David Dayen, American Prospect
Century-old retailer JCPenney filed for bankruptcy late on Friday, the latest large retailer to succumb this year. And you could hear private equity fund managers breathing a sigh of relief. Unlike J.Crew and Neiman Marcus, JCPenney is a publicly traded company. At least private equity wouldn’t be called out for this retail bankruptcy, and maybe that could absolve them of the high debt loads and mismanagement that has driven much of the retail apocalypse. If public and private firms are equally at risk, maybe the sector’s just obsolete.
First of all, you can’t cherry-pick one company and absolve the failed PE business model. According to the Wall Street Journal, 27 of the 38 retailers with the “weakest credit profiles” are private equity-owned. The incredible debt burden placed on these firms made them inflexible amid industry changes. And that was JCPenney’s problem too; its downfall mirrored the tell-tale signs of a private equity portfolio company.
Back in 2010, hedge fund titan Bill Ackman and real estate investor Vornado bought a quarter of JCPenney stock, and vowed to turn around the company. They effectively installed a new CEO, Ron Johnson, who subsequently ran JCPenney completely into the ground. He brought in his own inexperienced managers, fired 19,000 workers in cost-cutting measures, and reorganized the stores without market testing. Sales dropped 25 percent in a year and by 2012 Johnson was fired. Ackman and Vornado sold out and took losses. Private equity circled around the company, hinting at a purchase. But there was a problem: it was already weighed down by too much debt.
By 2013, JCPenney had $1.9 billion in net debt. And a loan from Goldman Sachsadded another $1.75 billion. In other words, it was already acting like a private equity-held company, using debt to survive. Like its private equity-owned colleagues, JCPenney went into conserve-cash mode, shunning investments in the business. This made it impossible to adapt and build an enduring presence online as e-commerce grew. The company also sold off real estate, stripping assets out to feed the debt machine.
Century-old retailer JCPenney filed for bankruptcy late on Friday, the latest large retailer to succumb this year. And you could hear private equity fund managers breathing a sigh of relief. Unlike J.Crew and Neiman Marcus, JCPenney is a publicly traded company. At least private equity wouldn’t be called out for this retail bankruptcy, and maybe that could absolve them of the high debt loads and mismanagement that has driven much of the retail apocalypse. If public and private firms are equally at risk, maybe the sector’s just obsolete.
First of all, you can’t cherry-pick one company and absolve the failed PE business model. According to the Wall Street Journal, 27 of the 38 retailers with the “weakest credit profiles” are private equity-owned. The incredible debt burden placed on these firms made them inflexible amid industry changes. And that was JCPenney’s problem too; its downfall mirrored the tell-tale signs of a private equity portfolio company.
Back in 2010, hedge fund titan Bill Ackman and real estate investor Vornado bought a quarter of JCPenney stock, and vowed to turn around the company. They effectively installed a new CEO, Ron Johnson, who subsequently ran JCPenney completely into the ground. He brought in his own inexperienced managers, fired 19,000 workers in cost-cutting measures, and reorganized the stores without market testing. Sales dropped 25 percent in a year and by 2012 Johnson was fired. Ackman and Vornado sold out and took losses. Private equity circled around the company, hinting at a purchase. But there was a problem: it was already weighed down by too much debt.
By 2013, JCPenney had $1.9 billion in net debt. And a loan from Goldman Sachsadded another $1.75 billion. In other words, it was already acting like a private equity-held company, using debt to survive. Like its private equity-owned colleagues, JCPenney went into conserve-cash mode, shunning investments in the business. This made it impossible to adapt and build an enduring presence online as e-commerce grew. The company also sold off real estate, stripping assets out to feed the debt machine.
But that debt mountain grew to $4 billion amid falling sales, and the coronavirus crisis tipped the company over the edge. It started skipping interest payments and the end was nigh. There are still 85,000 employees, most of them on the floor in sales and support. At least 200 stores will likely be shuttered.
After bankruptcy, JCPenney might finally become the attractive, debt-light company that private equity would want to play their turnaround game. It could find itself at the beginning of a new asset-stripping cycle, to the benefit of new private equity owners. The fear is that discounted, hobbled firms would get swallowed up into the PE borg, giving financiers an easy way to extend dominance.
But private equity may not be in the position to capitalize right now. Its portfolio companies keep going under or are considering bankruptcy. Major firms like KKRand Apollo have reported big losses. Valuations are impossible, given the uncertainty of reopening and returning sales. Selling companies, consequently, can’t happen. The federal government has supplied surprisingly little relief, although the Federal Reserve money cannon could still come to the rescue by purchasing junk bonds.
Private equity has lots of money in reserve for deals, and some have been dipping into that. But whether there will be enough appetite to take on companies like JCPenney is an open question. Meanwhile, we can say pretty definitively that the private equity business model adds hidden risk that can be incredibly damaging in a crisis. Where the valie lies is another question.
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