Payless sounds so much like what PE did to Sears.
The results seem pretty similar too.
Maybe PE actually is just a really easy business, where when things actually are tough, they get things very, very wrong?
That would explain why the PE guys make so much! Is Schwarzman still, as head of a public Blackstone, making around a billion a year? Fair. Am I jealous? Yes (I will say he's done some amazing stuff for decades. Others? I'm not so sure. Actually I am sure.)
18
When you add leveraged buyout firms sucking the cash out of companies to American consumers destroying jobs on Main Street by shopping exclusively at mass discounters like Walmart, and then destroying our manufacturing base by demanding even cheaper goods from them, you have a pretty good idea of why there are no middle class jobs in much of our country.
55
The article keeps circling around a central truth: financiers can be stupid. Both of the World Cup blunders mentioned here could have been avoided if the financiers had listened to people who knew what they were doing. And, of course, the most well-known example in the US of an idiot is Donald Trump, a former financier.
49
The nationwide and indeed global destruction and suffering inflicted by private equity is yet another manifestation of the disastrous worship of the MBA degree, an idolatry which commenced, most fittingly, during Reagan's presidency. For stripped of all stuffed-shirt arrogance and jargon, what is the bottom line that MBAs are taught? That ethics are for suckers, that being concerned for the well-being of anyone besides themselves is unprofessional, that all that matters is that the MBAs make gargantuan amounts of money, and that everything and everyone else can go to hell.
96
Mr. Irwin did an excellent, and fair, job of talking about the pros and cons of private equity. But, why did he choose a fragile low-end mall discount shoe shop like Payless as an example?
What of Sears and Toys R Us? Two iconic American retail brands that were run to the ground by investment fund owners who were so arrogant they did not even know what they didn't know -- but continued to ruin the businesses over many years.
Anyone who has shopped at either of those chains in recent years can attest to the utter mismanagement, and the squalid condition of the stores themselves, while the owners exacted huge payments for themselves.
Another abuse Irwin does not mention: evading financial responsibility to creditors (including employees, and landlords.) A private equity company can suck all the cash out of a retailer, leaving the entity unable to meet its obligations, while owners keep all their ill-gotten gains.
There's no provision for clawbacks even when the mismanagement and self-dealing is obvious.
142
"more dynamic" is code for bad managing practices and other bad for the American people behaviors by greedy amoral avarice driven people.
21
Payless is just the tip of the iceberg. This story is true of about half of corporate america. Just wait until interest rates go up - then we’ll all see who’s been swimming naked.
41
We categorize these companies as “Hedge Funds” or “Private Equity Firms” when in fact the are really “Capital Extraction Firms” that are willing to sacrifice all sense of ethics and social responsibility for the sake of the all mighty dollar and the power that it brings. They produce nothing of value relevant to anyone but themselves.
American Exceptionalism today is exemplified by our ability to monetize every segment of society, with no regard for the impact on the rest of the country! Sad!!!
73
I love the Upshot. David Leonhardt's earlier columns and then his editorial leadership has made the NYT a "go to" source for making the workings of the economy understandable to the rest of us. Neil Irwin has proved a worthy successor to this fantastic public interest initiative. Thank you.
25
The buyout artists in the 1980s said they were there to break things up. Looks like they succeeded beyond their wildest dreams.
27
One constant in these bankruptcy stories is large loans, taken on not by the buyer but by the target and the payment of substantial fees to the buyer for services rendered. Add in special dividends and haphazard “updates” to the physical plant, policies and procedures, and technologies and such a collapse is virtually inevitable.
41
The key issue how they define "efficient". On paper and accounting ledgers, things may seem that way but companies can be deeply dysfunctional. This means that the profits are there but the process in UNSUSTAINABLE. The employees are the ones that suffer.
Any business study that only studies how a company improves over 2 years indicates academic myopia. No study shorter than 5 years in the real world will tell you anything worthwhile.
So there you have it: academics mixing with corruption to create the economy we have today.
24
In general, securities counsel, investment bankers, accountants, etcetera, operate in a moral void, without malice but without empathy. Their assumption about the future of most transactions is summed up in this acronym:
"IBG-YBG," or "I'll be gone, you'll be gone."
Unlike corporate managers, these people can work their wiles, and be long gone when it comes time to pick up the pieces of shattered careers and ruined lives.
The problem is the centralization of power. The progressive impulse is not any better, because it centralizes power in elaborate regulation by labyrinthine agencies. However well-intentioned regulators may be to start, they become just as concerned with fiefdom as anyone in the private sector, but unconstrained by the spector of bankruptcy, and thus wholly unaccountable and unremovable.
Viigorous enforcement of anti-trust laws, simple but inflexible capital requirements of ALL lenders, likewise usury limits that not only protect borrowers but also constrain lenders in making risky loans would help. But simple laws do not make for regulatory jobs and do not hide the real intent of the regulated. That creates an unholy alliance between the them to keep regulation as complex as possible to obscure the real motives of both. Thus, they lobby intensely for their joint interests in highly faux-technical terms while the rest of us just try to get through our day.
The answers are simple. Turning them into public policy is not. I wish I knew how!
25
Companies should not be owned by private equity or hedge funds. Period.
26
"For every dollar that came in the door of the company in that span, it paid out $1.41 to its owners and 38 cents to its lenders." This sums up the real end game. Loot the assets and leave the empty carcass for the next buyer. There was no interest in selling shoes. That the new CEO came from Sears was a clear indication of where things were headed. Private equity is not investing to create value, they are keeping these companies just viable enough so they have time to cash out their assets You cannot build an economy on financial engineering. There is nothing being created of long term value.
71
My I-Watch just binged with a news flash. Seems that the drugstore mergers of CVS, Walgreens etc are now cutting staff to maximize profits. Sound familiar? Only problem is that already it is leading to more prescription errors. Just what we need as medical costs soar and a pandemic is threatened!
35
This is really simple. I worked as an operating manager of a division of a small manufacturing business in the late 1980's. The unit was a piece of an LBO engineered ( word used on purpose) several years earlier. Here is what I know: You can't kill something twice. The company has already been clinically dead. Or, it is kept alive artificially for the benefit of the new owners. It would be much better if we merely saw the business be acquired by a competitor or be liquidated. We use the accounting magic of debt to pretend that the business is viable. That is consistent with the entry of the Reagan era and rules our entire society to this day. Borrowed money at this scale only means that the day or reckoning will be massively disruptive, taking down more than the central culprits. The successful grave dancers are just better connected grifters than the rest of us. They add no value and they surely are not acting in the best interests of all stakeholders.
30
I found that Payless shoes were very low quality and didn't last long. Maybe that's one reason they went out of business?
5
What do you expect for $17? That was their market niche.
14
@Frances Grimble Walmart and Target have sold shoes in that price range and they're still around. But yes, they haven't had venture capital firms sucking cash out of them.
13
PE Buried Payless and a lot of really good private and local businesses all over, too. It seems to me the reason there is so much more private equity is the completely rigged tax system. The national debt is astronomical yet private equity is incentivized to pocket the cash and bank the losses for tax deductions in the future. They kill the goose to get the golden eggs and the government gives them the hatchet.
24
"Meanwhile, the company made huge payments to its private equity owners." What else do you need to know?
51
Now that it's simply too obvious to ignore, it is fascinating to watch the parade of "experts" grudgingly recognize and acknowledge, one after another, that the form of Capitalism practiced in this country for the past forty years was and is fundamentally and fatally flawed.
Most people in the real world have known this for decades, of course, but the groupthink of academics and journalists was so powerful that I sometimes think they actually believed the world worked like those silly Economics textbooks and MBA programs said it did.
Now that Capitalism is facing an existential threat there seems to be, finally, an acknowledgement that radical changes are urgently required.
Unfortunately, reforming Capitalism must now be executed in the context of the acceleration of the Artificial Intelligence and Digital Revolutions, which increases the complexity of doing so by an order of magnitude, if not two.
It's hard to see at this point how cleaning up the mess left behind by decades of reckless, unadulterated-greed-driven, Shareholder Capitalism doesn't involve violent unrest.
18
Hedge fund managers and the rest don’t buy companies to make them succeed. They buy them to strip the cash and load up the debt. They and the complicit bankers take their big fees upfront and then they play around and until the company crashes..they sell of real estate, if available, any good cash flow stores that are left and then go away leaving workers and communities stop of jobs and services. The debt scheme is, in my opinion, bank fraud and it’s time some prosecutions were had and some jail time given out.
36
They called them "corporate raiders" for good reason. Still applies.
18
"taking the money out" is what every leveraged buy out is about.
In many countries they're illegal. Because they destroy businesses.
Companies that lasted 100+ years--that weathered the Depression and 2 world wars--have been destroyed in under a decade by leveraged buy outs.
They are about making the "investors" rich. Or richer. That's it.
39
Private Equity = Creative Destruction. No value is added to society.
15
Knowing how to cut a cigar and which watch to add to your collection does not a savvy business man make. These guys don't build businesses, they milk them.
13
In this gimmick driven buyout the company is distracted as the cash is hauled out. Look no further than Sears.
13
I was astonished to see Bernie Sanders’ popularity surging.
After reading this, I am a lot less surprised.
14
@Ginger M. Bernie Sanders has no answers for this. Sucking more money into govt coffers isn't going to undo any of these parasitic leveraged buyouts.
1
I think the old fashioned phrase is, “a going concern”. Finance guys are more interested in how much loot they can strip mine out of a company, rather than how can a company make more money by doing a better job?
10
"Meanwhile, the company made huge payments to its private equity owners."
There you have it. The new private equity owners are there to "help"...in the same fashion as the vampire.
19
Worked there for over 3 decades. The company was run by dedicated and knowledgeable executives who understood retailing. The company was a blast to work for during it's heyday. Then we were spun off by May Department (MDSC). Weak and greedy top management resulted and the stage was set for the Vulture Capitalists. Really a shame. The company had excellent associates and had the capability to turn things around. They just needed to be pointed in the right direction and turned loose. Too many new senior executives were hired who preferred smoke over actual fire resulted in complete paralysis. Many companies in the Topeka and Kansas City area reaped a bonanza when they hired the terminated associates. These associates are making a major contribution to their new companies today so not at all was lost when the VCs took over.
25
There is certainly no "triple bottom line" accounting for PE parasites. Until the measurement for success includes the personal/social decimation to employees, their families, their commumities and the environment, PE operators' "success" is fake news. Their relentless attacks on the social safety net needed to save their victims from financial collapse is their final contribution to the destruction of our society. Warren and Sanders are the only candidates who grasp this and have solutions.
18
@suedtos completely agree
4
Leveraged Buyouts/Private Equity = Creative Destruction. Supposedly when a Leveraged Buyout was explained to Mitt Romney, he replied "That's nuts". He then went onto make himself wealthy doing them. When he was asked to explain how he made his money at Bain, he basically lied about what he did. PE is America's dirty little secret. The only people who win are the PE players. The company, employees and product produced all suffer. I see PE destroying many small to mid size companies here in Connecticut. These are the companies that supply the big defense contractors.
17
I’m impressed financial article is finally able to suggest a company performed poorly simply because senior management didn’t know what they were doing. Too many articles allow management to duck responsibility. It would be interesting to do research on the impact on share price as a result of incompetence at the senior level
16
Biologically, as i understand it, private equity & hedge funds and mobsters function as parasites. Parasites live off of the hard work and liveblood and vitality of the host. There is an extraordinary variety of parasites in the biological world which means we all evolved to live together. A smart parasite doesn't kill its host, it just lives off them. Our laws need to learn from biology, and evolve so that the parasites are kept in check, to allow the hosts to live, for a sustainable financial ecosystem.
