) said, ‘I build companies, and I create jobs!!’ Ah yes.

  23. Maximus Minimus says:

    “KKR’s head of consumer retail for the Americas Nate Taylor was at the meeting, volunteering for PR purposes to have his feet held to the fire. He replied to Miller that no one who led the LBO at the time was with KKR anymore.”
    And how many of the pension fund managers who made the investment in KKR are still around? And around it goes.

    • Kent says:

      Notice how the PR guy cleverly moved the goal posts from bankruptcy today to “the LBO at the time”. No one was there in between? No one?

      This is why you hire PR guys. Better stop posting or Wolf’s going to “moderate” me…

  24. sierra7 says:

    Money has no conscience……and there is no such thing left as “trust”……Having felt the sting of KKR in a “white knight” buyout of my company in the 1980’s and the resultant horror for everybody below the highest execs involved….it was a terrible experience. This is a good representation of “creative destruction” more on the destruction side than the creative.
    I feel bad for the 33,000 laid off employees.

    • MD says:

      Yup Carter was laughed out of office in 80, laughed at for warning of the dangers of unbridled greed.

      And here we are.

  25. Rates says:

    What Wolf is not saying is that it will continue to pass until the whole country collapses or in the best case, becomes just another 3rd world country.

    PE, illegal immigrants flouting the law, opioids, bitcoin, share buybacks through junk bonds ….

    “I believe I can fly …..”

    Actually I am pretty sure the Chinese or Russian are behind this. Trust me on this.

  26. vegeholic says:

    When the PE firm loads up a company with debt, and then extracts all of the equity, isn’t it obvious to everyone that it is going to fail? So who are the people/institutions who are loaning all of this money which they will never see again? It is a mystery to me why lenders fall for these LBO’s.

  27. Wisdom Seeker says:

    Toys R Us died years ago. Product lineup failed to attract customers. Internet retail siphoned off people looking for a full selection of really good, unique and educational toys. Internet gaming siphoned off kids who used to play with toys instead of mobile devices.

    We’re just burying the rotting corpse today.

  28. Alex says:

    Wall Street PE companies did this to many manufacturing companies in the 1990s. Put large debt on the balance sheet then extract large “management” fees then when the carcass is bare liquidate. KKR didn’t see it coming? Yeah, right!

Comments are closed.