PE: Bankruptcy 'n Things 'R' Us

Our July/August issue included a feature article on private equity by Orlando Segura, who worked in PE firms for several years. He concluded his insider’s account thus:

The legal framework that actively provides incentive for this industry to thrive has spawned a new breed of capitalism in which businesses are treated as assets to be bought and sold, rather than as social institutions that are sources of people’s livelihood. It is perhaps wise to consider the question: What value do these firms confer upon our economy, and through it our society? Private equity firms do not incentivize innovation in the economy, they do not create jobs, and they largely do not actively manage the businesses they own.

(Sorry–this article isn’t posted online, but you can order a copy of that issue of the magazine here.)

An article in today’s New York Times provides new fodder for criticism of private equity firms. It seems that many of the companies that PE firms have bought via (highly) leveraged buyouts–ranging from Linens ‘n Things and Toys “R” Us to Chrysler and GMAC–have been hit hard by the financial meltdown.

(What is it with PE and companies with cheesy names? PE’s slogan may become, “Bankruptcy ‘n Things ‘R’ Us”. Or will the proposed merger of GM and PE-owned Chrysler be called “GM ‘n Chrysler”? Or “Gas-Guzzling SUVs ‘R’ Us”?)

The choicest quote from this article, in an age of overheated doomsday proclamations, is from Josh Lerner, professor of investment banking at Harvard Business School: “There’s absolutely going to be a lot of pain to go around. The big question is how apocalyptic it will be.” [Emphasis ours.]

Debt Linked to Buyouts Tightens the Economic Vise

Published: November 2, 2008

Private equity firms embarked on one of the biggest spending sprees in corporate history for nearly three years, using borrowed money to gobble up huge swaths of industries and some of the biggest names—Neiman Marcus, Metro-Goldwyn-Mayer and Toys “R” Us.

The new owners then saddled the companies with the billions of dollars of debt used to buy them. But now many of the loans and bonds sold to finance the deals are about to come due at the worst possible time.

So, like homeowners with an adjustable rate mortgage that just went up, some of private equity’s titans are facing a huge squeeze. And that is coming at the same time consumers are staying home with their wallets closed.

Already this year, big retailers backed by private equity, like Linens ‘n Things, Mervyn’s and Steve & Barry’s, have filed for bankruptcy.

Read the rest of the article.

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