The idea of trying to amass tens of millions or billions of dollars has never appealed to me. What would I do with it? I don’t need it. But there are people who need it, because money breeds money, and those who never have, in their own minds, enough money, need every bit that they can get. Is it for bragging rights? Is it to purchase the world and lord over it as global god? Is it addiction? Is it compensation for some unrecognized subconscious shortcoming?
There are many ways of amassing money. Hard work. Luck. Winning the birth lottery. Theft, robbery, embezzlement, fraud. Investment. When it comes to investment, most people think of bank accounts, stocks, bonds, real estate, precious metals, and commodities. But there are other types of investment, available to those who already have amassed large sums of money. There’s the hedge fund. There’s private equity. They’re not secrets, though most Americans aren’t familiar with how they work.
Hedge funds pursue high risk investments in hopes of hitting it big. Private equity consists of funds not listed on a public exchange. In one sense, the sole proprietor who owns a $300,000 landscape business owns private equity, though those are not the sort of investments that come to mind when people familiar with private equity think of it.
What do hedge funds and private equity do? One path of investment is to acquire public companies and turn them private, or to invest in public companies that are in trouble and hope they turn it around. But increasingly, private equity and hedge funds are grabbing distressed businesses simply to extract the last bits of value and to abandon what’s left. As explained in
this article, too often, when given the opportunity to turn a distressed business in the direction of modernization, hedge fund and private equity managers prefer to take out money than to invest enough to turn the business around. This is what has happened with Sears, in which a controlling interest was purchased by hedge fund ESL Investments. It failed. Toys ‘R’ Us was acquired by KRR, Bain Capital, and Vornado Realty Trust. It failed. It happened to Gymboree, another Bain Capital investment. It failed. It happened to Payless ShoeSource, owned by Blum Capital and Golden Gate Capital. It failed. It happened to Radio Shack, in which Standard General had a substantial interest. It failed. Twice. It happened to Fairway, owned by Blackstone. It failed. The same outcome fell upon The Limited, Wet Seal, Claire’s, Aeropostale, Nine West, Brookstone, David’s Bridal, and Sports Authority.
From the perspective of the hedge funds and private equity, these aren’t tragedies. These have been good investments. From the perspective of employees, customers, and the malls in which these businesses rented space, these transactions have been disaster. Granted, retail stores have faced competition from their on-line counterparts, but would not saving one of these retailers included plans to go online? That didn’t happen. It didn’t happen because the new owners preferred not to put in even more money but to take out what was left. Worse, according to investment officer Jack Ablin, “many private equity investors lack the expertise to make the shift from traditional retail to online commerce.” Yet, surely they had the money to hire people who had the expertise. They didn’t, because, according to that investment officer, those investors “were also reluctant to commit more capital for the long-term to transform these struggling retailers.”
As noted in
this article, “Moody's Investor Service said David's and Sears are both less likely to pay their creditors because they are owned by private-equity investment firms, whose ‘aggressive financial policies,’ heavy borrowing, and focus on taking money out of firms tend to result in a lower likelihood that retailers they own will pay their debts. Some 92 percent of companies owned by 16 large private equity firms are rated at junk-bond levels, compared to 40 percent of operator-owned or corporate-owned stores.” How does it work? According to Ted Gavin, a partner in a turnaround firm, "A lot of retailers that have gone belly-up are private-equity-owned. It's pretty constant. They make incestuous loans to these companies at high rates, and they charge excessive fees. Cumbersome debt burdens, and owners taking fees simply for being an owner, does nothing good, and can precipitate distress."
Thousands of stores have closed. Hundreds of thousands of jobs have disappeared, in numbers far greater than the handful of jobs created by expanding online retailers. Shopping malls sit vacant, or have become virtual ghost towns with a smattering of open stores. And there’s more.
Serendipitously, at about the same time I was reading the articles I’ve mentioned, I was made aware of a situation that cuts closer to home. More than thirty years ago, I became a customer of a small, local heating and air conditioning company. A decade later, that company was bought out by a larger company. Then a few years later, that larger company was bought out by an even larger company. A decade after that, the even larger company was bought out by a very large company. Each time, the office staff and technicians with whom I dealt carried on. Continuity prevailed. Very recently, a competitor company, owned by a private equity firm, gobbled up the company currently handling my heating and air conditioning services. It let most of the office staff and technicians go, the opposite of job creation. It has been grabbing every competitor it can, across a half dozen states. It is buying customers, in an effort to sell units rather than focus on maintenance and repair. It installs one brand, its technicians are expert only with that brand, and the advice to customers with other brands, no matter the age, is to purchase new units. It has decided not to renew most existing service contracts. Surely it is no secret that the company’s goal is to control the market, if not establish a monopoly. Reviews are mediocre at best and customers complain about high prices. When I called because I needed something adjusted on one of my heaters, I was told the company doesn’t service that unit. It did not matter that I have a service contract in place. Bigger is not better, and being a number rather than a customer with whom office staff and technicians are familiar also is not better. Well, it’s better for those private equity investors whose need for more money is unlimited and eternal.
Is it only a matter of time before private equity disease puts this company into the list of failed enterprises? I do not intend to sit around to see if that happens. It’s too risky. At the moment, there still exist some of those smaller, local operations much like the one with which I started some decades ago. As for the existing service contract, my plan is to terminate it once I have a new one in place with another company, ask for a refund, and learn how much effort it will take to get that refund.
I wonder how things would have turned out if tax cuts had not been handed out to these folks during the past two decades. I wonder if they would have had the resources to do what they have done, are doing, and intend to continue doing. Retail stores probably still would have failed – they have, for many decades – but the resources that remained would not have been channeled into the hands of those already drowning in wealth. Perhaps not as many stores would have closed. Perhaps not as many people would have lost jobs. Perhaps some businesses would have hired people willing and able to take them online.
There are many lessons to learn from these events. Sometimes learning a lesson is helpful for the future. Sometimes learning a lesson comes too late, and the future is altered forever, often in a bad way. Perhaps we have run out of time.