6
When PE loads up a business with debt then crashes the whole thing, we call it bankruptcy. The courts become involved and some participants walk away with filled pockets. When the mob does the same thing, it’s called a “bust out”, felony charges can result and if it makes it to court, people can do time. As the song says, steal with a gun and they call you a robber but steal with a pen and they call you a banker.
22
I’d like a comment from anyone in a position to know, if these maneuvers sealed the fate of Baby’s R Us and AC MOORE. Were they also led into failure by predatory means?
6
Yes! And Hostess, Circuit City and a laundry list of others.
9
"In the 1980s, the first generation of leveraged buyout kings — an industry now known as Vulture Capitalists — identified problems with American corporations."
Fixed!
...then they loaded up the old company with debt, kept the borrowed money, declared bankruptcy and also took the pension funds as employees were let go...
16
Capitalism run amok, wow in the first 2 years the firm pulls 352 million out to investors. Who are you kidding, that’s was the plan. The private equity game is that , leverage! Take as much out as fast as possible and invest else where, leaving the bones and employees on the hook. Sear’s is another’s example.
Ask yourself who owns stock, the working class or the 2%
17
Another example of retailer bankruptcy abuse that is NOT private equity related is Mattress Firm, the shoddy bed retailer that became infamous for opening so many excess stores, some were actually across the street from each other!
When the thing blew up, the firm was able to declare bankruptcy and foist the losses on the landlords. The prevailing theory was this reckless expansion was an effort to drive other mattress stores out of business, but there was massive financial fraud going on at the same time by executives seeking to enhance their bonuses from the South African based holding company, Steinhoff.
11
260 Daily papers and USA Today-Gannett/ Gatehouse are foreign owned private equity owned papers. New Media Investment Group is owned by Softbank Group, a Japanese conglomerate founded by Masayoshi Son. They will sell and run an industry PR campaign. The business is gut the newsroom, advance authoritarianism.
10
I find it mind boggling that after setting forth data supporting the idea that PE has helped companies outperform productivity benchmarks of the rest of corporate America in general, that a cherry picked example of where it did not becomes "QED" the proof that PE does not. In order to come close to proving his point the author would need to show that *any* PE ownership of Payless would have similarly driven the company to insolvency. Instead he found a company run by an inept PE manager and extrapolates that to say "this is what PE does." Not even close to agreeing with him, and annoyed at the bias permitted in the article.
6
finance driven capitalism is next to the worst of the worst form of capitalism. It is simply the power of wealth to manipulate others to generate more wealth for the wealthy. Did the vulture capitalists lose money when Payless failed? No, they took their money up front. That is the essential fraud. This is not investment and restructuring for long term growth or even short term growth. It's simply financial rape softened by rhetoric.
The problem of complacent management is real. The solution is not even less committed "management". The actual best solution is the engagement of all stakeholders. A far too complex concept for the greedy brains of finance.
14
I’m not saying PE didn’t play a huge part in the demise of Payless. Let’s not forget the shoes were made so cheaply and fell apart after a few wears. And the Amazon effect.
2
The purpose is not to build or support growth but to extract cash and put deals on the table. What's missing from this article? The actual names and faces of those who "sat around the table" and put the Payless deal together. The name "payless" in this instance was fortuitous.
7
" ... the money men ... overruled the midlevel supply managers ... " Sounds like Mr. Trump and his minions overruling and even firing long term civil servants, e.g. Ukraine Ambassador Marie Yovanovitch. And like other comments here, this is also in the interest of self enrichment.
8
Parasites.
5
Private equity = asset strippers of the 1970s. Buy, leverage, cut costs and people, get the management fee upfront and then leave a husk behind.
Succubi
10
They sucked these companies dry, duh!!
1
I've been a part of one of these. You know it's time to leave when it happens. The buying people don't have any expertise and just want to milk and turn the screws on customers. Sure you could argue that well, this is a business that had problems, right? But this "2.0" is usually not the answer.
8
Didn’t know that Dunkin Donuts was taken over by private equity in 2006 but I do remember that its coffee started to taste awful starting from around that time and continues to today. Private equity has sucked so much joy out of my life and thousands of others just to enrich the lives of an undeserving few. It’s instructive to think of it that way.
11
I have limited experience in PE companies as a finance/accounting professional - only two companies. Much smaller than Payless - millions, not billions - but the formula was the same. Reduce the staff, cut the pay (= turnover = bottom of the barrel replacements), get quick hit benefits to maximize short term gain. The very top were well compensated, even when it was all crumbling down. Screw the rest of the workforce, though. As a contract accountant I made good money coming in to help fix these train wrecks but I don't do that work anymore - too depressing to see how companies are destroyed by bad PE.
23
This article is spot on and underscores the arrogance and failure of the finance and consulting industries.... ‘we know better and we’re bringing in the best and smartest talent’ — MBAs from elite schools who only look at spreadsheets and can relate to their small worlds without any real life understanding of the customer and employee. Or how the real world really plays out. Nevertheless, they don’t care about the long term because they leverage the crap out of these companies, stealing as much money from them as soon as possible, and stripping any potential for them to succeed.
14
Retail such as Payless is small time looting by PE. A recent focus of PE is on health care, buying up hospitals, physicians practices and resourcing agencies, pharmacies and urgent care facilities. Who pays for this, we do, escalating our health care costs, another route of transfer of wealth from the middle class to the billionaire class. Unfortunately private equity and hedge funds own both the Democrats and Republican leadership. Look no farther then Sen Schumer. There are only two Democrats in the primaries who are addressing reining in PE and hedge funds, Warren and Sanders, while there are many Wall Street "Democrats" who are working to stop either one of them from attaining the nomination.
17
If the owners don't understand retail, they will fail at retail. What's wrong with that? Seems like the right outcome to me.
One irony of this story is that Payless first succeeded as a retail disrupter - a self service shoe store, something that had never been done before. Now the market has moved further in that direction - on line self service. Maybe that's the new Payless and the brick-and-mortar stores need to UP the service for those who want it as their niche.
2
My last 2 FT jobs were in "Online retail". I helped them automate almost every aspect of their business'. Order fulfillment, stock replenishment, shipping, reporting...everything. Yet when it came time to adjust my salary or "share the profits", I was stonewalled. This is where there is a very real "disconnect" between valuing and rewarding certain skill sets and why there are great numbers of workers still on the sidelines in this job market. I could probably find a job in New Jersey, where all the warehouses are positioned to be in convenient delivery distance to NYC, but that would require a 2 hr commute and daily $25 in tolls. No thanks...too much risk.
17
The wisdom of the existing workers is always ignored by the 'know it all' financial wizards who think they can actually run or manage anything outside of their digital dream world.
There's a huge disconnect between those who conceptualize and provide financial models and those who can actually run things and produce financial results.
The success of the 'worker to owner' movement is that it is proving there is an alternative to the private equity perversion of our economy.
21
@Concerned Capital
In a management textbook I read years ago, there was an anecdote where the janitor in a plant kept trying to report trouble with a machine, and was ignored by management. Eventually the machine broke down, and had to be replaced at the cost of thousands of dollars when the outlay of a few dollars on preventive maintenance could have fixed the problem. Moral of the story: manages should listen to people who know what they are talking about.
6
The wisdom of the existing workers is always ignored by the 'know it all' financial wizards who think they can actually run or manage anything outside of their digital dream world.
There's a huge disconnect between those who conceptualize and provide financial models and those who can actually run things and produce financial results.
The success of the 'worker to owner' movement is that it is proving there is an alternative to the private equity perversion of our economy.
5
The wisdom of the existing workers is always ignored by the 'know it all' financial wizards who think they can actually run or manage anything outside of their digital dream world.
There's a huge disconnect between those who conceptualize and provide financial models and those who can actually run things and produce financial results.
The success of the 'worker to owner' movement is that it is proving there is an alternative to the private equity perversion of our economy.
3
I think the intention of the investors matters most. And the comparison in this article between Payless and Dunkin Donuts demonstrates at least one piece of the puzzle. Dunkin Donuts can't be digitized out of business. Its only choice is an actual store. And investors looking to "sell off the parts" would be selling coffee beans, sugar and flour. Maybe some baking tins. By comparison, Payless was in competition with online retailers. But it is clear to me that the real problem is people who are in it for the quick buck, who see it as an investment, and even the idea of the growth incentive the reporter references is part of the problem. Buy up a company, invest some but then try to make that money back and more, not to help the company thrive but to see a good return on the investment. And if that means closing stores, firing people, and ultimately, selling off the company for parts, that's considered a success if the investors make money. But for it to be a success in the wider world, in a way that helps the community and builds a sustainable business, that means the success of the company, not the investors, needs to be the main goal. In that case, a wise investor new to the business would listen to the managers and the workers to learn what works best instead of just jumping in and changing everything. Then they'd work together to make the business stronger. And maybe see growth in the long run, and maybe even some joy.
38
This oversimplifies things, but not by too much: Financial engineers (a.k.a. hedge funds, private equity firms, etc.) kill companies by stripping them of cash.
Companies don’t go out of business because they lack profit, but because they run out of cash. Dividend payments, fees and loan repayments, etc to the firm’s owners (financial engineers) are invariably made in cash, though the transactions giving rise to the cash payments are usually for ‘consulting, management fees, arrangement fees, etc, etc.
66
Here's another term for it: The Vulture Economy. Or maybe The Vampire Economy.
6
This article and others like it reveal the myth of American Business: that CEO's, Wall Street Bankers and Private Equity Managers are the driving force of success. These (mostly) guys display an air of superiority - that behind their expensive suits lies a superior mind that really understands all the ins-n-outs of financial wheeling and dealing. They really believe that they are the KEY cog to any successful business/corporation and DESERVE their rich rewards.
Almost every single study on this topic shows that these Titans of Industry are NOT as significant to their companies success as they would have us believe. One study from the Harvard Business Review said that the while good management does matter, the most significant element in CEO success was, "luck." That for the most part, they were simply in the right place (industry), at the right time. Perhaps they avoided the down-turn and crash that swallowed up others.
Steven Mnuchin might best fit this description - yet, from their own statements it is obvious that he and his wife think of themselves deserve to belong in the 1% due to their innate abilities and smarts. Sorry, but when you look at the numbers, "it just ain't so." Any chance that they will find humility and give some of their money back?
46
@Eric Sir, I am a private equity manager, I proudly wear a cheap suit, and if you ask any of the CEO's or managers of the companies I work with, they would tell you that I am a trusted confidant and business partner who helps them grow their business while creating wealth and career opportunities for their employees. Most of my private equity brethren would say the same. Just because you cite some cherry picked studies or you watched the movie Wall Street doesn't give you authority to paint all private equity managers as Gordon Gecko.
14
Eric I don’t have to watch movies to know what Fund managers do to going concerns. They crash them.
5
While what Daniel says may be true for himself, there is plenty of contrary evidence he may want to consider before generally labelling VC’s the good guys in our increasingly unequal society. Read the article that these comments are addressing or a book called Glass House by Brian Alexander. For that matter, look at how VC Eddie Lampert (Mnuchin’s roommate at Yale) ran a proud American icon, Sears, into the ground while somehow extracting many millions for himself. The financiers have done many horrible things to the American economy and working class (e.g., 2008) and need some serious regulation (e.g., Glass-Steagall) unless the Daniels of the world want to be replaced by socialism.
20
Where is the history of the growth of our country that gives proper credit to the giants: Henry Ford, Walter Chrysler, Frank Lloyd Wright, Frederick Lewis Maytag, and myriad more, jumping ahead to include Steve Wozniak and engineers and inventors of today. Our national growth heritage is based on inventors and engineers and doers/dreamers. UNTIL: the introduction of economists, of economic analysts, of pretenders to reign the bottom line. And that's been our goal in these last fifty plus years. Enhancing a peculiar, particular, bottom line.
28
Great article.
