Retail’s Existential Threat? Private Equity Firms

A “bust out” is a fraud tactic used in the organized crime world wherein a business’s assets and lines of credit are exploited and exhausted to the point of bankruptcy — Wikipedia.

By John E. McNellis, Principal at McNellis Partners, for The Registry:

Bleeding badly, Debenhams, a 200 year old British department store chain, died last week. The coroner trotted out the usual suspects — the internet, the oversupply of retail, rising rents, tighter margins and, at the end of the dreary line-up, private equity. As it happens, Debenhams had been purchased by a private equity consortium led by Texas Pacific Group (TPG) in 2003.

That group paid £1.8 billion for the company, using £600 million in equity and £1.2 billion in debt it forced Debenhams to assume. The private equiteers promptly began selling off assets, dramatically cutting costs (store refurbishments dropped 77%) and awarding themselves large dividends for their efforts. And, no surprise, consumers lost interest in the fraying stores.

Since I first wrote about private equity’s looting and ultimate devastation of Mervyn’s (“On Private Equity and Real Estate” September 2012, behind paywall), retailer after retailer has been similarly gutted. Payless Shoes, Toys ‘R’ Us, Gymboree, Sears Holding, Mattress Firm and Radio Shack — all companies at one point owned or controlled by private equity firms — have since filed Chapter 11. In fact, Debtwire, a financial news service, calculates that about forty percent of all US retail bankruptcies in the last three years were private equity backed.

How do the private equiteers do it? Simple, the leveraged buyout. The LBO is the financial world’s pick and roll, that is, a highly effective play that is difficult to counter, especially if the PE firm takes the prudent first step of bribing its intended victim’s CEO into going along with their acquisition.

In short, the PE firm pays top dollar for a given retailer, often even overpaying, but using as little equity and as much debt as it possibly can. It then improves the company’s profitability by cost-cutting beyond prudence and, as with Debenhams, says, “What a good boy am I,” rewarding itself with a major dividend, often recovering not only its entire initial investment, but a substantial profit to boot.

A PE firm may be in good faith, it may actually use its best efforts — to be fair, equiteers sometimes succeed with their retail acquisitions — but even under the best of circumstances, retail is a difficult business, the threats from e-commerce, changing tastes and ever more nimble competitors are all too real.

Here’s the PE challenge: If you’ve already got your investment plus a fat profit out of a company, how hard are you going to continue to work on bailing it out, especially when you’ve crushed its bottom line beneath a wrecking ball of expensive debt?

Is this legal? It shouldn’t be. Is this moral? You don’t have to ask. Is this perpetrated by a single bad guy? Does private equity have its own Vladimir Putin? No. The industry is more like Ali Baba and the Forty Thieves; everyone gets in on the action. In fact, it’s hard to think of a private equity firm that hasn’t dipped its toe in this cesspool.

With apologies to those firms unintentionally left out, the players read like a who’s who of the PE industry: Bain Capital Partners, Blum Capital Partners, Cerberus Capital Management, (when a company names itself after the three-headed dog that keeps lost souls in Hell from escaping, you just might intuit a certain moral ambiguity), Golden Gate Capital, Kohlberg Kravis Roberts, Lone Star Global Acquisitions, Sun Capital Partners, Sycamore Partners, TPG and Vornado Realty Trust.

The list goes on, but you get the point. And yes, Bain was Mitt Romney’s firm, but please remember that Richard Blum, husband of Senator Dianne Feinstein, is the principal of his eponymous firm. This isn’t about politics, just money.

Since private equity’s insidious effect on retail has been written about (to no apparent effect) as much as the President’s peccadilloes, it may be time to try a different tack. If a picture is worth a thousand words, an hour-long episode of the Sopranos is good for an encyclopedia on the topic of destroying retailers. In “Bust Out” (season 2, episode 10), Davey Scatino, an old boyhood friend of Tony’s, borrows money from the gangster to pay back gambling losses. Unable to repay his debt, Davey watches helplessly as Tony and Richie Aprile take over his sporting goods store. Knowing they will never pay another bill, the mobsters order ten times the store’s normal inventory, sell it all at a discount for cash, pocket the proceeds, destroying first Davey’s credit, forcing him into bankruptcy, then his life.

If Tony and Richie had prep school accents and minions in suits to bust out Davey’s business, you would be hard-pressed indeed to differentiate the mafia from the world of private equity. By John E. McNellis, for The Registry.

“Amazon’s plunge into the $800 billion US grocery industry posed an existential threat to rivals”: CNN, August 2018. So let’s see. Read…  Whole Foods’ Existential Threat?

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  63 comments for “Retail’s Existential Threat? Private Equity Firms

  1. WT Frogg
    Apr 19, 2019 at 10:19 am

    Private Equity = Vampire Squid

    Unfortunately, we have the best government money can buy.

