Private Equities and Toys ‘R’ Us

How do popular stores like Toys ‘R’ Us end up filing for bankruptcy?  The behind the scene story opens a window on the role of private equity funds in our society. “Thirty-three percent of retail job losses from 2016 through 2017 resulted from private-equity backed store closures…,” according to a report by Inflection Capital Management, an equity fund consulting firm. Due to competition from e-commerce like Amazon, Toys ‘R’ Us was in debt and was bought by a private equity fund. The funds some say are like payday lenders, they charge high interest rates. Rosemary Batt of Cornell says, “Debt is the lifeblood of private equity, but it spells death for companies and joblessness for workers.” So Toys ‘R’ Us ended up paying $400 million a year in interest alone, and wasn’t able to recover.  With that much debt it is difficult for the stores to improve their business. They can restructure and pare down expenses but the profits still aren’t enough to pay down the debt.  In time it was an untenable situation, Toys ‘R’ Us owed $5 billion. To be fair, the private-equity fund which had bought the 735 stores for $6.6 billion had put up $1.3 billion of its own money, so when it was time for bankruptcy they did lose money, but had already made money on their investment, and some say that in between its debt repayment and all the fees attached to the financial transactions had made up more than it had lost. The executives of Toys ‘R’ Us walked away with millions, but 30,000 workers lost their jobs without any severance pay. These are low paying, low skills jobs which continue to be disappearing for the same reason as what happened to Toys ‘R’ Us. It happened at Nine West, at Mervyn’s several years back and to others like Claire’s which are less well known.  It is difficult for these workers to find jobs, perhaps somewhat easier for the younger among them, but much harder for the many older ones. Some experts like Josh Kosman believe what he calls the buyout of America may lead to a financial crisis. Meanwhile it is important for us to understand the consequences of private equity funds, and realize what happens when Wall Street places profits ahead of the social good.