Hedge funds & private equity will always take a guaranteed dollar today over a dollar fifty in a couple of years time. The entire culture is macho, short-term, bonus driven money making, at any cost. The timelines are measured in months and quarters, rather than years.
Get in, remove as much cash as possible whilst trying to improve the project at the same time, then cash out. In many cases, the cash taken out produces more profit than investing for the future
This short-termism is worse in the US than anywhere else. It increases the wealth of the very rich, at the cost of the lower working class.
It's a tragedy.
121
“In hindsight, maybe we shouldn’t have raided the company like pirates and taken our payout before we delivered the goods.” Oh, really? Like it is only obvious in hindsight? Delivering value first and then reaping the rewards is called good management or standard business practice, at least before the 21st century.
69
"As in any corporate failure, there is no one cause. Over seven years, Payless went through a wringer of private equity and hedge fund stewardship that left it with inadequate technology, run-down stores and no financial cushion to survive an era of upheaval in retail."
Look closer, they stripped it of anything that had any value and might have kept it afloat.
finance capitalism is about theft and taking and otherwise harming to make money. They produce nothing and take as much as is possible in any way possible then dump it and run away with the money. All of this used to be illegal.
54
Private equity always does the same thing in retail (I.e., see Toys R Us): take over a store with lots of storefront that’s been in business for a long while, a couple decades, but is doing not so hot, then buy it, sell stocks to unsuspecting dupes to earn money, then do a reverse mortgage on all the property and equity, pocket it, and file for bankruptcy. Disappear with half the cash to Caribbean on mega-yacht and other half to repeat the process.
67
Why do I feel like the people who defend PE are the same people who sold us trickle-down economics, and the idea that "banks will regulate themselves"?
139
Who exactly said that "finance-driven capitalism was supposed to make the economy more dynamic"? Bankers and Wall st investors? Centrist and conservative politicians (like Joe Biden) who left laws that allowed it? It seems obvious that it is a set up for greed and destruction via extraction of wealth from companies.
40
What's especially weird is that they put their bloodsucking kings, Trump and Mnuchin, who destroyed everything they touched, in office. Ditto Murphy, who worked for Goldman Sachs, another looting, bloodsucking company. It's funny that the rest of the country sneers - rightfully - at the "coastal elites," then they vote for the worst of them.
6
Check out the excellent book, Glass House. Same sad story, different industry.
20
@HCM
Another good read is "The Buyout of America" by Josh Kosman.
Comments by Ralph Nader are included on the dust jacket: "Just how do those giant private equity boys get away with taking over companies, strip-mining their equity, squeezing out many workers, often ending in bankruptcy, yet still jump ship, pay very few taxes, and stay out of jail? The answers are in Josh Kosman's book..."
Thank you for your kind attention.
6
From one commentor: "Private equity buys a company for one purpose and one purpose only. To strip it of its most valuable assets and load it up with debt in order to pay the equity partners huge "management" fees."
Do any of the commentors here understand private equity or investing at all?
Yes - there are some spectacular failures. It is a small fraction of PE-backed companies that fail. And every PE firm is hoping their investments grow, like Dunkin or Hilton.
Constellation Brands bought Ballast Point Brewing for $1B and sold it 4 yrs later for 10%-20% of what they paid. Companies make mistakes, investors make mistakes. That doesn't mean they are "evil" or trying to bankrupt a company.
Just because you watch Michael Douglas in Wall Street doesn't mean you know what you are talking about.
12
You know what? Private Equity has its place. If it is a matter of asking for help to renegotiate lending or vendor agreements or supply chain arrangements or e commerce solutions thats great. However, I wouldn’t ask a banker how to operate my auto plant. I would find proven leadership in my industry to do that.
So the price that I am paying the PE firm for their expertise (financial) is outsized. The promise to run day to day operations is only to justify their bloated fee. They are financiers not business operators and that can destroy a business very quickly.
24
Rich financiers, bankers, hedge fund manager, have basically run this country into the ground, looted it, stolen our homes, etc. There should be a violent revolution to overthrow these people, but Americans are too weak and stupid, actually vote for their enemies, then take opioids when they can't handle the pain of unemployment and poverty.
5
how many other companies were destroyed this way?
Sears?
Sports Authority?
can't remember the rest right now. its a bunch.
47
@East Coast, keep an eye on Fairway supermarkets.
4
"... labor productivity — the revenue generated per employee — rose by 7.5 percent more than at otherwise comparable firms that were not acquired ..."
I have seen how they "achieve" it: They cut workforce; overwork the rest; and stop training new employees.
End result: The overworked people end up with broken families and sick (medicare pays); the new people are trained only in the traditionally managed companies.
These costs are "externalities" to them. Like pollution
66
One thing for sure, some top exec(s) skimmed a boatload of cash, and left employees and small creditors swinging in the wind.
58
"When a nation’s savings are channeled toward worthwhile projects, and effective managers are put in charge of large companies, good things tend to result. When resources are devoted to boondoggles, and companies are run by incompetent cronies, everyone ends up poorer."
Certainly seems like the exact same point translates especially to the current Trump administration:
If our tax money was spent toward worthwhile projects, if effective managers were in charge, good things were more likely to happen.
Unfortunately resources are devoted to boondoggles and government is run by incompetent cronies, with everyone ending up poorer with the exception of the cronies!
30
Because the mission of investment capital is to make money for the investors in as few financial quarters as possible. The easiest way is to wring equity out of the company you purchased, until all that is left is a desiccated husk. Ask anyone who has worked anywhere that has been bought by these vultures.
31
I wish the writer would have gone into whether the private equity owners were made whole on their investment when dividends and such were figured in.
If the lost money, how much? If they came out on the plus side, by how much?
10
While you would think that they at least wish to come out even, they often take an investment loss on paper while reaping multiples of that as income from the debt that crushed the company.
6
And let's not forget that most of these PE firms are legally "headquartered" in places like the Cayman Islands or Vanuatu, so that between perpetual trusts, double dutch sandwiches, and shell companies layered on top of one another, they pay not a penny in tax to any government.
40
North Dakota, Arizona and Delaware (isn’t there a resident running for office somewhere?) are proud to be in that rarified club too.
2
You think this is bad, this is just about shoes.
Private equity is buying physician practices throughout the country. These are where the surprise bills are coming from. This will end badly for patients and our healthcare system.
111
@T K yes someone could write a whole book on what private equity is doing to dentistry.
7
Payless died because they started to sell shoes that fell apart one block away from the store. They once sold good shoes that would last about a year, enough for working folk. Management wanted to turn a stolid trusted business into something it was never meant to be. In recent years predators have bought companies to gut them for profit and everyone ends up losing.
15
"The new owners found a new C.E.O. in W. Paul Jones, a veteran of two retailers owned by financial engineers: Sears under the hedge fund manager Eddie Lampert and Shopko under the private equity firm Sun Capital Partners" ... both kaput.
27
As a former victim of equity ownership I can say that the 2 causes are greed and incompetence
on the part of the equity firms, Companies are acquired by number people; some of whom have some veneer of background in the sector they buy into (some not( and then they big foot their way into a business. They strip its assets; usually the people who built the business and then start in on the grand plans they have ;most of which are sorely misguided in contrast to reality or the actual history of the business.
Once you realize that you are merely the couch in a home, being staged for the next sale, you have the epiphany that you have been placed into a scenario that the company you have tried to build is about to be pushed off a cliff.
23
Wait...this is the 1980’s all over again. Nothing ever changes. PE is just another veil of failed corporate strategies left and right, and how to monetize whatever is leftover.
18
1980s? It's a thousand times worse than the 1980s.
5
And all these hedge fund managers, who are telling the companies how to run their businesses just as the leaders of any non-fund-managed business tells their subordinates, somehow are taxed under carried-interest rules because there's this strange construct that states these managers are somehow not actually running businesses the way corporate leaders do.
It's a double-whammy scam!
21
There's no real management genius on display here. Much of so-called "private equity" is just an asset strip by greedy, ignorant stuffed-shirts; all while bleeding the company for cash. Those mythical "productivity gains" come because of layoffs, followed by higher workload for the remainers...Until they just burn out. The new management team usually stiffs suppliers and landlords, breaking old contracts via thuggish threats of "take our business elsewhere."
.
This passage from the article says it all... "In the two-year period ending in January 2015, Payless generated $249 million in “Ebitda,” a common metric for operating profits; paid $352 million in one-time dividends to shareholders; and made $94 million in interest payments. For every dollar that came in the door of the company in that span, it paid out $1.41 to its owners and 38 cents to its lenders. "
.
What was with the "one-time dividend"? Essentially, it was legal embezzlement of company money. Buncha thieves were running the outfit...
46
I’ve never understood why PE transactions are permitted to load the debt that finances the purchase onto the target rather than onto the buyer. Further, don’t accounting rules prohibit the absurd payouts from those borrowed funds?
6
“What if they dont know what there doing?” Oh, they know.
18
A more apt title for this article is: “Private Equity, like hundreds of other businesses, fails to outrun the global decline of brick and mortar retail stores”
Everyone wants a villain. When was the last time you purchased shoes online?
4
Private equity is the devil's work.
And, it's all done by white frat boys from families of privilege who are looking to get richer by stripping down what others have built and distributing the proceeds to themselves. (Trust me, I worked at a law firm that serviced these animals.)
58
Never actually. Buying shoes on line is like having sex on line - no substitute for the real feel.
2
Private equity wants to raise prices on everything. They don't care about anything else. Closing stores reduces competition. They have millions of ways to reduce competition and then raise prices.
13
It’s been about a decade since I’ve read a similar summary of Private Equity. I guess it’s time again to review. It’s likely most acquisitions are done with honest intent to improve the business. The thing is, this form of economic machinery has figured out how to make money whether or not they are successful at improving the business. That’s the problem...
18
Same as Sears.
These companies have definitely not managed to embrace changes in consumer buying, but they did not really deserve to die.
I look at the print ads and websites and sigh. These companies could be doing so much better. They simply need to change - and that is hard and it's too late for Sears and Payless and others.
9
Tax laws have to change to make vulture capitalism less attractive.
36
There is plenty of blame to be born by the new ‘management’, as financial managers either have no clue about the business, or squeeze every penny out of it before it’s driven to the ground. American capitalism at its worst, but you won’t find anyone at Wall Street calling to end this practice.
That said, as someone who once tried to shop there, the shoes were just awful, perhaps to be worn once or twice at most, if they were comfortable at all, and couldn’t possibly compete with other stores selling discounted, but better quality shoes. It was already a dying business.
11
The board chose a man with a deep voice and a strong chin, obviously a decisive leader. Passion for shoes and an artist's eye for inspired design are no part of the job!
15
Private equity will be the death of capitalism if real business people don't lead a revolt to change the laws.
27
Key quote: "Meanwhile, the company made huge payments to its private equity owners."
The terms for this are "asset stripping", "value destruction", "theft", and "corrupt behavior".
This is what is wrong with our economy. Those who work to produce a good product at a fair price with a dedicated and motivated workforce have no chance whatsoever against a well-lawyered group of private equity thieves who buys them up and destroys them.
This is also why most of the income and equity gain in the country goes to the top tiny fraction of the population. They have now purchased our government and have used it to cut their expenses (income and business taxes), and are seeking to further cut these expenses.
This article describes a particularly destructive form of theft, but in an "oh, so both sides" way. This is legalized blackmail and theft.
68
It's like allowing termites to eat your house.
9
These “Companies” make their money by borrowing money to “buy” a company that is supposedly in trouble. All the debt goes to the company they “bought,” 'not the company that “bought” it. Their “fees” are taken out of the loans to “buy” the company. So, the company is loaded with debt and the “buyers”have already made their money. They may try to”turn the company around” but in reality hey could not care less if it fails. I’ve seen the Wharton folks in action. They are not impressive. Most have never actually started a company, or even run a company and all they know is what some other Wharton person told them. They are mostly clueless when it comes to actually running a business. But they did learn how to run a lucrative scam, so I guess there’s that. Why would anyone think this useless activity adds anything at all to the economy?
