Comment by MarkMarine

2 years ago

“ us what happened with Toys “R” Us—how it went from a successful and iconic retail chain into bankruptcy [and] left employees with a $60 severance, while the private equity-anointed CEO cashed out with a $2.8 million exit package. It’s a really fascinating story. And I think it illustrates a lot of what works and doesn’t work in private equity. [In] 2005 a coalition of three firms, KKR, Bain, and Vornado, bought up Toys “R” Us for several billion dollars. Now, here’s the trick about private equity: They invested a little bit of their own money and investor money, but most of the acquisition was paid for with debt. And it was [not debt] that the private equity firms would hold—it was debt that Toys “R” Us would be responsible for paying. And that [debt] turned out to be enormous, and enormously burdensome. In fact, the common story around Toys “R” Us is that it was defeated by Amazon, that the wave of e-commerce made their business obsolete. That wasn’t actually true. In fact, Toys “R” Us was profitable the year before it filed for bankruptcy. The challenge that it had was [that] it was spending as much on servicing the debt as it was on actually making income. So part of the problem with the private equity acquisition was the reliance on debt. The other [problem] was the disinvestment in the business itself. Reportedly, the private equity firms slashed investment in basic things like store upkeep to such an extent that people were complaining that so much dust gathered in the rafters that it was...falling down onto customers like snowflakes. Beyond just disinvestment, they executed various tactics that brought money from Toys “R” Us to the private equity firm—things like extracting an estimated $180 million in fees.“