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Legislators Should Require Supervision And On-Site Examination Of Private Equity Firms

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Last year in November, I wrote about the thousands of people who have been fired from their private-equity sponsored retail companies. Unfortunately, the number of unemployed have risen since even more since then. According to a study released yesterday by the Americans for Financial Reform, The Center For Popular Democracy, and United For Respect, private equity-owned retailers slashed over half a million jobs even before the pandemic. “They cost nearly 542,000 jobs and closed nearly 18,000 stores by February 2020.”

Total job losses have been substantial and widespread with more than 10,000 retail jobs lost in 20 states and more than 30,000 jobs lost in California, Florida, and New York. There has been private-equity retail job creation, but the private equity retail job destruction has been nearly fourfold the amount of jobs created.

Private equity professionals’ model is typically to have companies taken on a significant amount of debt, which given low interest rates and a significant chase for yield by investors globally, has been easy to do. Then when a company’s costs have to be reduced, private equity professionals implement efficiencies strategies. According to Patrick Woodall, senior researcher at Americans for Financial Reform “these impacts are felt hardest by the people working in the important customer-facing positions, who are the same people that are paid the least. These low-wage retail jobs are often the only ones available to marginalized and oppressed communities and are predominantly held by women and people of color.”

  • After a number of years analyzing private equity transactions, Professors Brian Ayash and Mahdi Rastad have found that leveraged buyout transactions (LBOs) increase the likelihood of bankruptcy. Specifically “tracking a sample of 484 leveraged buyouts and propensity score matched control firms for 10 years.” Ayash and Rasad found that “these transactions increase the probability of bankruptcy for the target firm by approximately 18%” in comparison to non-LBO firms. These findings are distressing, because not only are shareholders at risk, more importantly thousands of employees at private-equity sponsored companies that routinely use LBOs, are at risk of being unemployed in the worst pandemic in a century. According to Woodall, “precarious private equity-owned retailers employed 215,000 workers as the pandemic broke: As the pandemic unfolded, twelve of the private equity-owned chains were at risk of collapse and some went into bankruptcy, such as J. Crew, Neiman Marcus, and Guitar Center. There were more than 215,000 workers at these 12 chains at heightened risk of job loss in 2020. Some of these workers may have already lost their jobs as retailers shutter locations or reorganize during the bankruptcy process.” Additionally, he stated that “thirteen states have more than 5,000 workers at vulnerable private equity-owned retailers — four states (California, Florida, North Carolina, and Texas) have more than 10,000 workers at these retailers.”

More than 55% of retail bankruptcies since 2015 were at private-equity backed retail chains. And from 2015 to 2019, about 63% of retail chains that entered bankruptcy were owned by private equity firms. “During 2020, when the pandemic drove a broader retail downturn, nearly two out of five (39.3 percent) of bankruptcies were at private equity-owned chains.” 

Unfortunately, there is little respite in sight. Presently, the Trailing Twelve Month (TTM) default rate in retailers with leveraged loans is the highest of any sector in the U.S. economy at almost 20%. As we enter winter and COVID-19 cases continue to increase, we can anticipate more and more restrictions or lockdowns, which will continue to hit retail workers. 

According to ‘Fitch U.S. Leveraged Loan Default Insight‘ published yesterday, retail companies Belk Inc, Blue Nile, Boardriders, IconixBrand Group Inc, Isagenix International Inc., Party City PRTY , Renfro Corp and Serta Simmons Bedding LLC are all in Fitch Ratings’ Top Loans of Concern. “With the exception of Party City, Isagenix and Iconix,” said Eric Rosenthal, Senior Director of Leveraged Finance at Fitch Ratings, “the others are private-equity sponsored.”

With the Biden-Harris administration taking over in January, it is imperative that legislators focus not only on how to better regulate private equity firms, but also how they can be supervised off-site and examined on-site. Ordinary Americans cannot afford the status quo of how private equity firms run. Every private equity executives fire people, they are destroying people’s livelihoods and compelling taxpayers to pay for these people’s unemployment and other social benefits. In essence, private equity firms force us to subsidize their profit making, but they sure do not share those profits with taxpayers. According to Charles Khan, organizing director of the Strong Economy For All Coalition and advisor of Wall Street and Corporate Accountability for the Center For Popular Democracy, “Private equity deals deals aren’t designed to work in the favor of the employees, who lose benefits and jobs, the customers, who lose favored products, or the long-term viability of these retailers. Wall Street’s strategy can be summarized as ‘We get rich, workers get ditched.’”

Investors can also play a significant role in forcing private equity to adapt better business models that do not involved laying off thousands of Americans. As part of their Environmental Social Governance (ESG) standards, investors should have policies not to invest in private equity firms unless their executives prove that they will not make employees wards of the state; private equity executives should provide training and post-employment benefits to people they fire without cause.  As this study specifically proposes, “The institutional investors (pensions, endowments, etc.) that fund private equity firms’ takeover strategies should receive ample information to assess predatory practices that might imperil the portfolio firm or its workers and hold the private equity firms accountable. Disclosures should include information about the debt burdens of the portfolio companies, the treatment of workers at portfolio firms (wages, benefits, retention, layoffs, etc.) and material information about the imposed costs and risks faced by portfolio firms.”



Additional articles about private equity:

Brown, Pocan, And Warren Are Right To Ask The Carlyle Group About Its Investments In Nursing Homes And Long-Term Care Facilities

Chase For Yield Has Fueled Private Equity With Significant Consequences For Americans

Democrats Call American Investment Council And Ernsy & Young Private Equity Report A Sham Study

Distressed Credit Ratings For Private Equity Backed Companies Have Risen Significantly

More Than Half Of Corporate Family Defaults Are Private Equity Owned Companies

New Study Shows Adverse Economic Effects of Private Equity Buyoutsver Half of Rated Company Defaulters Are Backed By Private Equity Firms

Private Equity Firms Have Caused Painful Job Losses And More Are Coming

Private Equity Should Stop Profiting From Immigration Detention Centers And Private Prisons

Private Equity Shows Adverse Economic Effects of Private Equity Buyouts

Significant Job Losses At Private Equity Backed Companies Should Worry Us

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