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THREAD: The retail apocalypse in full swing: Gymboree closes 800 stores, Shopko 105, Payless 2300, Charlotte Russe 400. What’s behind it? Some blame Amazon or changing taste, but the real culprit is private equity. We’ll explain how PE makes money as these businesses fail. 1/12
Private Equity Pillage details the business model that allows private equity firms to bankrupt chains, throw workers out of jobs, stiff vendors and still make a profit, in the context of grocery stores. 2/12 https://cepr.shorthandstories.com/private-equity-pillage/index.html …pic.twitter.com/HJRQeXiCLX
Here’s an overview of the business model. Private equity firms have rigged the process so they can extract profits not only from their investors (often public pension funds) but also from the companies that it “invests” in. Here's how: 3/12pic.twitter.com/FtJYCrGsff
Investors, using money from public employees' pensions for example, put their $$$ in a particular private equity fund. Right off the bat, the private equity firm makes a profit because they collect management fees for just accepting the money. 4/12pic.twitter.com/bOcY5AGOAI
The traditional story is that private equity firms invest in already distressed companies. Yet more and more they are healthy, proven companies that the PE firm then forces to take on debt (which the company now pays interest on). This erodes its ability to stay competitive. 5/12pic.twitter.com/RWwCYxXTz4
On top of the new financial pressures a company faces from this debt, it *also* pays monitoring fees to the PE firm. It may need to sell assets too, like real estate, and then pay rent to occupy the buildings it once owned. Where do the proceeds go? Usually, the PE firm. 6/12pic.twitter.com/fc3EafjpAG
With all this money being siphoned off from the company, it is in a much more difficult position to compete. 7/12pic.twitter.com/gh1NiDIeg9
Case in point: Albertsons, the 2nd largest grocer, struggles to compete, unlike Kroger's (the largest). The difference? Albertsons is owned by PE firm Cerberus and lacks $$$ to invest in multi-modal retailing. Kroger's can do all that Amazon-owned Whole Foods does & more. 8/12
Now in a precarious situation, the company might liquidate, restructure, or be sold. None might be the PE firm's most desirable outcome, but financial engineering usually ensures that it comes out on top (and it might be first in line to divvy up assets). 9/12pic.twitter.com/HjE3OrSY0M
Even if the PE firm doesn't make money from the bankruptcy, it has made money throughout the entire process via fees on its investors and the company it acquired, as well as from the assets the company sold off. The losers? Workers, investors like pension funds, vendors. 10/12pic.twitter.com/927Ld5RnH7
But common sense reforms can help. These could be limiting the debt an acquired company can take on, being transparent about fees, limiting payments to PE firms in the aftermath of a buyout, making PE firms joint employers, and protecting workers if a company goes bust. 11/12
Private equity gets away with all of this because of loopholes in current law. But that doesn’t mean what they are doing makes sense for either workers or the economy. We need reforms that center workers and others taken advantage of in the current PE model. 12/12pic.twitter.com/4umULvJesa
If you liked this thread, check out my new thread on private equity and surprise medical billing. You might find some interesting overlap!https://twitter.com/EileenAppelbaum/status/1171499409575563265 …
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