    Privatize the profits and socialize the losses.

    What could possibly go wrong ??

    • Nat
      Apr 19, 2019 at 11:06 am

      My only complaint is the “… we have the best government money can buy.”

      I would argue it is really “… *THEY* have the best government money can buy.”

    • Beard681
      Apr 19, 2019 at 2:16 pm

      Geez, I can’t believe how you young people hand wring and pontificate on simple matters. The real problem is these guys have to much access to capital seeking some sort of viable return. That along with too liberal corporate bankruptcy rules. Quick fixes:
      1. Increase dividend claw back time for bankruptcy to 6 years. They won’t let the company go bust if they know the creditors have a call on their “ill-gotten” gains.
      2. Treat money borrowed for take overs and mergers as initial startup money and not debt that can be tax deducted. Why subsidize debt used only for financial engineering.

      …People who care don’t know, people who know don’t care.

      • Dale
        Apr 19, 2019 at 7:16 pm

        Or simply make it illegal to acquire companies with debt. Then if PE wants to buy perfectly good companies and destroy them, they will be doing it with their own money and it is they that will be bankrupt soon.

        File under: Solved, but too much money is being paid to politicians to implement the solution. (This is a very big file.)

        • d
          Apr 20, 2019 at 2:49 pm

    • mike
      Apr 19, 2019 at 9:02 pm

      perfect

    • mike
      Apr 19, 2019 at 9:05 pm

      sears is worse, talking about a bunch of criminal tearing it up

  2. Petunia
    Apr 19, 2019 at 10:20 am

    JM thank you for writing this and Wolf thank you for publishing it. I know this site doesn’t like to get political, but business is always political. The last article about Sears is a perfect example of how much political corruption exists in business. How can any of this happen in two countries who pride themselves on the rule of law? It couldn’t happen, if the rule of law actually existed.

    Where are the oversight agencies? The Sears debacle has evolved over two decades. How can a bankruptcy judge not refer such an obvious “fiduciary failure” to prosecutors?

    There are other major frauds out there and they are well known by key players. Hold on because it ain’t over.

    • Unamused
      Apr 19, 2019 at 11:40 am

      =>Where are the oversight agencies?

      They’re busy trying to figure out how much mercury, lead, and carcinogens workers will tolerate without affecting corporate profits by persuading you that these are vitamins.

      It’s what people voted for. Consent has already been manufactured.

      In the meantime they’ll coerce you by promising to give your job to people who aren’t allowed to complain. In some parts of the world pollution is the leading cause of death, but they don’t live long anyway so it’s not much of a problem.

      They’re quick to remind you that if people are poor it’s their own fault. Which is actually true, because people are weaseled into supporting such a system.

    • akiddy111
      Apr 19, 2019 at 12:09 pm

      Don’t hold your breath in the hopes that our SEC and Federal Prosecutors will become more zealous.

      We are not going to return to the Michael Milken era or the Jeffrey Skiling era or the Dennis Kozlowski era.

      Neither our leader or Howard Schultz would approve of such harsh treatment.

      After all, they believe in Financial Engineering, generous Stock Option grants, our Bankruptcy laws, and the beauty of… ahemm … Free Markets.

      • Petunia
        Apr 19, 2019 at 12:45 pm

        Concerning your rogue’s gallery, they are all out and back in business.

    • Dale
      Apr 19, 2019 at 7:19 pm

      When you said ‘political’, I thought ‘here it comes, bashing …’. But I didn’t hear that part. Thanks.

      Because PE is fully supported by the elites of both parties. Because PE pays its dues — to the politicians. Meanwhile, the US is weakened with every PE transaction.

      If somebody really wanted to make America great again, they would eliminate PE.

    • Javert Chip
      Apr 19, 2019 at 7:59 pm

      Petunia

      This old retired CFO capitalist absolutely agrees, and echos your “WHERE ARE THE OVERSIGHT AGENCIES?” concern.

      Every “-ism” (socialism, capitalism, collectivism, etc) requires appropriate regulation to be sustainable.

      My experience is the bigger (more powerful & intrusive) government becomes, the less appropriate oversight there is (SEC, FTC, FDA, FCC to name a few). Bureaucracies (the VA) are loath to ACTUALLY perform actions they are mandated to perform before a situation becomes tragic, toxic or life-threatening. Why aren’t vaccinations enforced BEFORE epidemics occur; why aren’t recognized dangerous lending practices disallowed BEFORE causing a financial crisis?

      Unless you can afford otherwise, Justice becomes a political vendetta (like IRS 401.c.3 cert for conservative groups), or pay-to-play (Private Equity)

      • J.B.F.
        Apr 22, 2019 at 7:32 am

        Acton acutely observed that over time governments increasingly come to resemble organized crime.

    • MD
      Apr 20, 2019 at 8:56 am

      “Where are the oversight agencies?”

