Neiman Marcus and J. Crew are the latest to join a list of growing retailers filing for bankruptcy and they both have something in common – enormous debt burdens from leveraged buyouts led by private equity firms.
As the government rolls out trillions of dollars in stimulus funds, a push by the private equity industry, i.e. some of the same firms that own the likes of Neiman Marcus and J. Crew, to shape the stimulus in their favor has met with only modest success. Why?
Well lets revisit LBO’s.
Remember, according to our LBO self-study course, private equity firms use leverage to buy a company, and then further optimize operations to get to the end goal of maximizing returns when they exit the company. So the argument is that Neiman and J. Crew over the past decade have paid hundreds of millions of dollars in interest and fees, when they needed to spend money to adapt to a shifting retail environment. And when the pandemic wiped out much of their sales, neither retailer had anywhere to go for relief except court. Critics of private equity say this is the moment when the industry should be coming up with more ways to help the companies they own. “There is no limit to their creativity when they are extracting wealth from their portfolio companies,” said Dennis Kelleher, president of Better Markets, “but they cry binding constraints when they should be using the same creativity to bail out their portfolio companies.”
Take our LBO course and decide for yourself!