48
Add to that eviscerating any company pensions in place (see Bain capital) and the worker takes it on the chin with no recourse. If private equity were taxed correctly, the incentives would be a lot different.
29
"Private equity" has the same business model as the Mafia in "Goodfellas." Take a controlling interest, run the place into the ground, exhaust the credit, and then walk away when it finally fails. These people are not businessmen in any sense of the word. They are well-funded looters.
59
What I don't understand is why people who do these jobs -- and no I am not going to call it a career -- aren't scorned the way we justifiably scorn other con artists, professional gamblers and dishonest car salespeople? Why is this still okay, even valorized -- e.g. Pete Buttigieg who couldn't wait to turn all his meritocracy chips in for a gig at McKinsey? These people act like they are the smartest people in the room -- and maybe they are -- because those of us who always knew better, even 20, 30 years ago, don't properly call this out. Folks, don't let your kids grow up to work on Wall Street.
32
This is an old story of the arrogance of those who are very successful at one thing and therefor conclude that they are going to be very successful at everything. Well, not exactly. Being really smart isn't very useful if you aren't smart enough to recognize what you don't know and listen to those that do. Bottom line, when it comes to buying a cake, I'm looking for a great baker, not a great banker.
13
From the very beginning, this approach to business has been a disaster for everyone but those who made out like the bandits they were. You should not be excusing that. Like supply-side economics, this is another hoax that has raped the country.
22
Is Barnes and Noble next in line?
9
@Kevin Already happened -- my regular drinking buddy used to give me updates. Christmas 2018 the stores around here were empty because they laid off most of the logistics people and couldn't get product into stores. Total chaos of late unorganized deliveries in hundreds of UPS boxes. Then they laid him off in the new year. Wonder why sales were bad?
4
This is a terrific article! I was always surprised that Payless didn't use a franchise model. I liked getting shoes there. Now, I turn to Amazon. Seems that there is still an argument to be made that right sizing the company could have kept it around.
10
Bain under Mitt Romney did the same thing with Friendly's. Very common with private equity. Bunch of bums just out for the money.
30
What about the retailers that are barely hanging on after their buyouts? JCrew, Gap, Eddie Bauer, and several more. The quality of their products went way down after the buyouts and of course the prices went up markedly at the same time. Customers are staying away because why wouldn't they?
25
@K Henderson I wondered what happened to the gap. I used to shop there almost exclusively. Now it’s hard to find anything I like.
8
@Claire Me too. I have had clothes I bought there in the 90s that I wore for years, such nice quality. Now, their quality is the same as any discount store but with a bigger price tag.
3
Short sighted and stupid. that is America business these days
38
@sjs
Politicians too.
13
For many private equity firms their real business is buying and selling companies. This means that their main purpose is to make the company seem more profitable in the short run. Often this involves shedding expensive, usually older and experienced staff, closing down essential but unprofitable or marginal parts of the business such as R & D and similar support functions. Profits go up not through any increase in sales, but through unsustainable cuts to costs. The company is then sold and soon after fails. The logic embraces short term greed with no real business plan for the long-term.
44
Almost all of our greatest corporations started as entrepreneurial ideas of their founders. Think of Carnegie, Ford, Jobs and Gates. None of these men built their companies with the ideas of how they could extract the most wealth from the company. These are the true "job creators" not those who financialize industry.
28
One of my grandfathers worked in a bank after school.
He cleaned the premises and counted up the pennies and nickels
and dimes and quarters.
After he finished High School he became a Teller.
After a decade he became an assistant manager.
After another decade he became a manager.
He knew everyone who visited the bank and a rough idea
of the savings, checking and mortgages and their other loans.
As the Stock Market speculation became greater and
greater in 1929, he warned his customers to get out of
the market and refused to make anymore loans
until the "Banking Crisis" was over.
The bank survived the Depression and in 1940
he became President of the Bank.
Up to the day he retired he never stopped being a Teller
for part of the day, he sat down and met with customers
about loans, he stayed after closing hours and helped to
clean up and he counted the pennies, nickels, dimes...
All these Finance people need to be asked about how
much time did they spend actually working in the type
of business they are buying up.
If they don't know how the business is run from the newest
hire to the oldest hire, they should not be allowed to
buy up the business.
99
@John Brown
Hedge fund managers have a goal to run companies into the ground. They attend elite schools yet have no idea how the real world works nor do they care.
We work is another perfect model of no business plans buying up property where people go to work in a perfect living room. Is that a business that has merit?
When I was a teacher I used to buy my students shoes from Payless. As a teacher I didn't have much money and the kids needed shoes and we were able to achieve our goal.
I am sorry to hear that they have gone out of business. When a product works Wall Street ensures that it disappears for something like We work . the managers make money and could care less about customers ,employees pension plans and their lives.
31
@Tony
When will we, if ever,
control the greed of the Elites ?
22
Great story! That's how business used to work.
I won't bank at Chase, because you walk in, stand in a long line, and these twits in suits greet you and say "how can we help?" and basically do nothing. I say, "stand behind the counter there and work as a teller," and they are all shocked that I'd suggest such a thing.
9
"Because it's wreckable." Gordon Gekko. No one, Not one single person on earth builds a company against wreckability. It is built to make a profit producing something. That management structure is not sitting through self defense meetings and raiding deflection meetings. Although they ought to be.
Each and every business should now have an in-house Opposition Research Team. Under a very tight NDA contract.
10
That says it all ...
For every dollar that came in the door of the company in that span, it paid out $1.41 to its owners and 38 cents to its lenders. That left the company with less of a financial cushion to ride out any future challenges. And the future, as it turned out, held some major challenges.
32
Why hasn't finance-driven capital of the last few decades created faster growth? Primarily because that's not its mission. The mission is to make as much money as possible for themselves and their investors, at any cost to the financial well being of the organization or its employees.
125
You need to add: ‘as quickly as possible’
7
The answer is in the article.
"Meanwhile, the company made huge payments to its private equity owners."
Finance-driven capitalism is known in less polite society as vampire capitalism. I am sure that the private equity owners were delighted with their results.
That it was achieved by sucking the life blood out of the business makes no nevermind to them.
119
@David Rose
Isn't there a former GOP presidential candidate (currently a member of congress) who played that game until money came out of his ears?
15
@David Rose
Bernie/ Warren talk about it all the time. We work is another example of vampire capitalism and so was Barney's
No one cares about the employees, pension plans, health care, it doesnt matter.
Wall Street is doing well by destroying America
20
@Mark Shyres Blum Capital is owned by Diane Feinstein’s husband. Unfortunately, it’s not limited to Republicans.
3
Suck as much money out of a company as legally permissible then file for bankruptcy. Move on to the next company. Repeat.
91
@Kristine If these vampires are on their game, they will use the host resources to leverage as much debt as it can - the previously dull but stable company will have an excellent credit rating.
You then pull the cash out as 'legitimate' (just so long as it is legal) charges and fees.
The host company then has no working capital or credit available so it can't maneuver in the marketplace and fails.
The vampires get rich, and the middle class workers are out of a job, and the creditors don't get paid - so maybe they go bust too, and then there are no wages, so the beauty salons and corner stores, diners and local restaurants, and all the other local service businesses go belly up.
Exceptional is one word for it.
30
@Kristine
That is why Mayor Pete didn't want to talk about what he did at the vampire company he worked for. would of ruined his fresh face look as if he is not a vampire capitalist, like Bloomberg he has a new outlook on life he wants to run for president .
Bernie/ Warren have the knowledge to break the back of Wall Street corruption
14
Take a look at the way Carlyle sucked out all the cash from Booz Allen Hamilton that has strapped them with a mountain of debt for a government contractor that needs zero capital spending. It was essentially a transfer from taxpayers to Carlyle and it's institutional investors. Thanks for the rehab of the mall David Rubenstein.
28
@John Take a look at the role of AECOM, the current owner of Carlyle and the biggest defense contractor nobody knows about.
9
I'm glad Payless is going. When I was younger and broke I had to buy my shoes there. The glue that they used to attach the shoe to the sole would always dissolve walking through the next rain. I don't know how many poor people they ripped off with a substandard product and terrible service but they can't go broke fast enough.
16
@Hypoteneus I stopped buying there when I was a poor student The product was terrible I learned an important lesson: you get what you pay for I seldom dress fashionably because I cannot afford high-quality products every season On the other hand, my wardrobe is full of classics and many of my garments and shoes are several years old I do my best not to buy products made by near-slave-Labor in China
5
Private equity firms are just leeches on our society, nothing good has come from their existence, except to the 1% crowd, who run them.
63
Thank Romney and his ilk.
38
More of our “American exceptionalism” at work.
21
Private Equity and Hedge Fund. Two types of business which should be strenuously regulated in the least and probably outlawed for the misery they cause across the world. They are famous for stripping everything of value out of the companies they buy, making extremely ridiculous decisions which have dire economic consequences for the employees, or raising prices on prescription drugs to astronomical levels simply because they can.
The stories of successful takeovers by this type of business are minuscule compared to the economic disasters they’ve created across humanity.
Here’s an idea that might dampen their zeal for pirating assets of vulnerable companies. For each employee who loses their job the owners of raiding entity serves a week in prison. For each store closed as a result of their asset stripping the owners of the raiding entity serves a year in prison. And for any town wrecked by such activity (think Sydney, Nebraska) the owners of the raiding entity serves 25 years in prison. For any person denied prescription drug coverage and dies as a result due to astronomical cost increases the owners of the raiding entity should serve life in prison as any killer should.
34
Simply put, the corporate bankruptcy laws have allowed these private equity companies to plunder perfectly good companies and then walk away from the mess they created.
61
The professors quoted on productivity improvements gave us figures for two years post going private transactions. However typical holding periods are closer to five years or a little more for PE historically. Acquisition targets are chosen for perceived cost cutting or industry consolidation opportunities, ie the private equity genius is in the buying not the managing - the productivity benefit quoted is selection bias, doing what a turnaround management team might have done. Nevertheless the two year window is important. Internal rate of return is a huge metric for PE to the effect layering on debt and taking out cash in recapitalizations from day one of the deal is SOP for acquisitions of companies in mature industries. Nothing bumps up IRR like getting cash out quick.
This article is quite constructive for laying out differing impacts and goals of PE over time, as one old enough to remember PE in the 80s, but the quoted professors are polishing credentials for speaking gigs at this millennium’s versions of the Predators Ball - and advisory work.
In the interest of disclosure my research has included reading 10s of thousands of PE firm emails, hundreds of depositions, and analyzing an acre of excel spreadsheets in the context of bankruptcy and disputes between firms. The resumes of the PE guys are awesome but scenarios where anything approaching the unalloyed good portrayed by the industry’s advocates are rare and more like venture capital than the big buyout model.
21
One problem is that your annecdote about PE doing good is wrong, wrong, wrong. Since DD was taken over, the donuts are terrible and the coffee is worse. After a life of subsisting on DD donuts and coffee, I won't step foot in one. And I know many people who feel the same.
27
@Flick Lives Lost customer loyalty is an externality that does not show up on the books until the crooks are gone.
14
@Flick Lives
I agree! The food at Dunkin Donuts tastes like plastic. They are profiting more because the food is poor quality. I am mystified as to why people put that food in their bodies.
6
@Flick Lives
the biggest factor in Dunkin Donuts success is their locations, which were set years and years ago. Most of them are in great locations. the food is OK but not great.
2
Does Elizabeth Warren have a plan for throttling private equity?