      Many of them now sat in lucrative private sector non-exec, consultancy or ‘advisory’ positions one would imagine..?

      The revolving door spins so fast in these troubling days of corporate political capture, it’s merely a blur.

  3. Lemko
    Apr 19, 2019 at 10:30 am

    Didn’t Icahn give the blueprint on how to become a Raider ?

  4. Harrold
    Apr 19, 2019 at 10:34 am

    Isn’t PE going to run out of retailers to plunder? Or did that already happen?

    Where will they turn to next?

    • Unamused
      Apr 19, 2019 at 11:45 am

      =>Isn’t PE going to run out of retailers to plunder?

      They’re trying to time it so the last retailers and last customers go bankrupt about the same time, expecting that people will find the symmetry pleasing.

    • Rowen
      Apr 19, 2019 at 3:48 pm

      The problem with unbridled capitalism is eventually 99% of the people run out of money to be plundered.

      Doesn’t the SSTF still have ~3T left to privatize?

      • Javert Chip
        Apr 19, 2019 at 8:13 pm

        ROWEN:

        Harsh fact – financial corruption is not what you blithely term “unbridled capitalism”. Corruption is thieving, stealing, intimidation, bribery, failing to follow laws, and it easily occurs in ANY system.

        Just because it involves money doesn’t make it capitalism. Example: 99% of socialist Venezuelans have literally run out of money to be plundered – they can’t even buy toilet paper.

        • Timmy75
          Apr 19, 2019 at 11:18 pm

          Ah, but alas… by omitting ‘capitalism’, one relinquishes that warm and fuzzy feeling one derives from one’s pompous virtue signaling. “Why, those EVIL capitalists…….!!” (see there?? I really AM a swell guy, no?)

        • Markinsf
          Apr 21, 2019 at 9:54 pm

          Please. Don’t we hear enough Venezuelan propaganda from the MSM without having more of it posted in the Wolf Street comments section? It’s pretty obvious you have zero insight into the situation in that country so why do you blacken your otherwise informed commentary? What is clear is 1 – Venezuela is sitting on the world’s largest oil reserves 2 – US sanctions are in place in an attempt to make life miserable for the masses (hopefully enough to cause mass revolt) and make it as difficult as possible for Venezuela to profitably refine and sell their oil and 3 – Their population, despite shortcomings in education, is wise enough to know which side of their bread is buttered. Until the US affects regime change in Venezuela there will be no PE firms operating there.

    • Dale
      Apr 19, 2019 at 7:21 pm

      The PE cancer (PEC) is not limited to retailers. Every industry is scourged by them. And in no case is it for the better for the consumers, for the economy, for the employees, or the country. Only better for the ethically-challenged.

      Whenever a product’s quality degrades significantly, I make a check. And, yes, that product has come under the control of PE.

  5. mark
    Apr 19, 2019 at 10:37 am

    Vulture capitalism for the rich ….. “bust out” for everybody else.

    Totalitarian oligarchy ? You bet. Democracy ? That’s a joke.

    • Unamused
      Apr 19, 2019 at 12:05 pm

      =>Democracy ? That’s a joke.

      Not entirely. You can vote for anybody you like, so long as they pick the candidates. Pretenses of democracy have always been important to maintain the Empire. It’s why the USSR had elections. So did Weimar Germany, until they finally found the right guy and elections were no longer needed.

      In the meantime the US Constitution is kept locked up under heavy guard to ensure public safety. While it has never been redacted, it has always been subject to creative interpretation. Call ahead for visiting hours.

    • Javert Chip
      Apr 19, 2019 at 9:14 pm

      Mark:

      Gee, if totalitarian oligarchy is your thing, and you’re not overly fond of toilet paper, Venezuela awaits. You’ll love Russia, Turkey, China…South Africa is quickly changing sides. An absolute monarchy like Saudis Arabia might be your thing.

      Actually, I’d recommend you get out and travel. I’m absolutely serious: 3-4 days touring Cuba is absolutely soul-killing mind-sucking terrifying.

    • Timmy75
      Apr 19, 2019 at 11:24 pm

      That’s correct. In a true democracy, it’s the proles that do the busting out, as human nature looms large regardless of one’s station in life.

  6. Apr 19, 2019 at 10:40 am

    Besides the legal cover of being Wall St. firms, what is the difference between private equity firms and the bust outs portrayed in the Sopranos and Goodfellas? If caught, Mafia hoods go to prison while hoods who robbed Sears and other companies are asked for campaign contributions. Could it be so simple that all the Mafia needed to do was register with the SEC to avoid prison?

