The menace of private equity firms


Luke Darby explains how venture capital and private equity firms are responsible for destroying otherwise healthy companies, killing jobs, devastating communities, while reaping fat rewards for their investors. Once they take over a company, the private equity partners take out huge fees for themselves, burdening the company with large debts.

The quick and dirty explanation of private equity is that these are firms that buy other businesses. They restructure acquired companies in order to increase short-term profits or otherwise make them look more appealing to a buyer, and then sell them at a profit. While that means a nice chunk of cash for the investors who made the sale, it can be a chaotic and disastrous process for the employees of the companies being bought and sold, and they might get laid off or see their company broken up and sold out from under them.


The untimely and completely avoidable death of Toys ‘R’ Us is perfect example of why private equity has earned the nickname “vulture capital.” In 2004, Vornado, a real estate investment firm, and KKR and Bain Capital, both private equity firms, put up $6.6 billion to buy Toys ‘R’ Us. But they only needed to front 20 percent of that, borrowing the rest. Once they had control of the company, Toys ‘R’ Us was then responsible for paying off the rest of that massive loan. While the company remained profitable, it never became profitable enough to get out from under that tremendous debt burden. The company was paying $425 million to $517 million each year in interest alone, while suffering the same stagnation other brick-and-mortar businesses faced in an era of rising online shopping and shrinking middle class incomes. Had Vornado, KKR, and Bain Capital never come into the picture, the company might still be around today. Instead, Toys ‘R’ Us filed for bankruptcy in 2017, and in early 2018 it abruptly announced that all 900 of its U.S. and U.K. locations were shutting down or being sold, meaning more than 30,000 people were out of a job—with essentially no warning.

But Vornado, KKR and Bain didn’t walk away empty handed, according to Giovanna De La Rosa, a former Toys ‘R’ Us employee, who was testifying Tuesday. “My coworkers and I were left with nothing,” she told the legislators, “while Toys ‘R’ Us paid $470 million in fees to private equity owners. That’d be enough to pay over $14,000 in severance to each employee who lost their job.”

Even when private equity doesn’t choose to completely shut down a company, they can run the business and its employees into the ground. The Denver Post is an example of this: in 2010 the paper was acquired by Digital First Media, which is owned by Alden Global Capital. At the time, the Post had 200 employees and, unusual in an era of online news, was actually turning a profit. Despite that positive financial picture, Alden laid off staff to squeeze out more money, and by 2018 there were only 50 full-time employees still at the paper. The editorial board responded with a searing editorial, writing, “Denver deserves a newspaper owner who supports its newsroom. If Alden isn’t willing to do good journalism here, it should sell the Post to owners who will.” A day later, Alden fired another 30 people.

At Tuesday’s congressional hearings, representatives Nydia Velazquez and Alexandria Ocasio-Cortez used their time to show how disruptive these practices actually are.

This is naked capitalism, red in tooth and claw, richly feeding on the carcasses of its kills.

Comments

  1. Marshall says

    I don’t really know anything about this, but why would Toys ‘R’ Us agree to being purchased? Was it not obvious what was going to happen?

  2. Mano Singham says

    Marshall @#1,

    I too am not too familiar with these takeovers but as I understand it, there are at least two kinds. One is a friendly takeover with the cooperation of the company being taken over.The other is a hostile takeover done in the teeth of opposition. I think this is done by offering to buy the shares at a price that makes it attractive to the shareholders to sell to them in order to get a controlling interest. They buy the shares by borrowing the money and then ‘asset strip’ or otherwise extract money from the company to pay off the debt.

    To avoid a hostile takeover, the targeted company sometimes looks for a ‘white knight’, another company that they prefer to merge with or be taken over by.

    But as I said, that is just my rough understanding if how things work.

  3. readysf says

    Venture capital is NOT the same as private equity. Private equity firms connive with investment banks to load debt on companies and screw them. Venture capitalists invest in risky startup companies money to grow bigger, and often lose.

  4. lorn says

    I watched as a company I worked for was disassembled. The company was purchased and the machinery was sold, and leased back (none of it moved an inch) to the company. It all was now under a lucrative service contract I spit coffee out my nose when I found out what they were paying for a guy to come out once a week, to ‘adjust the gibs’, and squirt a little oil. Costs were well over local market rates. The land and buildings were purchased by nominally different entities and leased back to the company at a rate that usually involves a gun.

    A bit more than a year later they filed for bankruptcy. Obligations to employees not in the executive suite were always last on the list. Insurance payments were lost and “covered” treatments were billed directly to employees. Plump employee benefit funds were “lost” but then “found” considerably lighter than anticipated. Something about ‘the cost of recovery’ or something. I never understood it. By then everyone was so punch drunk, disappointed and fed up it barely registered.

    Labor got fucked, hard. It felt like a classic ‘bust out’ from The Sopranos. But it was, as the saying goes (the line is best delivered in the classic Fog-horn-leg-horn southern accent) “All perfectly legal”.

  5. Jenora Feuer says

    @Marshall, Mano:
    Yes, the big reason companies ‘agree to being purchased’ is that, often, it isn’t the company executive that agree, it’s the shareholders and the board of directors. If the buyers offer enough of a payout to the shareholders, they will often act against the company’s interest because their shares will just get shifted to shares of the buying company.

    And often the shareholders are actively in on it. Look up Carl Icahn as one of the more infamous examples. A tactic he’s used a lot is to buy up company shares, lean on other shareholders to give him their proxies for a vote, and then announce to the board that his company (or some other company he likes because they have a lot of money) is willing to buy them and he backs this and is willing to start a fight to make the deal go through so he’ll get paid off. He first came to my attention when he tried to force Yahoo to sell itself off to Microsoft, but that wasn’t his first or last attempt at similar tricks.

    This sort of thing is one of the reasons some companies opt not to go public at all… because when you do, your company is now owned by the shareholders, and unless you make sure you can assert control over the shares, the company isn’t yours anymore.