11
@Green Tea
Yes . she does and so does Bernie. I dont know about Amy and Mayor Pete, I haven't read any of there position papers addressing that horrific issue.
9
One only needs to review the sad tale of corporate then private equity takeover of Stella D'oro in the Bronx to understand how this works. A successful company is bought by a giant corporation, run into the ground by bad management then sold at a fraction of the cost to the hyenas of private equity who make impossible demands on employees.They then strip the company of all it's value to line their pockets and sell it to a cheap manufacturer.
Gone are the good-paying jobs from a successful company, ruined by mismanagement and avarice.
42
@Scott Your description of the Stella D'Oro saga could be a template for what happens in so many corporate takeovers. Just change the company's name.
13
In all too many cases, takeovers are characterized by two things: excessive fees to affiliates of the new owners and excessive debt-service obligations from the debt that the target uses to finance the acquisition for the new owners, who shift the financial risk of their "investment" to the target corp, its employees and retirees, any lenders foolish enough to finance the takeover, and ult the taxpayers who often are left to pick up part of the tab.
Eventually, the target goes bankrupt, unable to add massive interest payments to the normal expenses of doing business.
OK with me of Bernie puts a wood stake into this kind of "capitalism."
30
While not casualty of private equity, Boeing is a victim of similar financialization with far more tragic consequences than some mislabeled shoes.
19
@Alexandra Bangs
Trump tells up all the time how good the economy is doing. Yes indeed, its going well. Wait till Ms. warren gets in their and Yang is in charge of the treasury dept, they wont know what hit them.
2
The real problem is private equity (and ever worse hedge funds) are there to get as much out of the company as quickly as possible, and despite what they claim they don't have a long term strategy. What they call productivity gains are not based in making workers more efficient or implementing improved processes, that 'productivity' is done by getting rid of employees (and not surprisingly, getting rid of senior employees who actually know the industry but who also make more money) and either relying on stretching employees to the limit or relying on new hires at the management level who make less but know less, too. One of the lessons of the go go 80's, when middle level manager became a curse word to the takeover set and were eliminated, was they found out pretty quickly how much it bolloxed up the works, that rather than being an obstacle, they were a solution. Fundamentally private equity and the like want to do things rapidly, get money out of something quickly, and it leads to a company basically getting gutted. Just look at Sears, look at Fairway markets, to see what private equity can do to a company.
25
Reading this, my thoughts wandered to the way the Trump administration has tried to manage the overall US economy to produce the illusion of strength through metrics: a booming stock market that benefits few, low unemployment in which millions earn less than subsistence wages, cutting protections and services partly to offset huge tax cuts that benefit the very rich and corporations but inject little into developing the economy, especially in the manufacturing sector that’s currently in recession. It’s all out of the playbook of the pirates of private equity.
As Elizabeth Warren says, this works great in the short term for the upper crust of financial manipulators but doesn’t do anything for the rest of us and the overall economy. It’s the MBA version of meth and just as destructive.
The financialization of the US economy is a grift and Americans are the marks.
71
@Pottree
Lately, I have been hearing many people crowing about how great their 401Ks are doing and isn't life great now that they are rich. Good times, baby. To me it sound just like the end of 2007 when everybody was crowing about how much their house was worth and wasn't life great now that they were rich. Good times, baby until the fall of 2008 when everything came crashing down. Today sounds so much like then sometimes I have to look at a calendar to be certain what decade I'm in.
28
Private equity is just a way of taking out "excess capital" from companies, supposedly through the improvement in financial indicators, this line has been circulating since the days of KKR and Michael Milken and during its reign we have seen a lot of sinking ships, Sears, Kmart, Payless, etc, all drown by a fateful combination of exaggerated dividend payments, business refocusing and other similar techniques to "reward" those who put capital in the optimal place and which end with business closures and shady real estate deals.
24
@Camilo Blanco
Exactly. Just about every retail company that has been acquired by private equity has shoddy products and consequently declining sales.
If you sell expensive junk of course people aren't going to buy it. Why would they when they see the appalling quality? Needed some quality binders and walked into a Staples. Every binder I was interested in reeked of a funky plastic smell and would barely cover the cardboard underneath. The following year the supply of the same binders was better, but their price had more than doubled.
Needless to say, I wound by getting quality binders at an used office supply/furniture store.
AliExpress and other Chinese retail sites are expert peddlers of junk, and they sell it as a fraction of the cost.
5
@Viv "If you sell expensive junk of course people aren't going to buy it."
I'm not so sure of that. A lot of expensive junk seems to sell.
1
@Viv
There's sometimes (if not often) a problem with quality control. A good many off shore manufacturers are great at bait and switch. They show one grade of samples to the buyers and if they buyers don't watch it - what is often delivered in nothing of the same quality. By cutting out the quality control center at Payless the new owners simply assured that would happen - factor inspection is a joke. Sometimes it has horrible consequences in the case of aircraft.
13
Some interesting arguments made here, but the thesis is not well-executed. One missing point would be more examples of similar failures by private equity to understand the businesses they've acquired and to cause them to ultimately fail in the US market. Another point missing is more illumination on the concept presented here that private equity ownership is stifling competition. But very commendable in attempting to address the alternate possibilities to the thesis that private equity is slowing economic growth.
3
The American economy has become markedly less dynamic. Fewer businesses are being started, and the newcomers are having less success unseating incumbents. Workers are less likely to change jobs, which suggests labor is not moving toward the most productive forms of work. Many major industries are becoming more concentrated among a few giants.
Copyright laws have stopped innovation....
7
@1st Armored Division 1971-1973 Yet you frequently hear that companies are struggling to find skilled workers. Why aren't people moving to the jobs? The lack of affordable housing?
2
@1st Armored Division 1971-1973 What's "innovative" about copying someone else's work?
3
@Avarren
Some countries pride themselves on "copying and improving" while others pride themselves on making inferior copies. Then again, it's still copying.
2
This sounds like the future for Tim Hortons( a so-called Canadian institution) Don't make enough money selling mediocre coffee and reheating frozen donuts trucked in? The geniuses in Brazil said , lets sell all sorts of food products for breakfast , lunch and supper and compete against McDonalds. Would of been better off listening to the Canadian managers and customers about brewing coffee that tastes as good as McDonalds and making the donuts fresh in the kitchen of the location where they are sold. Innovation is nice but only if your launching rockets into space, not making donuts
24
I remember when Payless went through explosive growth--it was so impressive. The PE firm that insisted on the World Cup footwear is hopefully out of business.
Retail is about having the right product at the right time at the right price, particularly in a field where even the best minds make costly errors.
If a PE firm uses its clients money to take over an industry stalwart, it better understand that industry inside and out. What galls me is the arrogance of the PE people.
11
If businesses don't fail, you don't have free markets or improvements over time. Poorly managed companies deserve to die. Too bad our poorly managed federal government that taxes in ways to prefer some over others in violation of equal protection, just keeps getting bigger and more expensive with no benefits to the citizens who are forced to endure it.
If customers like it, it'll do well. If not, say goodbye and let the better solutions bloom. Why prop up a dead tree when it can be a nurse log to the next generation?
3
Wall Street and the banks and the entire capitalist system are the dead trees propped up by taxpayers. In a better country, looters like Wells Fargo, Bank of America and Goldman Sachs would have disappeared after they caused the 2008 financial crisis.
5
We citizens will remember what these billionaires have done to our American companies, leading to depressed communities and worthless stock for average people. We will remember who to target and where in the tropics they’ve parked their “earnings” when the time comes for us to get revenge for them robbing us blind all so they can profit from bankruptcy and real estate deals. The list is being added to each day, and these “kings” will not be able to hide anywhere on this planet.
17
@Chris McClure. — If only the Electorate would think and remember, but I doubt they ever will.
5
'Private Equity' a paradox? Can you think a single reason it should gain our support, given it has no social value...other than exploiting those of us clueless as to the harm it may cause to the millions of unsuspecting folks contributing to it's success...while too many are left stranded, holding the bag?
9
"Their willingness to cause some pain — to close factories, lay people off, renegotiate arrangements with longtime suppliers — is, many economists argue, a feature, not a bug"
Here's an idea: How about applying the same 'feature' to the economics industry? Miserable failures in economic theories as well as their application would result in mass firings, public shamings of universities that churn out incompetent frauds, etc....
19
Don’t get distracted by penny ante sectors like universities.
Go after the banks - that’s where the money is.
6
Don’t you know? All products are the same. Anyone can manage any company. Just ask Boeing
16
Blum is Feinstein's husband. Probably what these billionaires did to close Payless and make millions of dollars is legal, but not moral. Thanks to immoral politicians it's legal.
17
...and then there's Sears...
8
The Masters of the Financial Universe know exactly what they’re doing: running the tables in a fast-moving big money casino. The underlying elements, be they businesses, real estate, or old fashioned instruments like mortgages, are only the chips.
8
This is the same thing that occurred to Sears and K Mart. The underlying business was not necessarily in bad shape but being saddled with debt is what ultimately did these companies in. We have to distinguish between high finance and running a business. The former is a part of the latter. But in today's environment, financiers are equated to being businessmen. Nothing could be further from the truth.
I hold an MBA with a track in Finance. But today, I don't work in the finance industry. The practices there turned me off, with its emphasis on eternal growth. I learned in business school that for a business to prosper it must master a few fundamentals that would leads to it being the low-cost producer in its industry. With that it has pricing power and can match any competitor. These fundamentals are not stressed; it is what's been done on a quarter by quarter basis that is important. Perpetual growth is the mantra.
Why can't companies be satisfied with having a decent margins on the sales they have? Why the need to search for more and more growth? If companies would deemphasize growth and look to being the low-cost producer and therefore have pricing power in the market place the margin of the business would be decent and the company would continue to be viable within its environment.
If business can get back to the root of good business, we wouldn't need to move production to China or to have so much upheaval that result in people losing their livelihood.
32
@RAB The company I work for was recently bought by an investment group. We went from an emphasis on quality and repeat business to an emphasis on quarterly growth and increasing EBITBA.
11
@RAB I think I can answer that one RAB. The reason businesses can't be satisfied with a reasonable profit margin is that investment flows to companies that appear to offer the highest rate of return. So the PE industry wrecks companies while making them appear to generate huge profits for a year or two, then selling them to suckers who discover too late the mess they've gotten themselves into. A sensibly run company with a reasonable profit margin can't attract the financing it needs to maintain its competitiveness and dies a slow death. I got schooled in this about 12 years ago when the Times did a major story about how the PE industry completely destroyed the entire American mattress industry. No one cared then and it appears no one cares now.
11
Isn't it convenient that these groups can go bankrupt and dump their debt, while students cannot do the same.
And the insistence on immediate and substantial shareholder profit in this case is just a microcosm of the business principals that are leading many Americans to consider whether a socialist president might not be in the best interests of the country. Meanwhile, the masters of the financial universe wonder why the average American, whose shopping drives the economy, are not spending more money. Perhaps because their 3 gig economy, minimum wage jobs don't even meet the threshold for paying rent, health care premiums and buying groceries. Maybe in the long run, greed is not so good.
27
What's the issue? Hedge funds and private equity did just what they're designed to do: take over a going concern and strip it of whatever they can for the new owners, then go bankrupt and leave the creditors to fight over what little assets may be left. Mission accomplished.
37
I grew up getting shoes from Payless (when we got new ones at all) and the old familiar sense of worry, inferiority and generally barely getting by of that time is burnt into the old Payless orange in my mind, the stacks of boxes, the Orange Julius stand in the food court.
That wasn't a consumer experience that meant anything good to the people who were buying it. PE or not, it was a business that was waiting to be crowded out by something more convenient. Something more beautiful was never in the cards.