    • Chemdude
      Apr 19, 2019 at 11:43 am

      If one were to try to assign a primary enabler (I.e. trying to assign a fundamental, root cause) to the LBOs “gone bad,” what would it be? Is this simply a consequence of an over abundance of currency/credit sloshing around in the system? Is there something else at play? What would need to change (not meaning regulation, as too often it’s poorly conceived and has disastrous secondary and tertiary effects) to disincentivize such behavior? Or, is this behavior appropriate, as perverse and immoral as it may be, if one were to assess such businesses (or people, re: the mafia) were doomed to fail / overbuilt / etc?

    • Unamused
      Apr 19, 2019 at 12:11 pm

      =>Could it be so simple that all the Mafia needed to do was register with the SEC to avoid prison?

      Easily solving the problem of organised crime: just put a mafia Don in charge.

      It’s what the people wanted, so they have no cause to complain when he drives his golf cart on the greens.

    • d
      Apr 20, 2019 at 2:54 pm

      “Could it be so simple that all the Mafia needed to do was register with the SEC to avoid prison?”

  7. Karl Kolchak
    Apr 19, 2019 at 11:11 am

    There is also a scene in Goodfellas that shows how these schemes work. The owner of a restaurant where the gangsters hang out asks the boss to come in as a partner in order to protect himself from Joe Pesci. The mobsters then load the place up with debt as Ray Liotta explains what is happening in the narration. When the “joint” is then “busted out,” he and Pesci “light a match” and burn it down.

    Pretty standard mob tactic, I gather.

    • Unamused
      Apr 19, 2019 at 12:13 pm

      Do it to an entire country and call it Greece.

      Welcome to the New World Order.

    • Paulo
      Apr 19, 2019 at 1:34 pm

      A friend of mine, that I worked for part-time, owned a small airline. Maybe 2 million in assets and an excellent group of loyal customers. A guy came along and bought it using debt up the ying yang. Debt and more debt. He ran it into the ground and bled it out just like these exampes. After year 3 had a ‘fire’, one day before the insurance ran out. Nothing happened to him as the fire/claim was tied up in investigations forever. This bandit was finally busted flying drugs into Lake Oroville Indian Reserve, from Canada. A game warden pitched a rock and hit a propeller when he tried to take off. They found him days later and he went to the ‘Big House”.

      Old story with new players.

  8. Howard Fritz
    Apr 19, 2019 at 11:12 am

    If I’m understanding this correctly an LBO consists of two parts:

    1. The buyout is the acquisition of a company, generally by management or some of its own shareholders. By purchasing the other owners’ shares, they are said to have ‘bought out’ those owners. They may then continue the company as a private enterprise or subsequently hold a stock offering.

    A buyout might happen for a variety of reasons: perhaps some owners believe the company is undervalued, or want to run it a different way (if they act in good faith), or want to continue to operate without being publicly traded.

    2. The ‘leveraged’ part indicates that these buyers took on debt to make the purchase, rather than using their own capital. Typically this involves the company’s assets becoming collateral for a loan from a bank or other financial sponsor. The company is then responsible for paying back this debt.

    -That leads the question as to the long term implications of destroying these retail outlets and whether it will cause further consolidation of our already extremely consolidated corporate environment. Surely there must be a point of slim pickings?

  9. red pill economics
    Apr 19, 2019 at 11:23 am

    “Is this legal? It shouldn’t be. Is this moral? You don’t have to ask.”

    It’s apparently legal, but you’ve correctly answered you second (rhetorical) question. No consequences, no change in behavior.

    Legal is subjective and subject to being bent by the definition, e.g. what the definition of “is” is. Legal is a distillation of what the zeitgeist of society says is moral, ethical and legal. Not a healthy trend, IMHO.

    I’ve often said that the PE/Sears situation is a metaphor for and a microcosm of the entire financial system in the U.S. Crony capitalism isn’t free market capitalism. More like Socialism.

    Central banks have way overstepped their charters.

    https://www.theamericanconservative.com/articles/trump-is-right-to-blow-up-the-fed/
    Trump is Right to Blow Up the Fed

    “The Federal Reserve is out of control, acting in ways and with powers that were never explicitly granted by Congress.”

    By Christopher Whalen • April 9, 2019

    “We should be worried about Fed independence, but not because the central bank is somehow suffering under the tyranny of the executive branch. Rather the Federal Reserve is out of control, acting in ways and with powers that were never granted to it. Quantitative easing, “Operation Twist,” and the explicit 2 percent inflation target are just three example of how the Federal Reserve Board is operating outside of its legal authority.”

    I saw a recent article where the Fed is already “greasing the skids” for the next financial meltdown; they’re looking to buy even more assets. Turning Japanese. Stop the madness!

    More of the same isn’t fixing the problem; simply another power grab by the nefarious Fed. Send the economy to rehab before the inevitable OD and ER experience, and the Fed.

