Many reports put the demise of large US retailers lay blame at Amazon, because it makes for a nice, simple narrative.
Takes very little reporting and you can get enough quotes from analysts to back up the premise. However, there’s another villan, which takes a bit more reporting and can be backed up by the old adage of “follow the money.”
Private equity firms, which are the money men for the 1 percenters as well as large pensions and insurance companies, have been feasting on retailer debt for the last three years.
In simple terms a PE firm will do a Levered Buy Out of a firm or what is called “taking it private.” When it does this to a publicly trade company it buys out the shareholders at a premium to the stock price.
The firm puts little of its own money into the buyout, since it will load the company with debt to finance the stock purchase and in turn own the debt, which it will get paid for servicing.
An extreme example of this in retail is Eddie Lampert’s ESL PE firm. Lampert owned K-Mart and then bought Sears in 2005 for roughly $5B. Today Sears is worth maybe $1B but Lampert has made a nice profit from selling off or licensing most of Sears brands as well as the fees he gets from Sears and K-Mart.
Most PE firms hold positions for 5 years or less. If there is anything salvageable after that they may spin the company back to the public markets in an IPO or if there is little left sell it to a bottom feeding PE firm, which will “strip the copper out of the firm” and put it in bankruptcy.
Most of the time all these firms are making big money despite what the balance sheet looks like.
What does a retailer look like that has been infiltrated by private equity firms?
Below is a list of PE firms that have profited handsomely from the retail debt binge bankruptcy cycle in the past year or so.
- Apollo Global Management: Claire’s
- Sycamore Partners: Aeropostale
- Sterling Investment Partners: Fairway
- Leonard Green & Partners: Sports Authority
- Standard General: American Apparel
Other big names in the industry are: Ares Management, Starboard and Jana Partners