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.
@AOC: "I wasn’t sent here to safeguard & protect profit. I was sent here to safeguard & protect people.
— AFR (@RealBankReform) November 19, 2019
This is naked capitalism, red in tooth and claw, richly feeding on the carcasses of its kills.