What is Private Equity?
Focus on 0:23-3:08
https://www.youtube.com/watch?v=tbRkdm80cFs (If the video does not load in time)
The Role of PE
The Role of PE can be significant since they deal with finances within companies, and companies are helping the Economy. PE firms can help the stores grow, change and create jobs, which can lead to more impacts.
PE firms also work by helping struggling businesses regain their company. Firms can help by making these changes to increase productivity and efficiency. By doing so, they can modify management teams, business strategies, and how they are operated. Thus assisting the store in improving its profitability and staying feasible. The work of PE brings a solution to these failing businesses to prevent bankruptcies.
COVID-19 Pandemic
COVID-19’s arrival in the United States in 2020 caused a market collapse. As a result, all forms of economic activity stopped. Companies were in distress because people rarely went outside to shop. PE firms took the pandemic as an opportunity to invest in companies to help them recover. A company like J.Crew was revived by a firm called “TPG.” The PE firm’s changes paid off since the store could remove its debt and focus on its primary business. According to Maheshwari and Friedman (2020), by rescuing several businesses, like J.Crew, PE had acted and used the retail apocalypse of 2020 as a chance to generate growth and support the economy.
Despite the accomplishment that TPG has done for J.Crew, it doesn’t apply to all firms.
Benefits and Drawbacks of Private Equity
There are outcomes where a PE firm can successfully help a business. Not only economically but strategies to improve the industry overall. Such as capital infusion, where firms can provide necessary funds through different financing methods. Firms also offer expertise management, a strategic direction for businesses to increase productivity and profitability. Value creation, which emphasizes producing value through the changes of making improvements or cost-cutting, is another advantage PE firms deliver to businesses.
These changes can sometimes be harmful, leading to high costs and risks. Like capital infusion, it can provide necessary funds, but the action taken to get funds can be through taking loans. Taking on loans can eventually lead to more debt if not regulated carefully. Leveraged buyouts have always been a high risk, but a firm’s strategy is to use the money to change the company. The firms actually invest very little of their own money into the company.
Employee firing as a cost-cutting measure for value creation results in high unemployment rates. Unemployment is also due to the firm’s motive of keeping it short-term with a business. They focus too much on short-term gains at the expense of long-term sustainability. A house hearing done in 2019 can agree and statistically show that 10 of the last 14 companies had declared bankruptcy due to private equity firms. Toys “R” Us is a great example to exemplify the failure of PE because it had laid off 30,000 of its employees and closed all of its stores.
PE and Production
PE can significantly increase faster growth due to production, wages, or employment. Contrary to what I previously stated, PE can bring employment, too, since it depends on the results that firms direct the organization towards. Bernstein, Lerner, Sorensen, and Strömberg conducted a study that compared the nations with the U.S. to show how the structure had increased productivity. In Table 8, it is discussed how the findings of employee growth rate are more significant than other industries despite the active concern that employees can be laid back or not paid enough. Table 6 shows the different growth rates of PE, and its shows that it grows at an annual rate that is a few points higher than a non-PE industry.
Overall, this study comparing different industries shows that PE can solve declining businesses, as it needs more money. In general, PE brings in fast growth to all business aspects and if applied to a business during the retail apocalypse, can save many stores and jobs.
The main strategy: Buying and selling
Private companies are a well-known source of buying and selling tactics that might be profitable. Through its purchasing and selling strategy, a corporation tries to support a company in recovering and making a profit. To help them recover, companies buy failing businesses, take on debt and funding from investors, and sell their investments to a different party if it succeeds. Ultimately, it’s a win-win situation for the company and the industry since everyone benefits. It is also well known that the firm is taking a risk to benefit from the business. Businesses are prepared to take that risk to help the retail stores recover. There will be some that could improve and some that might cause a large drop in earnings. Providing loans would be a gamble on whether the business would thrive or build debt. However, private equity businesses can potentially generate higher returns. Since private firms have made more money than losses on their investments, they claim they provide a more significant annual return than public corporations, whose values may change over time and lower final returns. Barber and Goold’s statistics comparing the profits it can create from a business to those of a public company are helpful. By offering goods and services, they expand companies and strengthen our economy. A strong, growing firm also creates more jobs.
Conclusion
Does private equity help or worsen the retail apocalypse? The solution is not fully clear and is still arguable. Private equity can cause a fall in some stores but can also bring businesses that need help the funding and knowledge they need to survive. However, retailers should adapt and take on risks to stay, whether through private equity investment or other ways. The effect of private equity on the retail industry will remain controversial since it has many advantages and disadvantages.