Cash Out, Collapse, Repeat: A Deadly Private Equity Mantra
Private equity firms carry a notorious reputation. They are often painted as financial predators, descending on vulnerable corporations, leeching out their value, and leaving behind a hollowed-out shell. A more cynical observer might describe them as the Wall Street equivalent of a vulture circling slowly overhead, waiting for the moment to swoop in.
In the dreary world of financial toxicity, private equity’s misadventures hold a special place. The poster children for these may include Toys “R” Us, WeWork, Bed Bath & Beyond — companies whose financial Darwinism played out publicly and painfully. Let’s peel back the veneer, move past the corporate euphemisms, and expose the high stakes game played out on the backs of unsuspecting stakeholders.
The Rise and Fall of Toys “R” Us
Like a bad fairy tale, the story of Toys “R” Us begins with a dream and ends in a nightmare. In 2005, a group of investors led by Bain Capital, KKR & Co., and Vornado Realty Trust bought out the company for $6.6 billion, promising to supercharge its response to retail competitors.
However, their idea of supercharging involved massive borrowing against the company, coupled with dubious financial engineering techniques designed to siphon off profits. Meanwhile, revenues dwindled as competition stiffened. The financial noose tightened, and in 2017, Toys “R” Us filed for bankruptcy, resulting in 33,000 layoffs.
Financial Red Flags
In the lead up to its eventual collapse, Toys “R” Us showed all the classic symptoms of private equity-induced trauma. The most glaring red flags: $400 million annual interest payments on a debt load of $5 billion, while profits stood at only around $460 million. As for Bain Capital and its cohort, they collected around $470 million in fees during their 12-year sojourn.
WeWork: The Wall Street Soap Opera
WeWork, the office-sharing start-up, was once a darling of the investment world. Everything changed when SoftBank’s Vision Fund decided to feed this darling steroids in form of a staggering $10 billion investment.
WeWork’s collapse was like watching a car crash in slow motion. With a gibberish-spewing CEO and a lack of corporate governance, the company’s $47 billion valuation quickly evaporated, and the planned IPO was abruptly canceled. The ensuing cleanup by SoftBank continues with the “quixotic” CEO ousted, thousands laid off, and billions in losses declared.
The Indicators Were There
With WeWork, like many private equity debacles, the red flags were brightly visible. A CEO with unchecked power, curious side deals benefiting said CEO, and valuations based on unchecked ambitions rather than concrete business performance. The financial engineering here involved manipulation and overinflation, creating a bubble just waiting to burst.
The Takeaway
When it comes to private equity misadventures, the modus operandi rarely changes. Investors identify a company, often struggling yet promising. Buy it out, saddle it with debt, extract money through fees, and leave it impotent. When asked, they simply quote “market forces.”
But let’s call it what it is: predatory capitalism. It’s not about adding value or revitalizing companies. It’s about wealth extraction at the expense of thousands of jobs and financial stability. Until regulations are set to restrict such ruthless behavior, the cycle — cash out, collapse, repeat — will persist in the dark underbelly of Wall Street.