8
@Telecaster I'm sorry you think payless was so awful. I loved shopping there as did my friends. None of us have a lot of money, but it made us feel like we did because we could buy a few things and still have money left over.
3
Stories about private equity taking over a business always closely resemble the plot line in Goodfellas about the mafia taking over a restaurant. Borrow money on the company’s credit to pay yourself and when it finally goes out of business burn it down.
70
@DatMel - It is EXACTLY the same thing. By the way, when the mob does it, it’s called a “bust out.” At least they don’t hide behind fancy words.
16
Productivity: Run the company on a near starvation diet. The workers earn just enough not to quit with bare bones benefits.
CxO and PE firm reap up the “productivity” gains.
27
@How Much Is Enough? Don't forget to steal the pensions on the way out.
I think that's in the Hedge Fund playbook.
7
Can anyone explain to me why a one-time dividend payment to share-holders that amounted to $352 million was a) even considered at a time when the company wasn't even asking that much a year and b) not (in this article at least) flagged as the reason the ship went down?
I am not a business person. What is the upside to paying out big dividends to shareholders when a company is struggling? Anyone?
25
@Jessica T I will try ot give you as balanced an opinion as possible. I have been in the hedge fund, leverage buyout, private equity business for 35 years and made plenty of money. The basic business model is to make as much profit as possible in the shortest period of time, and move on. The industry is not interested in running manufacturing business; they want to make transaction happen where they can get as much money out of the system as possible. In this case, and agreement was probably made between the sellers advisors and the funding institution/buyer, to pay a 3-5% fee to the financing group, up front, which they deal makers can pocket. Its all legal, and the lenders get a year fee as well, regardless of the state of the business. The industry is allowed to borrow money from the Government at a discount rate of 3-4% and then make deals that pays back 10-15% or more, or in the minimum, 8%. At the present time, the hedge funds can borrow 16 times the capital they have on their balance sheet and are free to do what they want. If it goes bad, like in 2008, the Government steps in. Up until the mid 80s, business grew based on productivity, but when the buyout industry got started the basic principle of Capitalism changed and the result is what you see now: a depletion of the capital wealth of the middle class. I made the decision to change objectives and aim for a more equitable system because this the one we have is getting close to the edge of the cliff.
35
@Jessica T Private equity firms report IRR (internal rate of return) as a performance metric.
IRR is the percentage rate at which the time-discounted value of cash flows of a project or investment is equal to zero. Generally a successful investment's cashflows are big and negative to start (i.e., it costs you money to buy a company), small and positive over a few years (i.e., you get paid a small dividend each year), and finishes with a big positive cash flow at the end (i.e., you sell your company). Higher IRR, like let's say 15%, is better because it implies that you would have done the investment even if the cost of money was 15% per year. (In reality, today the cost of money is probably like 4-5% for private equity investors.)
So what does this have to do with dividends? IRRs are driven up by larger positive cash flows during the beginning of an investment. If you can pay yourself a large dividend shortly after investment, this could drive your IRR upward and may help you market your next fund. And if a bank is willing to lend your company the money to issue this dividend, why not?
9
@Jessica T excellent question. Boeing, Wells Fargo and Volkswagen are other poster children of companies with supposedly brilliant CEO's recently making incredibly stupid, short-sighted and shareholder profit driven decisions that have brought disgrace to the name brand, and eventually lost them billions. Some folks never seem to learn.
8
Finance should serve and support productive businesses. In the US economy now, it is the other way around. The financial sector has engorged itself by extracting assets from companies, like leeches. It produces huge wealth for a very few who take a lot and make nothing.
26
@MEM "who take a lot and RETURN nothing"
1
"labor productivity — the revenue generated per employee — rose by 7.5 percent"
Here you go: fire 7% of the employees. Tell the remaining 93% that if they don't work harder and make up for those who were fired, they will be fired too.
I am a financial genius. Can I have a billion dollars, please?
15
@Les Productivity very rarely makes the customer any happier- it can be making things more efficient such as streamlining processes, but it's often just a fancy word for "doing two/three/more people's jobs". What that means for the customer is long lines, poor quality products and service and in the case of "productivity" for healthcare, sometimes death.
14
The common practice of bringing in new C-Level executives from outside the company, rather than hiring internally is probably the real gorilla in the room. There are way to many C-Level types who have absolutely no experience in the business (or role) who get these high profile jobs purely through connections. I think many of us had to listen to the new CEO ramble on about his background, peppered with the words “my dad” and how his music degree from Northwestern qualifies him for his new role
in pharmaceuticals. Extra points for the Sunset CEOs who sit on dying companies for years just to collect a lucrative paycheck. Looking at you Sears!
16
I read this with interest, as the employee of a government contractor in aerospace that has just been sold to a private equity firm. We shall see.
11
I hope your resumé is up to date.
9
Private Equity is a misnomer, it’s really Pirate Equity.
48
Payless is a good example of an endemic and far-reaching problem, not just with private equity. Boeing didn't need to be taken over and gutted by private equity. Their disastrous decline (set in motion over at least a decade and a half) has been marked by many of the same issues described here: financialization (core goal is maximization of share price and dividends, rather than designing, building, maintaining safe aircraft for the long haul) and disdain by boards and upper management for the expertise of the practitioners who make the core business function (who needs to listen to engineers or line workers?). The shortsightedness of the recent American model of turning everything into a financial instrument has long-term consequences - in Boeing's case, they are now damaged for at least one or two decades (several years to get back up to speed on 737s, no new single-aisle plane anytime soon, while Airbus and Comac will fly ahead). This has played out across the U.S. over the past several decades. We are in trouble.
23
"Barbarians at the Gate"
9
Whose money did the masters of the universe spend? Isn’t that the most important question and the beginning of the search for the answer? If the masters of the universe are so talented, why don’t they start actual companies, you know, ones that sell products for more than the cost of the products?
14
A pity. I bought my shoes at Payless---good quality at excellent prices. I miss them.
But the disorganization was evident. Once, taking advantage of a buy one, second 50% off offer, the clerk and computer system got hopelessly tangled up. As far as I could tell, it gave me more than I was entitled to. I didn't want to take unfair advantage, but there was no way to figure out what was going on and make it right.
9
"Owners of companies look to make a profit; sometimes they succeed." Is that a good summary of the whole article here?
The article does not mention interest rates at all. We've had abnormally low rates in the US for the last 10 years. When debt is as cheap as it is, it's no wonder the private equity industry has grown as quickly as it has and why some poorly-though out deals are getting done.
If there was $10 on the floor, would you pick it up? If yes, then you're reacting to the same instinct that a PE firm has - it's free money, why don't we go for it?
Many are making typical inane comments about "vulture capitalism" without regard for the conditions that are fostering it.
7
"Finance-driven capitalism was supposed to make the economy more dynamic. A failed shoe chain shows why it hasn’t happened."
"Dynamic" did happen. Payless was treated very dynamically. Money seeking money does dynamic things to businesses all the time. Just don't expect "dynamic" to mean the business and jobs are still there when the capital flits off to the next shiny object.
10
My wife buys 90% of the family's shoes and clothing from eBay and Amazon. Name brands (and quality, too) for less.
2
@David name brands from e-bay and amazon? Are you sure? The jungle of counterfeits.
12
@David
'Name brands' - are you sure? Amazon and eBay are leading purveyors of fraudulent copycat products and doing everything they can to evade responsibility for that.
10
"Finance-driven capitalism was supposed to make the economy more dynamic."
Just another big lie. It was only ever intended to do one thing. Make wealthy people even more wealthy while destroying everything in its path.
90
This happened to Qualcomm and Toys R Us, too. Many people lost the jobs they had held for decades. No one benefits except for the vultures pulling the money out.
32
Wall Street and finance isn't about bringing needed money to Main Street. It's about vulture capitalism, picking aprt Main Street and selling it's shiniest parts for a profit while the rest of the organization slowly dies. That's what Wall Street is all about. Just ask Goldman Sachs.
26
This article should have been confined to the Payless story. Instead is meanders into so called "good examples" of Private Equity and we have no way of looking at those from a 360 degree perspective-- as in was it goof for consumers, their workers instead of not just tanking the company. Also not sure why you go into labor productivity. Unless, there is some drill down examples, don't understand where this was meant to go. All in all, a disappointing story as is seems to digress in a way that might suit the author's bias.
7
Decades ago a friend of mine who was studying for an MBA degree at a prestigious business school told me, confidently, that if you had an BA degree you didn't have to know anything about the businesses you would be running.
I thought it sounded like self-serving hogwash back then and it still sounds like self-serving hogwash today.
14
That business school didn’t happen to be Wharton, was it?
Oh yeah, you were talking about a “prestigious” school.
2
Name brands for less and the shoe fits, too. Ebay and Amazon will save you money and you get quality, too
1
Predatory capitalism. But I repeat myself.
8
Vulture capitalists posing as private equity firms suck every last dime out of company to put into their pockets and then throw its carcass into the ditch. They rob employees of their earned pensions. They auction everything for pennies on the dollar. They confiscate all their real estate where much of the company's wealth resides forcing remaining stores to pay astronomical rents on property once theirs. Look what they did to Sears. A travesty that should be criminal. Look at all the companies that fell victim to their attacks during the Great Recession and the millions who lost jobs because of it causing unemployment numbers to skyrocket 15% -16% in distressed areas. This was the underlying story that never got its full credit for making the recession so much worse than it had to be.
40
Leveraged Buy-outs ("LBO's") should be made illegal.
Payless. Toys-r-us. Countless others. All destroyed by greed.
25
@Karl
What about your home mortgage? Should that be illegal? A home mortgage is an LBO too.
@GMooG
If i pull out equity from my house I have to pay it back. If I go bankrupt, it becomes much more difficult to secure a loan.
PE firms dont have to worry about those issues to the same extent. They can pull out cash and walk away from company, leaving it more debt laden then before the buyout.
I dont have a problem with PE, I just have a problem with the laws they've lobbied for. If you run a company, you need skin in the game.
8
Private equity, let me count the ways:
Gracious Home
Fairway
Payless
What others will be left in their wake?
9
Reagan had it wrong (once again). The scariest words in the English language are, "I'm from a hedge fund. I'm here to help."
27
I so miss Payless. I cannot easily shop for shoes online for myself, and it doesn't work at all for kids. The sports stores only carry overpriced athletic shoes, but not the basics needed for growing kids or for simple casual wear. This is where Payless shined. No other store came even close. My hope is that it (and it's sales model) makes a return soon.
9
@JTFJ2
As a vegetarian mired in strictly suburabn or mainstream choices (long ago, when I was a teenager) payless was the one place I could get all synthetic shoes I could afford.
I have to say I was fascinated by the choices there, thinking about someone thinking about what to present.
I cannot imagine a market built around consumer needs these days, only consumer manipulation and adherence to business cycles defined by expectation of return for the most detached.
The system is more than unfair. It is hostile to basic decency.
9
@JTFJ2 Yeah, personally I don't like shopping for shoes online- I have specific preferences when it comes to them. And I'm not a big fan of Target for shoes- every Target shoe I've had falls apart in 6 months
2
I loved that Payless carried wide width business / heels.
4
The retail landscape has changed drastically in both good and bad ways. Online shopping is fast and easy for the customer, which is making it difficult for malls to exist.
What I noticed about PayLess Shoes (I shopped there a lot over the years), is the quality of the shoes. They became cheaper made with a higher price. At one time you could find comfortable and stylish shoes for a low price. Towards the end of my shopping at PayLess Shoes (several years ago), the shoes were made of cheap materials that not only looked unattractive, but were uncomfortable to wear.
A bargain is only a bargain if the quality is good.
