Intro: The Perfect Storm
Our tour of private equity mishaps brings us today to another unfortunate concoction: the potent mix of Private Equity (PE) and the chaos of supply chain disruptions in the retail sector. You might think: Wouldn’t a retail company, already navigating the challenges of the digital era, desperation-merge with a private equity firm for some relief, some support? Maybe even a shot at a shining, post-COVID, eCommerce glory? More often than not, you would be deluding yourself. The casualties — think Toys R Us and Bed Bath & Beyond — tell a drearier tale.
Case Unpacked: Meet the Fallen Giants
Let’s take a brief, sobering walkthrough of some cautionary tales.
Remember Toys R Us? Already struggling before its 2005 leveraged buyout (LBO) by a few PE heavyweights, it was a beloved toy retail giant walking on thin ice. It crumbled under its debt load, with unforgiving speed, after the buyout. Was it a pandemic? A sharp digital shift? No, this was 2018. Toys R Us filed for bankruptcy, shuttered its US operations, and left a gaping void in the toy retail market – not to mention thousands unemployed.
Then there’s the tale of Bed Bath & Beyond, the homegoods retailer operating since 1971. Three private equity firms held a substantial stake in the company since 2019. Fast forward through a global pandemic and a CEO change, Bed Bath & Beyond ended up selling and leasing back real estate just to survive. A move right out of the ‘PE survival kit’. Two years later, faced with supply chain issues, the once largely competitive retail chain revealed plans to sell off half of its stores.
Red Flags & Financial Fun
There’s a consistent pattern here. Traditional retail businesses acquired by PE firms are often saddled with massive debt loads due to the often-used LBO strategy. Then, any hiccup — a slight downturn, supply chain disruptions, or a global pandemic — exposes the vulnerability of these debt-burdened firms.
Then come the familiar tactics. Cost-cutting, job firings, selling off real estate and leasing it back — the all-too-familiar maneuvers employed by PE firms trying to patch up a sinking ship that they inadvertently shot holes into. And when all fails, bankruptcy emerges as the path of least resistance.
Takeaways: A Comedy of Terrors
Looking at the hard-nosed numbers and outcomes, you might wonder if the PE gurus didn’t foresee the inherent chaos of the retail industry. Or did they simply underestimate the impact of disruptive events like supply chain issues and pandemics?
The answer is likely less about obliviousness and more about the structure of the PE model itself. Driven by tendencies for financial engineering and a short-term view of profitability, this performance can veer off the course of sustainable growth.
Pair this with the fragile balance of retail supply chains, especially in a post-pandemic world, and it… well, it starts looking less like comedy and more like a horror show of epic financial proportions.
To the sharp reader, and potential victim of a PE-motivated acquisition, this unflattering portrayal of the retail-PE love story isn’t meant to mar the history of private equity. Instead, it illuminates its inadequacy in successfully navigating an inherently chaotic and unpredictable retail sector.
It seems the time is ripe to re-examine the formulaic approach of financial engineering and possess a deeper understanding of the industry being entered. And perhaps above all, be prepared for chaos that isn’t merely theoretical, but inconveniently, relentlessly real.