Private Equity, BAD!!
Bad Company is an overly simplistic tale of capitalism. The author seems to equate private equity with Leveraged Buy-Outs. But that is just one business model. It’s true that the private equity capital stack uses more debt than public companies. That is also true of most privately-owned businesses. And most businesses are privately owned. Public companies are the exception, not the rule.
I appreciate the author’s story telling through four individuals affected by companies that transitioned ownership.
The author picks some rough cases: Toys R Us, a rural hospital, local newspapers, and an apartment owner. The story of these failed private equity ownerships are taken to the human level through the four story arcs of those individuals.
Toys R Us is an easy punching bag. The chain was in trouble in 2005 when it as acquired through a leveraged buyout. Bain and KKR thought they had a plan to turn things around. They succeeded for a few years, but ultimately collapsed. It could not fend off Amazon, Target and Wal-Mart, the rise of streaming services, tablets, and video games.
Yes, it was over leveraged. The lenders made the loans because they believed in the Bain-KKR turnaround strategy. Lenders are not in the business of not getting repaid. The author misses that point.
The author misses the massive payout to the stockholders of Toys R Us. That is one of the great things private equity does. It offers exits to business owners. Most private equity transactions are not public-to-private leveraged buy-outs. They buy private companies where the owners are looking to sell.
As for the rural hospital story line. Ugh. Personally, I see it as a indictment of the American medical system. <Spoiler> In the end, the solution is a government paid for non-profit hospital.
Small newspapers. <Spoiler> The solution is a non-profit model. Gatehouse killed small newspapers. But it was the merely the final shot. The loss of classifieds to the internet. The loss of advertising dollars. The inability to monetize the web presence.
The fourth story of real estate. Clearly I have a personal bias here. And a whole lot of knowledge. Only small minority of residential real estate is owned by public companies. The bigger the apartment complex, the more capital needed. So the bigger the more likely it has an institutional owner. The author picks the time when an apartment building is having major maintenance issues and the COVID pandemic. There is a crisis. People are not paying rent. Landlords have to pay their mortgage. Bad things happen. There are good landlords are there are bad landlords. Some landlords have capital to fix problems and some do not. Some are willing to fix problems quickly and expediently. Some are not.
Sources:
- What Went Wrong: The Demise of Toys R Us
- Buy the book at Amazon: Bad Company: Private Equity and the Death of the American Dream―An Exposé of Private Equity’s Devastating Impact on American Lives, Communities, and the Economy
- Corporate Ownership of Residential Land By Kristina McGeehan, Lincoln Insitute of Land Policy
- The Private Equity Wager: Heads We Win, Tails You Lose by Jennifer Szalai, New York Times
- Private Equity Doesn’t Actually Want to Kill the American Dream By Gary Sernovitz, Bloomberg