Fair point - I mean shitty in that they are shitty people causing harm to others because it enriches them in the short term.
They killed Toys R Us with bad schemes like this. Went into massive debt, paid the executives, even with bonkers growth they never would be able to repay everything, and closed despite having decent profits. The saddled debt was just too much (going off of memory here).
And Toys 'R Us, and a quite a few other companies, IIRC.
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a veritable crustacean ponzi scheme.
More of a prawnzi scheme, no?
There ought to be a law that says if debt taken on for purposes of buying company, dividends are illegal until all such debt repaid.
I’m surprised no one has called this a “shrimp scam-pi” yet.
Counterpoint: Private equity kept Toys R Us alive for 12 years during a very tough period for retail. Yes, the take-private transaction was risky and the debt ultimately proved to be too much, but all of the decisionmakers involved in the 2005 deal (both the private equity investors and the lenders who funded the mountain of debt necessary to do the deal) believed at the time that the company had a very real shot to grow in a way that would outpace the debt. The executives got paid well along the way, but would have been paid WAY more if they’d actually pulled off their initial business plan. They were definitely not rooting for failure.
This narrative that private equity goes into deals intending to destroy the company and declare bankruptcy is silly. Like most conspiracy theories there’s a grain of truth to it (deals are definitely designed to minimize the risk to the people who take over the company, often without really considering the potential downsides to rank-and-file employees and other stakeholders), but the private equity industry wouldn’t be able to get the debt it needs to do these kinds of deals if the lenders thought the company was inevitably headed for BK.
i think you present an interesting point.
in practice though they’re certainly seeking to extract the most profit. and if that runs up against keeping people employed, or keeping the doors open, so be it.
loading the corporate entity up with debt, and walking away after cashing out on an artificially inflated stock price seems to be a common tactic. one of many.
their focus - in general - is on short term proft extraction, not long term growth and investment.
i’ve got this on my to be read pile:
This is reminding me of wework; but with more maritime slave labor.
What exactly did they contribute that helped with that? Or are you just saying the debt didn’t sink the company until later?
That was Q3; in Q4 it was $12.5m. No, that doesn’t sink a corporation. But it does make a dandy scapegoat for the real problem: repost of dwall0’s link to Business Insider and nicely advances a narrative that the blame lies elsewhere. Really wish media would start digging a little deeper than what RL’s PR flacks are laying out. The endless-shrimp story is all I’m hearing.
No disagreement.
It doesn’t really work that way. First, these deals are private (hence “private equity”): they’re either buying an already-private company or “taking private” a public company (like in the TRU deal). Second, the stock price at which they exit is only as high as someone else is willing to pay. So they’re only really cashing out by selling stock if they’ve generally succeeded in their business plan. If the plan fails, they declare bankruptcy, their stock is worth zero, and the lenders get whatever is left. That said, the actual management folks DO get paid a lot of fees and salaries along the way, so (like I said before), those particular folks tend to shoulder relatively little of the downside risk.
Short to medium term, yes. The private equity model is generally a gamble on their ability to take something that’s not worth a ton, invest a bunch of money in it, and hope they can transform it fairly quickly into something that’s worth way more.
I’m saying they kept the company alive through the biggest economic downturn of our lifetime, a period of time during which every other major toy-specific retailer failed (eToys.com and KB Toys both filed BK in 2008, Macy’s aborted their attempt to reboot F.A.O. Schwarz a year or two later) and all kinds of other major retailers shut down (Woolworths, Blockbuster, A&P, Circuit City, Borders, etc.). There’s a VERY good chance that TRU would have gone bust sooner if it weren’t for the private equity guys’ efforts to turn it around. Which isn’t to make them out as heroes (they’re definitely not heroes), but I don’t think they’re quite the villains that many people seem to think they are.
The issue with PE firms is the moral hazard i.e. the fact that they risk little of their own money but they get most of the value if the company becomes successful.
So they have a strong incentive to take huge risks rather than going for a surer but less rewarding path; and to squeeze dry companies and move onto the next rather than investing time and money to make them reasonably profitable.
Fookin prawns
Here’s another story about private equity keeping a business running through tough times using a tried and true business plan.
Only if success is measured by finding the greater fool in the market (e.g. someone who sees value in a zombie brand that was kept shambling along longer than it should have).
“Shrimp not so popular these days? Fuck you, buy more shrimp.”
come on, “prawnsy scheme” was right there!
