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April 21, 2017 | Private Equity ‘Genius’: Lever, Gut, Destroy

Danielle Park

Portfolio Manager and President of Venable Park Investment Counsel (www.venablepark.com) Ms Park is a financial analyst, attorney, finance author and regular guest on North American media. She is also the author of the best-selling myth-busting book "Juggling Dynamite: An insider's wisdom on money management, markets and wealth that lasts," and a popular daily financial blog: www.jugglingdynamite.com

There have been more retail bankruptcies year to date in 2017, than in all of 2016 and the number of retailers filing for Chapter 11 bankruptcy is now approaching its highest level since the 2008 recession.  There is reason to expect much more consolidation in this heavily bloated sector that ballooned on the consumer debt bubble of the past decade.

It’s not just that consumers are encumbered by weak wage growth and crushing debt, nor is it just the rise of e-commerce taking sales away from bricks and mortar stores.  It’s also that yield-starved investors plowed indiscriminately into this sector the past 8 years, while private equity raiders worked their usual ‘genius’, buying up majority stakes and levering up the balance sheet to suck out cash, leaving the emaciated businesses to implode on workers, landlords, taxpayers and the other investors.

You know tax incentives are perverse and need changing, when non-productive debt and participants are given preferential treatment to grotesquely enrich themselves at the expense of economic stability and productivity.  See Clock’s up on retailers borrowed time:

Some retailers survived the Great Recession only because investors were throwing easy money at them, perhaps unwisely. These retailers incurred sharply higher debt in the years after the financial crisis, a type of financial life support now expediting their demise.

Data show private equity firms targeted certain retailers with low debt loads and then had those companies borrow billions of dollars they now can’t repay. Some of that money went to pay dividends to private equity investors.

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April 21st, 2017

Posted In: Juggling Dynamite

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