    • Mac
      Apr 19, 2019 at 5:58 pm

      “Trump is right to blow up the Fed”

      It doesn’t seem that Christopher Whalen understands that Trump, Cain, and Moore have all explicitly argued for continued quantitative easing. The Fed is currently reversing QE, as was initially intended. While I’d agree QE infinity is an experiment I’d rather not see happen, that’s all the more reason to be concerned about Fed independence from the executive branch! It doesn’t make any sense to be frustrated at the Fed overstepping it’s authority with QE and simultaneously not be concerned when the executive branch and its new nominees are pro QE.

      • Bankers
        Apr 20, 2019 at 7:33 am

        Money is a public good, and so a lot is being made to keep people better.

        What would be reassuring would be to have the author’s portrait on the currency to remind us who to thank, but unfortunately the administration is quite faceless as it claims a mathematical precept , and the US doesn’t do executive notes, just pens. Wouldn’t the US currency be worth more if it carried the portrait of Nixon, Reagan, Bush, OB, and president Trump ? I mean it has sort of deviated from it’s original charter so it seems a bit unfair to blame or credit early legislators, or even to decorate it with recent famous persona who have nothing much to do with its statute and implementation of that.

        (Playing the role of polemicist for anyone who missed that)

  10. nicko2
    Apr 19, 2019 at 11:24 am

    The article overlooks the fact these retail ‘anchor store’s’ ubiquitous of suburban malls across the developed world are all doomed due to the rise of the Internet, Amazon and other new players. with private equity buying distressed assets and pawning them off piecemeal…. Is this not better than awaiting the inevitable collapse? Bottom feeders play an essential part of any ecosystem.

    ….. Or is this a call for government and union intervention to prop up failing businesses that just so happen to employ tens of thousands of formerly well compensated ‘middle class’ workers?

    ….. Let’s also not gloss over the inherent evils of such mass consumer consumption, spurred by our post-global world of factories in dozens of emerging economies, paying workers $2-20 a day, 10 hours a day…. Producing stuff for retailers who then mark everything up 1000%.

    ….. But hey, those workers in Bangladesh, Honduras, India, Cambodia…China… and dozens of other low cost labor nations all have kids to feed and educate.

    Fear not, the automation and 3d printing revolution will make most of these quite deplorable jobs obsolete over the coming decades. New business and societal models will emerge. Some will adapt and thrive, many will not.

    • Apr 19, 2019 at 12:00 pm

      This article was about “bust outs” of retail companies and not their decline due to internet sales. Larding up with debt that can be discharged in a bankruptcy court is not bottom feeding, it is legalized theft and not essential to anything but themselves. Making that illegal isn’t propping up what could well fail on it’s own but saving tax payers and the banks from raiders who are nothing but thieves.

      If you believe retail workers were once “formerly well compensated middle class workers” then you never worked in retail.

      Whatever the workers who make the widgets are paid, in whatever country those widgets are produced, has no baring on retail stores who sell those widgets, other than price.

    • illumined
      Apr 19, 2019 at 5:14 pm

      @nicko2 – Toys ‘R Us wasn’t a distressed asset. Many of these businesses were very profitable prior to the leveraged buy outs. The reason LBOs are such a problem is because it’s the company that borrows the money, not the PE firm. So the business then has to pay the interest on the loan, which given that these loans are often measured in billions of dollars is massive. That hugely overwhelms whatever profits there were.

      I do think it’s funny you should mention Amazon as the wave of the future as opposed to old retailers that make money. Amazon makes no money on it’s ecommerce, there’s a reason the company wasn’t profitable at all until a few years ago when they went in hard on cloud services.

      • Spot On
        Apr 20, 2019 at 8:27 am

        You are so correct….many folks don’t know the evolution of Private Equity but as more and more public companies are being held to “earnings” reports, etc. the decide to go private…no one needs to know whats on our books…just look at how many publicly traded companies there were 10 years ago as compared to today.
        Big banks are just as guilty if they are providing financing for these deals and placing them on the company themselves. It truly is a legal racket as the PE firm puts their people in as officers of said company and then proceed to bleed it dry and default…hence no liability to the PE members…Big Banks are nearly always at the root of all evil…

      • Javert Chip
        Apr 20, 2019 at 10:17 pm

        Strongly disagree. Toy-R-Us was indeed a distresses asset before the 2005 LBO. All the following had happened BEFORE the LBO:

        o Toy-R-Us created in 1957, and store essentially never updated as retail changed
        o Toys-R-Us signed 10-year e-marketing deal with Amazon; essentially botched the rollout, ended up suing each other & terminating the agreement
        o Traditional toy market was shrinking (2004-05: $22.1B decrease to $21.3B)
        o Stand-alone toy stores losing market share (2003-05: 25% decrease to 20.1%)
        o Toys-R-Us debt downgraded to junk

        Pre-LBO Toys-R-Us had years of bad pricing, horrible merchandising, failure to adapt business model, and miserable customer service as competition (Walmart, Amazon, others) was eating their lunch. The incumbent senior managers (responsible for years of poor performance before the LBO) were losers.