11
Private equity and hedge funds have been acquiring retail for some time, and in each instance there is a familiar pattern. They operate, invest in questionable purchases and/or volume then suddenly liquidate, sell or cause bankruptcy. Look at Lord and Taylor- owned by Hudson Bay which in turn is owned by an equity company. The flagship NYC 5th Ave property was sold to WeWork- there is no longer a L&T in NYC and WeWork is going under. Look at Bergdorf Goodman which was acquired by Neiman Marcus, then both were sold to a hedge fund. Major layoffs ensued.
Yes, retail and shopping as we knew is for at least a century has changed with ecommerce playing a larger role, but the issue of stock, operational staffing, finance staffing is the same whether selling through a warehouse online or in a brick and mortar store.
14
@robin So the rich companies like to drive themselves into bankruptcy for what, profit?
@David
They don't- the equity firms and hedge funds acquire the assets to cut costs and either later to sell off or use a bankruptcy protection to either restructure or close- either way eliminating their obligations.The objective is to acquire and use the assets for other acquisitions.
11
The problem is that PE firms, like most entities, are perfectly fine owners when things are going well. When they aren't, they are fairly awful, as their lack of subject matter expertise in areas other than financial engineering can be fatal.
Moreover, it is rare that a PE firm doesn't buy a company with more or less the maximum amount of debt that the markets/banks will let them borrow. This is for two reasons: 1. Other bidders will, allowing them to potentially outbid, and 2. the math tells you that all other things being equal, more debt and less equity invested translates into greater equity returns.
The problem is that all other things aren't equal, and when the business hits a bump, that debt load limits your ability to invest in the business dramatically. Also, the cycle of refinancing and dividending capital back to the owners only makes this worse, but often leaves the owners in very good financial shape, at cost to the company, the employees, the suppliers, and the local jurisdiction. Which is another way of saying that it can end up being a transfer of wealth to the 1% from the 99%. Not shocking, I know.
28
Been to a casino lately? Not sure how many times we need to be reminded that the finance sector of the economy produces and builds nothing. They just manipulate the productive parts of the economy to wring money out of them. 2008 taught us nothing.
158
@AL Creative destruction is the lifeblood. It's like you wanting adults to live another 50 years beyond the current lifespan, to what purpose, to have more feeble people with expensive medical conditions? The success of life is like the success of free markets, out with the old and in with the new, unless you can be good and strong while older.
1
“Creative destruction”!? Is that what you call that? No, I think tearing apart companies for the benefit of a some wall street suits is not creative, but it is destruction. I thought real capitalism wasn’t gaming the system with financial tricks but making a better product. Pretty quaint I admit.
23
The reporter may be underestimating the amount of money taken out of the company. In addition to interest on loans and dividends, the private equity firms usually collect enormous "management fees" from the companies they have purchased.
149
"If you're so rich, why aren't you smart?"
19
I went into this article with the understanding that private equity capitalism was about looting companies for private equity profit, and I was not dissuaded.
"For every dollar that came in the door of the company in that span, it paid out $1.41 to its owners and 38 cents to its lenders." And this was *before* investing anything into improving the business. That is looting, plain and simple.
The problems with the American economy have been obvious for 40 years to everyone except the millionaire-now-billionaire class who have been too busy stealing from the poor to pay any attention.
190
@Steve So you are now free to compete with a better idea that doesn't do all the bad things you think they did. Most people grumble about bad business, but that's how it works...the well run ones succeed while the poorly run ones go away, making space for new ideas to replace the tired and bad ones.
@Steve - The Vulture-Pirate industry would be considerably dialed back were the deductibility of interest on loans for such acquisitions to be restricted; a good starting point, which would also cease the effective underwriting of such ventures by the U.S. Treasury, using Jane/Joe Sixpack's tax remittances.
23
@David Based on the article, I think we found them. But like zombies and vampires they still exist.
2
Hope they bring back their online marketplace. Payless' Comfort Plus heels shoe line were the best. It had hundreds of 4 or 5 star reviews. People were always surprised when I told them where I got them. I can go on and on about Christian Siriano's shoe line.
9
"Rather than keep inventory in a back room and employ lots of salespeople, as department stores did, Payless kept boxes of shoes on open display in the store..." In other words, eliminating thousands of jobs, back in the 1950s.
So, Payless was the shoe Amazon of 70 years ago.
8
Thought 2: Let me add that "two wrongs don't make a right." USA needs to establish and maintain a stable economic floor upon which decent and dedicated people can stand.
3
Capitalism is designed to amass capital for capitalists. That's exactly as it should be. It is ultimately the people who will decide exactly how much longer they will continue laboring to make the rich richer.
Keep popping those champagne corks, Finance Bro's. Your times are just about over.
37
I think people have a very distorted view of what private equity is. All it is is large institutions (and some rich people) pooling their money in order to invest in businesses. The reason it's called private equity as opposed to public equity is because they don't sell stock to the public. There's nothing mysterious or evil about it. For every failure like Payless Shoes, there are hundreds of examples where an investment was made in a business, and it was successful.
And I guarantee you there were some very large institutions and deep pocketed people who lost huge amounts of money in Payless shoes. It was not bankrupted on purpose.
But- people like to demonize things they don't understand. Hence we have all these posts where people talk about private equity as if it is something evil. It's not.
9
@Marty
Sorry, but you've very clearly never sat through a partners' meeting at a typical private equity firm. The first and only thing they pitch focuses on is the IRR (internal rate of return). The partners do not really care what the business does. Oh sure, there will be some discussion of soft issues, but the sole driver of whether a deal is pursued is expected profitability. I've worked in different capacities in finance (including private equity) and there's one constant: financiers prioritize their profits over everything else (e.g., workers, suppliers, reputation, societal benefits). Private equity isn't evil, but let's recognize it's driven by enormous self-interest.
99
@Pitcher So if you have a better model, selling shoes to benefit the customers without regard to making money, do it. Just do it! Tired of all the envious people who think others are bad actors who sit on the sidelines and don't prove their model works even a bit.
there is not a single retail success story in all of the PE LBO mania of modern times. Poster child in CA was Mervyn's. One of the greats, until Target's parent Dayton Hudson bought them , in order to rob them, to finance their expansion in the western USA. when the beast was damaged, Target left the carcass to be picked clean by the PE firm who bought them. Mervyn's died in the wake of the 2008 crash, but it was years of financial manipulation that led them to the brink. I'd suggest them as a good case study for your "expert" from U of Chicago. But those zealots do not want to understand what they and their cult leader Milton Friedman have done to our once middle class economy.
9
Payless was a valuable part of my family's household budgeting. In addition to killing Payless, they also hurt many families on a budget. (WalMart shoes are not as good, and online purchases of kids' shoes is Russian roulette--you really need to physically try on the shoes.) My family is completely ticked off at the private equity vultures who killed Payless.
45
Personally, when I had little kids at home, Payless was the place I went to to buy shoes for their ever growing feet. I have not been in side a Payless store is more than a decade. All my kids are out of home now and I basically wear my shoes for a very long time and buy my shoes online when needed.
This article exposes the classic fact of CEOs and bean counters (seated in gilded towers far far away) not knowing the business they are in and not listening to sales people in the field.
20
The author incorrectly states: "When resources are devoted to boondoggles, and companies are run by incompetent cronies, everyone ends up poorer." - the financiers themselves make out like bandits, which is the whole point.
Vulture capitalism and wanton piracy, couched as 'disruption', are still plain ol' robbery.
124
So--let's re-analyze the "Death by Debt Spiral" of Payless over eight years--2012 to 2020---parsed against the stock price of Payless's major competitor, Amazon--a West Coast company, according to the facts of Mr. Irwin's NYT's article:
Phase 1: 2012--Golden Gate Capital and Blum Capital, both of San Francisco, take over Payless with its $2.4 billion in revenue, 4,300 stores worldwide and load Payless up with debt.
AMZN stock price in Sept 2012: $178.
Phase 2: 2015--Payless begins its debt-death spiral after the debilitating West Coast Longshoreman's slowdown as ships from Asia containing millions of pairs of Payless shoes were steaming across the Pacific ahead of the crucial spring season.
AMZN stock price in Oct 2015: $659.
Phase 3: 2018--The nail in the proverbial debt-death coffin--the Payless Flip-Flop Debacle in buying millions of 2018 World Cup flip flops--arriving AFTER the 2018 World Cup mis-matched to Latin American Countries.
AMZN stock price in Oct 2018: $1642.
So--in whose financial interest was the debt-death spiral of Payless?
Let's check the market today:
Market Summary > Amazon.com, Inc.
NASDAQ: AMZN
2,023.71 USD +153.03 (8.18%)
Jan 31, 9:44 AM EST · Disclaimer
The NYT did a great story recently on how a once proud US company, Remington, was turned into a joke by private equity: https://www.nytimes.com/interactive/2019/05/01/magazine/remington-guns-jobs-huntsville.html
24
Let's take it one step further. The reason American productivity has declined is not only, as Mr Irwin demonstrates, that financial capitalism gets to borrow money on the cheap, take a company over and then suck the life out of it. It's also how that money is used once it has been 'liberated.'
After all, in the USA there should be an abundance of productive investments. Why haven't the financial capitalists taken their gains and redirected them to more productive investments?
Two reasons:
1) Cutting taxes for those who don't spend (i.e., cash-hoarding corporations and the wealthy) means money ends up saved.
2) But due to growing income inequality, there is simply not enough end demand from the working and middle classes to justify the private sector investing those savings.
The upshot is that money ends up chasing unproductive assets like housing, art, or stock.
Meanwhile, paradoxically, debt keeps growing. Growing debt shouldn't bother us, as long as that debt is used for productive purposes. But the worrisome thing today is that, due to the very weak investment that we've noted, America's ability to service that debt has not kept up.
The remedy is simple: reform the tax system to recycle America's wealth into productive uses. If the private sector can't find a way, we can turn to the government. There are plenty of infrastructure projects out there to be built, research to be done, and people to be trained, to name just three.
Let's get on it!
222
@VCR: Hear hear. To have a prayer of making that happen, vote Democrat.
41
@VCR
Hear, hear, again.
Note that productivity has grown; the productivity growth rate has declined. Meanwhile, the gains of productivity growth have been given to the very rich; the workers have gotten none of it.
39
@VCR This is why since beginning of 2018, the U.S. produces a DEFICIT equal to 5% of its economy but its GDP growth is STUCK below 3% or even at just 2%.
The money is simply not being deployed productively in things that make most people's lives better like healthcare, better schools, better transportation grids, better housing, rebuilding our energy infrastructure for the 21st century.
The waste and corruption is MONUMENTAL if 3% of GDP disappears into a dark hole every year.
10
This all has the smell of a bunch of scammers.
22
In the buyout model, the people are viewed the same way as inanimate assets like inventory, plant and equipment. A person who works for a private equity is subject to avarice of the owners.
With this model, as a worker, the more skilled and paid you are, the more likely it is that you get fired.
33
That the first act of the so-called "transformative" managers at private equity was to extract a huge "dividend" on top of huge interest payments due on the money they had borrowed to buy the company should be emphasized a lot more. The 'ideal' private equity deal, too often, is a form of financial rape: the private equity firm has the company borrow lots of money that i used to to 'buy' the company for the new private equity owners, who then loot the financial reserves. Whatever hapless bean-counter is left behind as "chief executive" is all too often simply carrying out the resulting liquidation of a company lacking the capital or the leadership to continue as a going business.
That $394 million "dividend" is the give-away, the rest was just carrying out the consequences of the original looting, and probably didn't matter very much either way.
55
@Pquincy14 Absolutely correct. These "special dividends" go directly into the pockets of the private equity investors, which can greatly reduce or even eliminate their initial financial investment. To add insult to injury, the private equity firm will then charge the company ongoing exorbitant fees for financial, legal, strategic, and other "advice." Of course, if they are ultimately able to sell the company or take it public, it becomes a financial home run for the private equity investors.
