From The Atlantic:
"The news of Fairway Market’s second foray into bankruptcy, this time with the threat that stores could be liquidated to pay off the unsustainable debt hanging over the grocery chain, dismayed its legions of loyal Manhattan customers. Fairway’s New York City stores draw an eclectic crowd of shoppers: local residents, professors and students at schools from the City University of New York to Columbia University, and others seeking its fresh-baked breads, unusual cheeses, and wide range of international foods. Upscale and idiosyncratic, with its humble roots still evident, Fairway is emblematic of the city in which it has become a storied institution. But, fatefully, it is also emblematic of the way private-equity investors - including Fairway’s former owner Sterling Investment Partners - have hastened the fall of brick-and-mortar stores caught in the so-called retail apocalypse."
It is a familiar story in the retail business. A retail chain has been around for a long time, and has relatively low debt. It also tends to own a lot of real estate. Private equity steps in, and offers ownership a chance at a big check.
The Atlantic goes on:
"The low debt means that private-equity firms can acquire retail chains by putting up very little of their own money and can take on high levels of debt that the company, not the investors who own it, must ultimately repay. The real estate gives investors an opportunity to sell off some of it and pocket the proceeds, leaving the stores to pay rent on properties they once owned. Especially attractive to private-equity owners is the high cash flow in retail operations. Private-equity owners have not been shy about putting their hands in the till to pay themselves exorbitant dividends.
"Unfortunately, private-equity owners are far more accustomed to taking money out of retailers than to putting money into them, and the hollowed-out chains they own are ill-equipped to meet today’s competitive challenges. Brick-and-mortar stores need to invest in e-commerce, same-day delivery, and the technologies and logistics that success in retail now requires. While all traditional retail faces these challenges, chains owned by private equity make up a disproportionate share of businesses that have failed. This record is not just a product of markets; it’s a matter of morality as well. Private-equity firms profit as the companies they own tumble into bankruptcy."
The Atlantic suggests that "if private-equity firms cannot be socially responsible stewards of capital, then Congress will need to act. One possible reform would involve fully taxing the advisory and other fees that private-equity investors extract from the companies they own. Another potential reform would impose restrictions on dividends paid out in the two years following a buyout." Perhaps, the story posits, private equity should be required to "bear some of the liability for a company’s debt when the buyout ends in bankruptcy," since it has positioned itself to make so much money when things go well and even, apparently, when things do not.
This is not to say that all private equity is bad: "Private-equity firms claim that they make their money turning troubled companies around, and some do. But all too often, these investors buy healthy companies and use their superior access to borrowed money as a method of harvesting profits on their investments from the companies they acquire. Having made their money, they then move on, and the fate of employees in hollowed-out companies is no concern of theirs."
The story is here.
- KC's View:
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The piece is well-written and totally worth reading … though you have to have a strong stomach, because it'll make you sick.
Does the phrase "made out like a bandit" sound familiar? It seems appropriate in this case, because as the original private equity group that took over Fairway, Sterling Investment Partners, expanded the company, loading it up with even more debt and putting it in a position where it could not compete economically as the market got tougher, it was feathering its own nest with fees and dividends of more than $80 million. It almost didn't matter how Fairway did - Sterling seems to have done just fine.
(I was curious, and so I went on Sterling's website and - no surprise - there seems to be no mention of its Fairway misadventures. One thing that did surprise me was that there seems to be no relationship between Sterling Investment Partners and Sterling Equities … which is the New York firm that owns the New York Mets, and is doing its level best to mismanage the franchise into obscurity and oblivion. I figured that they almost had to be connected…)