  11. Umang Varma
    Apr 19, 2019 at 11:48 am

    How come the creditors, who are the ultimate losers in these LBOs, can’t sue for fraudulent conveyance and clawback the dividends?

    What PE firms should do if they’re really Machievellian is buy CDS against the company as they’re bankrupting it. That’s essentially what hedge fund Aurelius did as they bankrupted Windstream.

  12. Robert
    Apr 19, 2019 at 12:05 pm

    “That group paid £1.8 billion for the company, using £600 million in equity and £1.2 billion in debt it forced Debenhams to assume.”
    That’s like a doctor handing a sick patient a cyanide capsule- and the patient knows it (or was Debenham’s deaf, dumb and blind). Why did they do it?

    • Anthony Aluknavich
      Apr 19, 2019 at 12:30 pm

      My guess is they greased up ($$$$$) the CEO’s exit package to the point where he couldn’t refuse.

    • MC01
      Apr 20, 2019 at 1:50 am

      Let’s say I am a Debenhams shareholder and I know the company is valued £1.6 billion. In comes a PE consortium valuing the company at £1.8 billion to get it right now. My share of the company is instantly worth 12.5% more.
      I am not as highly principled as most people here: once I know the buyer is solvent and the cash is there I’d sell in a heartbeat, then it’s not my problem anymore.

      The favorite trick of these PE consortium is to offer full price or even more than the latest valuation for a company to win over the shareholders: it’s not merely a matter of bribing the CEO. Everybody has to get his share of the pie: if the CEO tries to shortchange shareholders he won’t enjoy his money for long, I can assure you of that. Everybody has to be on board, and for everybody to be on board all shareholders have to receive adequate compensation, one way or the other.

      • HowNow
        Apr 20, 2019 at 5:07 am

        I’m angered that many of the readers here want to crucify the culprits, scavengers and demons lurking in the P.E. world. This is Capitalism, folks. When money accumulates into the hands of fewer and fewer players, why the big surprise? Warren Buffet, if I remember this correctly, said that the perfect business is a toll booth, read “monopoly” No capitalist wants a “level playing field” and as far as invisible hands go, they’d like their own hands to be invisible so their counter-party can’t see what they’re up to.
        These retail companies are not sacred. If a successful business owner didn’t “take the company public”, this whole stock charade wouldn’t exist. The owner, in most instances, wanted to cash out portions or all of his or her business – FOR SOME REASON (“financing to scale it up”… sure!). Why not just bring in a few partners? Why not offer partial ownership to the employees? Have you shopped in a “Publix” market? The employees have ownership stakes in that grocery chain. Contrast the treatment there to customer service in a Walmart where the downtrodden work. The Waltons want to maximize their personal fortunes – where’s the piety in that? If at some point Walmart goes belly-up, will people whine that this great American institution got stripped to the bone by greedy financiers? String up the private equity guys!
        People have either got to stop whining and wailing over bad players while they defend sacrosanct “Capitalism” or invite real regulation by non-corporate-controlled regulators (will never happen). And, while the imaginary regulators are at it, charge businesses with the “externalities” that they spew out into the environment with no cost to themselves. It’s that simple – keep capitalism alive with serious rehab and some decency. Free-marketers are absolutely full of crap. In “theory” (hypothesis) a “free market” sounds good; in practice, you end up with PEs that you can revile and hate. And, who the heck lent them the money for the leveraged buy outs? Were they in on the heist, too?
        As for the “moral” aspects of this ravaging and financial exploitation, you need to look no further than the oval office. The buck starts there.

        • Javert Chip
          Apr 20, 2019 at 10:42 pm

          You remember the Warren Buffett “toll booth” story incorrectly:

          Warren’s comment was made as a 9-year-old kid, sitting on the porch of his friend’s house and watching cars and the street trolley pass on the street in front of the house during rush hour. One day he said to his friend’s mom, “All that traffic. What a shame you aren’t making money from the people going by. What a shame, Mrs. Russell.” Even as a 9 year old Buffett was thinking about businesses, and he wanted his friend’s mom to set up a toll booth.

          Buffett has been very explicit about always seeking out businesses with large economic moats – businesses having large, unique, and sustainable competitive advantage that ultimately results in pricing power and high returns on invested capital.

          If you’re going to attempt to slander Buffet as having claimed “monopoly; no capitalist wants a level playing field”, at least get the story about a 9-year-old boy correct (Buffett has never said or implied those comments).

        • HowNow
          Apr 21, 2019 at 7:40 am

          Javert: you’re imputing a moral value on “monopoly” by suggesting that I’ve “slandered” Buffet. Not the case – both that my comment was a form of slander (because a detail of a story was lacking which I admitted I may not have remembered correctly in my original comment!), and by suggesting that “monopoly power”, as implied, is somehow so heinous that someone’s interest in having an investment monopoly is fundamentally damaging to their reputation for pursuing it. Is that what you meant by slander, or am I missing something??

