[MarkMarine]

I thought the PE model was to buy one of these companies, leverage them with many multiples of debt while paying themselves out massive fees and bonuses, then letting the huge interest and debt load take its toll on the husk of the company.

[civilized]

It often is, but this isn't some kind of free money tree that only rich people can access. Loading up a company with debt requires a creditor. Selling underlying assets requires a buyer. If these counterparties don't offer enough money to offset what PE spent to buy the company, PE loses. And this often happens, including, apparently, in this case!

[MarkMarine]

“ us what happened with Toys “R” Us—how it went from a successful and iconic retail chain into bankruptcy [and] left employees with a $60 severance, while the private equity-anointed CEO cashed out with a $2.8 million exit package. It’s a really fascinating story. And I think it illustrates a lot of what works and doesn’t work in private equity. [In] 2005 a coalition of three firms, KKR, Bain, and Vornado, bought up Toys “R” Us for several billion dollars. Now, here’s the trick about private equity: They invested a little bit of their own money and investor money, but most of the acquisition was paid for with debt. And it was [not debt] that the private equity firms would hold—it was debt that Toys “R” Us would be responsible for paying. And that [debt] turned out to be enormous, and enormously burdensome. In fact, the common story around Toys “R” Us is that it was defeated by Amazon, that the wave of e-commerce made their business obsolete. That wasn’t actually true. In fact, Toys “R” Us was profitable the year before it filed for bankruptcy. The challenge that it had was [that] it was spending as much on servicing the debt as it was on actually making income. So part of the problem with the private equity acquisition was the reliance on debt. The other [problem] was the disinvestment in the business itself. Reportedly, the private equity firms slashed investment in basic things like store upkeep to such an extent that people were complaining that so much dust gathered in the rafters that it was...falling down onto customers like snowflakes. Beyond just disinvestment, they executed various tactics that brought money from Toys “R” Us to the private equity firm—things like extracting an estimated $180 million in fees.“

https://open.substack.com/pub/adaml/p/a-conversation-with-br...

[renewiltord]

So the sucker here is the bank? Can't say that I care that much about that. It's just business and the banks apparently suck at it. They can foreclose on the business and sell it off to someone who relaunches it.

[s1artibartfast]

Yep, and banks come out ahead on average too. That's why they choose to lend to PE.

Some mortgages and credit cards end in bankruptcy too. They set their interest rate according and it is a cost of doing business.

[tharmas]

Don't the banks just print the money when they lend out anyway? Before the loan the money didn't exist. I suppose the bank is still holding the bag for the unpaid debt.

[MarkMarine]

I think the sucker is always regular people. The ones that worked at these companies, and the collective us that the banks pass these costs down to

[jgalt212]

The leverage game is much tougher to do now that ZIRP is thankfully over.

[joegibbs]

But why would anyone lend to a company which has been bought out by a PE firm then? Wouldn't banks turn around and say "hold on, I know this old trick, you're going to take loads of my money and then give it to yourself and default, and I get nothing"?

[MarkMarine]

The PE firms use the debt from their purchase of the business to load them up. They don’t even put their own money into it.