Private equity firms: A failure of capitalism

WHY? Private equity firms are like sharks in the water. They smell blood and they look for more. In the process, they put people out of work while enriching themselves. It’s a disgrace that hurts decent, hard-working people. The relationship between private equity firms and workers is zero-sum: when they thrive, working-class communities suffer.

Private equity firms buy up companies, employing what they claim are superior management techniques to make them more efficient and profitable. Maybe sharp minds like Mitt Romney, America’s most famous private equity manager back when he worked at Bain Capital, can turn around struggling businesses. But in reality, the success or failure of the company is almost beside the point: this is about extracting profits and leaving employees without any lifeline.

For more than a decade, Shopko offered employees not just a paycheck, but a place where every employee was considered family. They were proud to work at a company that was founded in Green Bay and served Wisconsin families.

Enter Sun Capital Partners, a Florida-headquartered private equity firm, who bought out Shopko in 2005. No matter how successful Shopko ran the business, Sun Capital’s apparent intention was not growth but to take out as much money as possible by slowly killing the company.

According to Business Insider, “Sun Capital executives drowned Shopko in nearly $1 billion in debt. They pushed the store into bankruptcy, leaving more than 14,000 employees desperately searching for a lifeline. Even during Shopko’s liquidation, Sun Capital executives continued to collect: In total, Shopko executives paid themselves nearly $67 million in dividends and fees. My coworkers and I were offered nothing”.

When Sun Capital finally shuttered Shopko’s doors, they also broke commitments to Shopko workers by failing to distribute once-promised severance payments, leaving many in utter financial distress. Sun Capital pulled the same move on the state of Wisconsin, when it skipped out on $8 million in sales tax payments.

Since 2009, private equity firms havedestroyed over 1.3 million jobs by bankrupting retail companies and stripping them for parts. Many of the brands you used to shop at — from Toys ‘R’ Us, to Payless ShoeSource, Sears, and ArtVan — were destroyed the same way. In nearly all cases, workers were left with nothing.

When the PE firm has sucked all the money it can out of the company and its stakeholders, which usually takes between three and five years, it either sends it into bankruptcy (where workers lose whatever they have left) or sells it (often to another PE firm).

Go to Sun Capital’s website and you’ll see a bunch of very white employees living the good life in Boca Raton Florida.

Private equity firms, famously, have no commitment to the long-term sustainability of the companies they buy; their time horizon is three to five years until, ideally, they exit these investments. The heart of private equity’s business model is the “leveraged buyout” (LBO). This is a deal in which a PE fund uses capital supplied by pension funds, endowments, wealthy individuals, and other investors as a down payment, and buys out a company using high levels of debt that it loads on the company — typically in the range of 70 percent of the purchase price. Post-buyout, PE firms often add on more debt in order to pay themselves a dividend, or they sell off assets or real estate, reducing financial stability. Strangled by debt and newly obligated to pay rent, these grocery chains have neither the ability to cut prices to compete with low-cost chains nor the resources to invest and compete with upscale markets. 

Even in the bankruptcy of the companies they buy PE firms manage to reward themselves with huge payouts amounting to tens of millions of dollars while employee are left with nothing. They wreck firms because they can and because they only care about their investors.

Unless the Fed or Congress step up PE firms are going to continue to suck the money out of businesses they buy leaving bewildered and unemployed employees. This is a failure of Capitalism.

About richmeyer

Rich is a passionate marketer who is able to quickly understand what turns a prospect into a customer. He challenges the status quo and always asks "what can we do better"? He knows how to take analytics and turn them into opportunities and he is a great communicator.

View all posts by richmeyer →

One Comment on “Private equity firms: A failure of capitalism”

  1. What Sun Capital immediately did when they bought ShopKo/Pamida was to take all of the real estate that they owned and sell it in a sale/leaseback where Sun Capital kept most of the money that was received on the sale.

    Sun Capital received about three times return from their original investment on that transaction.

    It left the company heavily in debt. Even when they shut down non-performing stores, they still were obligated to pay rent on these stores for many years to come.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.