          In other comments you’ve made on this site, as I recall (which may not be accurate as my memory is not what it once was) your defense of capitalism reminds me of someone I know who drones on about “free markets”. He feels that “externalities” is a non-issue, but will admit: “yes, you need regulations”. But it’s the regulation that HE deigns as acceptable; there are huge inequities in our system that HE ignores. I would assert, my opinion only, that you believe that there are good faith vs. bad faith regulations, but it’s YOUR opinion of good and bad regulations but, to be sure, in accordance with law. But if monopolies are bad, are duopolies okay? If lending to people who cannot comprehend they are being charged usurious interest fees is okay because you’ve legally disclosed the conditions (survival of the fittest/buyer beware are business ethics for some, to be sure)? If a wealthy capitalist can effectively control the taxation rates to his advantage through political control of reps, (lobbying is a massive industry), is that okay = “moral”? Is entry to the Ivy League colleges from massive donations, to the exclusions of qualified but less endowed candidates, okay, which is the practice and prerogative of the wealthy? Is ownership of an unassailable moat okay provided there’s some competition, however feeble, okay, etc… So, if you become emperor, you’ll be able to set all the regulatory rules, and I’m confident they will all be quite moral and certainly legal. But when you’re weighing “moral” considerations, I would suggest you expand your thinking on the matter. Personally, I’m all for capitalism, but I think it needs “renovation”. You may want to read Pikkety’s book on “Capital”.
          I don’t like having people characterize me as writing slanderous things, especially when that are not.

        • HowNow
          Apr 21, 2019 at 7:52 am

          And, as you’re concerned that the story about Buffet be retold correctly, you may want to bone up on the difference between slander and libel.

        • HowNow
          Apr 21, 2019 at 8:56 am

          Further, I wanted to find where I could have gone so wrong thinking that Buffet would have thought a toll gate was the perfect investment, so, searching I found a brief commentary from Gary Miller, at Trusted Financial Advisors, entitled, “Buffet Buys another Toll Bridge”, and borrowed this excerpt: “Berkshire Hathaway, Warren Buffet’s investment vehicle announced today it would take 100% control of one of the nation’s largest railways, Burlington Northern Santa Fe (BNI).Trusted Financial holds, in most client portfolios, a position in Berkshire Hathaway, and this commentator has personally held a position in the company for some 12 years. Today’s acquisition, Berkshire’s largest is not something I applaud, but it is revealing when one considers the evolution of investment style of the greatest investor of our Age. As a child in Omaha, Nebraska, Warren Buffet commented to a friend who lived on a busy thoroughfare, that he wished they could find a way to erect a toll booth and collect money for every car that passed. Buffet’s desire to own businesses that have an effective monopoly, like a toll bridge, has been chronicled in books like Roger Lowenstein’s “Warren Buffet, the Making of an American Capitalist“, a 1995 work that I am in the midst of re-reading. Earlier this year I read the massive “The Snowball” (Alice Schroeder,(C) 2008, Bantam Books). Is that libelous, too? I read both books referred to, incidentally. Happy Easter.

        • Javert Chip
          Apr 21, 2019 at 3:52 pm

          HowNow

          Of course we all have our personal opinions. I didn’t say your opinions were wrong.

          Your canting not withstanding, I was simply advising that if you want to slander Buffett, it helps to get the facts of the underlying “precipitating incident” of a 9-year-old boy accurate.

          Just trying to help.

  13. Nash
    Apr 19, 2019 at 12:11 pm

    Way to go boys well done millions out of work and you guys are spending like company executive wives well done live ya guys

  14. Bankers
    Apr 19, 2019 at 1:02 pm

    This business is too small (two stores…now one) to catch much headline or funding (crowdshare), and I don’t think it was LBO result, or is one.. not sure, just a fitting story of the sign of the times as it is labelled the world’s oldest department store (well before Le Bon Marché in France or Marble Palace in the US), even if it did not expand to their size

    https://www.itv.com/news/central/2019-04-13/bennetts-ashbourne-department-store-to-close-its-doors-for-the-final-time/

  15. Timothy J McLean
    Apr 19, 2019 at 3:11 pm

    After reading the article and comments, I didn’t really see anyone placing part of the blame on the “enablers.” The only way for these PE’s to pull off these LBO’s is with cooperation from both underwriters and buyers of the debt. If you ever saw or read “The Big Short,” there was a question ask of Dr. Michael Burry about how he knew the bonds secured by subprime crap loans were going to fail. He responded by saying he read the prospectuses. My point is credit from Wall Street is flowing too easily today, so all the big banks are happy to accept big fees to sell these crap loans to unsuspecting buyers at rates well below the ACTUAL risk.
    The liquidity in these debt markets will evaporate one day.