24
@Pquincy14
This cannot be emphasized strongly enough. It's one reason, not the only reason, I felt this article was written with blinders on.
7
How many ways does private equity make money?
Here's another way:
Private equity companies break contract obligations owed toward workers, vendors, customers, and neighbors by the companies they acquire.
Contract compliance often rests more on the decency of the parties than on threat of legal enforcement. The parties comply less because they fear lawsuits than because they are honorable people who think they should keep their word.
Private equity likes to acquire companies that have contract obligations of this sort, i.e., obligations that can be escaped by an ethically challenged manager backed by an army of lawyers.
Such companies are "undermanaged," in private equity lingo. Translation: current management is foolishly honoring its obligations. We'll put a end to that when we run the show. This will make the black ink flow! We've spotted some pension obligations to former workers. We'll just zero them out! And we'll have our army of lawyers dispense with those who complain.
Bottom line: the special attribute that private equity players bring to the table is their lack of ethics. This is their special talent. They look for businesses run by honorable managers who feel obliged to keep their word, especially when others have relied on it. These "undermanaged" businesses are ripe targets for private equity's magic trick: the violation of solemn obligations.
The secret sauce of private equity players is their quick willingness betray others' trust.
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@Roddie Edmonds Spot on. Spoken like an insider.
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Read "Glass House" by Brian Alexander to get an in-depth view and analysis about how private equity destroyed a business and the surrounding community.
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"Think of how much richer West Germany became compared with East Germany over the four decades the country was divided."
Think about which of those countries was communist and which was capitalist.
Let's be careful not to throw the good capitalism baby out with the bad capitalism bathwater.
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@JM I completely agree. It's very easy to blame Capitalism for some of our problems, but what's the alternative? I do believe that competition is a healthy and important factor for success. Our system is far from perfect (no system is) but comparing with Socialism and Communism the answer is very clear.
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@JM
How about which of those countries had most of its factories shipped to the Soviet Union to make up for the destruction caused by the Nazi invasion? Nevertheless, East Germany became one of the more productive countries in the Soviet bloc. It's not a simple one-factor comparison.
Note to enraged commenters (if any): I am not defending East Germany. I am adding an important fact.
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Sounds eerily like the business model currently being run by our Federal government. It is really going to hurt when the other shoe drops.
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This has been the dynamics for decades. Private equity borrows money, puts it in their pockets and then sells the crippled remainder. But what's in it for the bondholders? It must be that the junk bond interest rates being paid are high enough, and losers are infrequent enough that the bond holders are being paid too. This has persisted for decades, so if it didn't add up, the private equity folks couldn't borrow the funds to make it happen. So in most cases, the private equity managers actions to make the companies more efficient must be paying for at least part of this. But unfortunately, some of the payoff comes from selling seed corn. When they sell too much, they wound the company beyond repair, permanently destroying value that was not recognized by accounting systems or by markets. They may be getting as little as 50 cents on the dollar for selling this unrecognized future value.
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The article doesn't report on the consequences of the Payless bankrupcies for the firms of Golden Gate Capital and Alden Global Capital. Did they lose money? Did they lose credibility or investors? This is key to assess the "story private equity tells about itself" and whether the failure of Payless also represented a failure for their overseers. Does the non-public status and/or accounting practices of the latter shield them from investigative reports on their bottom line? It would be good for reporters to inform readers regarding the availability of information required to make this assessment. The we would have some information to answer the question "what if they know exactly what they are doing?".
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@HF
Very important. "Private equity" has been growing; it must make money for the buyout firms.
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Private equity has no concern about the viability of the businesses they buy. They only care about amt of money they can wring out via special dividends and mandatory payments to themselves. Look at Sears/K-Mart. How much money was invested in the business vs how much was stripped out to enrich the Mr. Lampert? This story is a well-told example - of the dangers of private equity ownership.
In an ideal world no "special dividends" or mandatory payments should be made until/unless mandatory investments are made in the underlying business- but that would necessitate a a social commitment that today's boomers are too selfish to "commit" their actions to.
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@M.P. Neumann
You turn a valid observation into an attack on personalities. How about thinking of the advantages our corporate and tax structures give to the "special dividends" and heavy interest payments?
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@Thomas Zaslavsky
Clarification: This has nothing to do with "boomers". Get over that superficial labelling.
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Phone call from some years ago:
Caller: We are interested in investing in your company (blah, blah, corporate jargon).
Me: Are you a private equity firm?
Caller: (hesitation) Y...yes.
I hung up.
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Ebay is a good case study in why productivity hasn't grown faster. They treat their sellers like slaves, always heaping new requirements on us that mess with our productivity as if that is the point of the business, to turn us into cogs in the ebay machine.
They had a much better listing tool for sellers 10 years ago than they do now, they destroyed it for reasons of their own convenience without a thought about the effect on sellers.
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@newageblues Agreed! Ebay is a mess which succeeds despite itself simply because it's such a good idea. I am on it nearly every day and curse it just about as regularly.
I mostly buy rather than sell, but the website is infuriating. Simple things such as 'save this seller' until very recently, used to take you OFF the seller's page and onto a completely different one, which would then tell you (in my case) 'you have exceeded your saved sellers limit. Please go back and delete some in order to save this one'.
Why would there be a saved sellers limit? Who knows? But this is just one example of a litany of things that make me think it's run by penguins.
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"For every dollar that came in the door of the company in that span, it paid out $1.41 to its owners and 38 cents to its lenders." I don't think you need an MBA from Wharton to identify that as a bad business model. Yet, if you look at too many of these deals, the "financial wizards" aren't interested in improving the company...they're interested in making money by stripping assets and cash, like the $6 billion in debt piled on the formerly successful Toys “R” Us, leaving it to pay $500 million annually in interest payments alone. Or the $1.5B in debt that sunk Gymboree. This belies Mr. Jones claim that “Yes, taking out the money, in hindsight, made the business more vulnerable, susceptible, and in an environment of so much uncertainty that nobody understood. In hindsight, we shouldn’t have done it.” To the contrary, taking money out is the ONLY reason for most of these deals. The investment firms get their millions and the employees get laid off.
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Leveraged buy-out failures are often not a failure at all, but a well-executed plan by Wall Street vampires:
1. Buy an undervalued company on the cheap.
2. Use the assets of that company as collateral to secure a massive loan.
3. Funnel the loan into huge payouts to the buyout firm, while investing nothing in the company.
4. Make the bought-out company declare bankruptcy, close it down, and lay everyone off.
5. Feign shock that things didn't work out.
Exhibit A: Toys R Us
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@Jim The most inhumane thing is when they raid overfunded pensions and then find out that the fund was not overfunded at all. They stop funding the account after they have taken their special dividend.
Then they leave the Pension Guaranty Board and the rest of us with the liability.
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@Jim Precisely... it's laughable that anyone believes the economics of PE "don't work..." they work perfectly - for the PE firms. It's an industry that happens to cause chaos in other industries, but stand-alone it's a remarkably successful business model when executed correctly. Hate the game, etc...
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@Jim - Yes; Irwin incorrectly states: "When resources are devoted to boondoggles, and companies are run by incompetent cronies, everyone ends up poorer." since the financiers do not end up poorer.
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Private quite firms are basically legal vultures. When a corporation or industry it in trouble, they come down, pick on the remains, throw away any piece they don't like to eat and let them survive and in the process they become billionaires.
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@Paul You are confusing them with vulture capitalists who specialise in buying distressed companies. PE looks for undervalued companies. They want a company with a lot of cash on the balance sheet. They want the cash, and they want something they can borrow against, using the loan proceeds to pay themselves special dividends and management fees.
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@Jonathan thank you for your reply. It may be a technical difference but to me there is little difference. They are millionaires who go in and thru favorable laws make millions or billons out of something that you or I pay for.
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An tremendous excess of capital in the super investor class, combined with a searing deficit of capital among the plebs, predicts this waste.
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The hedge fund got back their money in the special dividend, the Chinese manufacturer was stuck with unpaid bills. Is'nt backruptcy wonderful?
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@seattle expat
The workers lost their jobs, the customers lost their shoe supply, etc., etc., and the private equity firms had big profits to use in the next cycle.
I also suspect favorable tax treatment helps sponsor these leveraged buyouts, such as the deductibility of interest payments from taxable profit.
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Private equity believes in making money quickly. This does not necesseraly mean that the target companies ought to be well run, especially for the long run.
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How many successful firms have been bled dry and eventually killed by private equity firms?
Their focus is on how much money they can milk out of an acquisition. They buy a firm, suck out 'excess capital' and load it up with debt, then sell it off in a weakened state where it will eventually fail.
It's all about the $$$$$$. Jackals bleeding viable firms dry.
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Call it what it was. It was a looting. Once all the equity had been sucked out of the company the husk was discarded.
It is an old story.
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Consumer retail has experienced industry wide issues over the last 5 years. The really big mistake for these smart people is they did not see this tsunami forming. Besides a growing consumer preference to avoid malls, the USA has far too many stores period. Victoria’s Secret, Macy’s, and Nordstrom’s are just a few of prior success stories that stumbled badly. Yes, the private equity firm made errors in an unforgiving market. The group spent and lost their money plus likely a big portion of money lent to them.That is how business works. Given the company’s prior condition and the horrible overall climate for retail, it is an open question as to whether Payless would have survived without the private equity group’s investments.
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@Michael Blazin
The group probably made a big profit. Others lost.
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Private equity buys a company for one purpose and one purpose only. To strip it of its most valuable assets and load it up with debt in order to pay the equity partners huge "management" fees.
If a company actually survives its a fluke.
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"What if the masters of financial efficiency are making choices that don’t actually create the more dynamic, productive economy they promise?"
These are pure heads-I-win-tails-you-lose transactions structured so that the private equity money gets paid first and no matter what else happens.
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This story reminds me of a Harvard Business School case I used to teach. Top management believes it knows everything because it looks at the numbers. How the numbers are created, read individual creativity and productivity, is ignored. Flexibility to meet demands is lost. Financial goals are short term but deadly. Just look at Sears. The demand for most of its products and services was there but it couldn't adapt quickly enough to exploit it. Selling off assets pays off debt and other short-term players.
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I would be interested in reading the HBS case. Do you recall the name of the case study?
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Having been involved in a private equity transaction and having learned a lot about the industry, I would say the advantage private equity has over publicly traded companies is that private equity firms do not have the pressure to produce immediate quarterly returns. Most of the time, they are free to initiate a 5 to 7 year plan for a turnaround. Their investors know this. That's why private equity is so successful and people and institutions are eager to invest in those firms.
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"Turnaround" for the equity company = bankruptcy for the company, all workers losing jobs, secondary negative financial losses for the town/immediate area due to the job loss. And massive profits for vulture capitalism.
No wonder Bernie is surging.
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My background is in quality assurance.
I do not believe I would be a good fit in retail.
So, given that, why would any business entity install those who have no background in retail in executive positions in retail?
Oh, I know, nickel-clickers and numbers crunchers with no regard as to the real costs of poor judgement in penny-pinching.
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Private equity firms believe smarts are more importent than experience
Combine that with taking money out of companies every year in the form of special dividends, and most of these stories don’t end well
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@Paul, I have met and gotten to know a lot of people who are in private equity, and I can say for sure that your assertion that "private equity firms believe smarts are more important than experience" could not be further from the truth. Yes, these people are very smart, and that is why they value experience.
There's always a few failures, but that will always be true, because business involves risk, and that includes the risk of complete failure and huge loss of money and jobs. But if people were not willing to risk their money, there would be no jobs at all.
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@Marty All too often, the financial interests at private equity firms are _not_ risking any money. Their investment is recouped quickly from the debt that they take on in the takeover transaction -- debt for which not the private equity firm, but the target is liable. It really couldn't be clearer.
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