  16. c smith
    Apr 19, 2019 at 6:28 pm

    PE is purely a creature of free (or nearly free) money. Remove the money trough, and PE can no longer subsume vast swaths of the economy.

  17. tester mc testerson
    Apr 19, 2019 at 10:55 pm

    FUBAR… bar = beyond all repair.

  18. medialAxis
    Apr 20, 2019 at 1:25 am

    Never a lender nor a borrower be.

  19. Apr 20, 2019 at 8:56 am

    Great article. I dont think I’ve read an article in the last 10 years that does a better job of explaining what’s really going on in this current business cycle. Looting is a proven business model. The PE plutocrats probably even rationalize the havoc they have wrecked in the economy with the notion they are somehow promoting a more “rational” allocation of resources. Pigs at the trough may take comfort the same way I suppose.

  20. Apr 20, 2019 at 10:10 am

    Isn’t all this in nature channel terms, arguing about the rudeness of the vultures, and ignoring what the real predators did to the global economy?

  21. sierra7
    Apr 20, 2019 at 12:23 pm

    Good article! Brought out lots of variable comments…..how so many who did comment have so many different variations in their views on how, what, when, where….etc.
    How can “capitalists” get away with “obvious” theft?
    Depends on how you define “theft”.
    Humans are burdened with the “Seven Deadly Sins” (I’m an atheist and use this example from my unpublished manuscript about the GFC of 2008-9 etc..) Envy, Greed, Lust, Pride, Gluttony, Anger and Sloth. Generally described in those labels.
    “Capitalism” or trade or whatever you may wish to call how humans interact to attempt to materially better themselves bear those traits in every kind of exchange transactions.
    The “destruction” of so many B&M businesses in recent years reflects the revolutionary changes going on and going forward.
    I look at modern day “capitalism” as a game. All games need rules. So many of the rules that were established after the Great Depression of the ’30’s have been dismantled. Most of the readers of these columns are familiar with them most notably the Glass-Steagal Act.
    Many of the “rules of the game” were established to try to curb the tendencies of those “seven deadly sins” to destroy the “game” outright and destroy societ(ies).
    I was born in 1930, grew up during the GP and observed from an early age how “capitalism” work(s)(ed) by being exposed to the most basic of business markets, the Oakland produce market. All races; dislikes, likes, hatreds, conniving, back stabbing, poor, humbled, wealthy individuals, groups all trying to out-do all others in mostly very simple business transactions.
    But, in the end it all boiled down to mostly “Greed”……”Greed is Good”…Gordon Gecko from the original movie, “Wall Street”. Gordon G. also had another famous line in that movie: “Because it’s wreckable!” (referring to the airline he was kissing up front and stabbing to death under the table)
    Yes, “Greed” is good!
    If, it has rules to the game that attempt to curb the most violent of the aspects of greed (and the other “deadly” vices mentioned).
    The rules of the game are the “regulations” that have been trashed over the decades for those believers that “free” markets will benefit all mankind.
    No argument there!
    Many on this planet enjoy better lives materially than even just 100 years ago.
    I’m a capitalist with a caveat: “The game needs rules.” Period.
    What has happened and will continue to happen to all these B&M businesses, rightly or wrongly, for good or for bad will continue during this revolutionary times.
    To curb this or slow it down you need humans; the public, business owners/leaders, politicians to realize that we need rules to the game and enforcers, “The Regulators” to be able to do their jobs.
    Bill Black wrote the book: “The Best Way to Rob a Bank is to Own One”. He is/was right.
    The best way to own a country is to, “own the government”. That’s what we have and that’s why we are experiencing the “excess” of those sins.
    “Constructive Destruction” is supposed to modify the excesses of “capitalism”, but we know from experience and history that the forces of money, and now the formidable ones of global flows (really tidal waves) are rendering “local” actions of participants just plain, “road kill”.
    We need rules to the game. We need regulators that will be allowed to do their jobs. We need real consequences for the violations of rules laid down.
    Quite frankly we need other than the “Madoffs” to go to jail.
    Remember the S&L (Bill Black’s book mentioned above) Crisis back in the late 1980’s?
    More than a thousand violators went to jail.
    Compare that to the real steal of the GFC in 2008-09.
    “Looting” is basic nature to our brand of capitalism.
    We need to do better. Maybe when the general public realizes that they are the “sheeple” to be continually sheared will we be able to progress to something better.
    Meanwhile, practice your “deadly sins” in order to survive.

  22. McMike
    Apr 20, 2019 at 11:00 pm

    Talking about it is indeed aparently not enough. It was not enough thirty years ago when they made the movie wall street – and the country missed the point. Back then the point was raiding pensions.

    You cant talk about any of this without talking about cheap money, lax security regulation, and tax policy.

    PE firms arent just getting away with murder, we keep handing them the gun

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