Commonly, companies acquire or merge with other companies to gain more assets, become more competitive, enter into a market, or invest in them and then sell them later. These deals go through a tedious process and involve a lot of equity. Private Equity focuses on going through these deals with long due diligence (research), valuation, and money. What happens when these acquisitions don’t succeed – what does Private Equity do to secure a profit. Here is some information to give you insight into what happens when Private Equity doesn’t secure a profit and what lengths they will go to get a profit.

What is Private Equity?

Private Equity is an investment fund based on acquiring majority stakes in mature companies using a 60-70% amount of debt to finance the acquisition. Private Equity firms acquire companies with stable cash flows, great management, and low capital expenditures. Essentially, they look for low-cost companies and stability in their investments then sell in three to seven years.

What does Retail have to do with Private Equity?

Private Equity invests in all sectors including retail and there are multiple critical events happening in retail. Currently, retail is going through what some investors call a “transformation”. With the introduction of online retailers including Amazon and eBay – many retailers have struggled to transition into the online space. Furthermore, the general economy is declining or is currently in a recession depending on your view of the economy. Insert an investment firm dedicated to receiving profit despite these factors and you have a recipe for chaos. Private Equity kept on investing in retailers and even wanted to cut costs which would impede the transition into the online marketplace.

Understanding the Situation more in Depth

Retailers acquired by Private Equity firms are more prone to bankruptcy, debt pumping, layoffs, loss of purpose, and harsh exits. Private Equity firms tend to strategically use debt but overload debt into their acquisitions to turn a profit. Normally this works for the short-term but once interest and loan payments are near then the acquisition goes into a frenzy by that time the Private Equity firm already exited and left the business bankrupt. Private Equity firms are aware of the consequences of their debt pumping and will exit their acquisitions no matter what. Their exits are harsh and somewhat corrupted they include hidden IPO contracts and secret dividend payments designated for Private Equity payment. These exits consist of a heavy payment of equity put into Private Equity’s pocket for a smooth exit. Layoffs are key to Private Equity’s profit by “cost-sizing” and removing redundant costs to increase profit. This disproportionately affects minorities and affects the overall purpose of the company. Employees are key to the purpose of a company and replacing employees or getting rid of them is not viable. Cost sizing might be a way to lower expenses but ultimately lowers customer flow in the business and it attracts fewer customers. All of this, increase the likelihood of bankruptcy among all Private Equity owned retailers.

What Others say

Many attribute the decline in retail to external factors such as the general shift towards online and the macroeconomy. They also claim that it is rare for Private Equity firms to make mistakes with their acquisitions due to the meticulous process of due diligence. Although the general shift towards an online marketplace is affecting all retailers then why is there a clear discrepancy between non-private equity-owned and private equity-owned retailers in bankruptcy. According to Americans for Financial Reform, “From 2015 to 2020, there were more than 50 private equity-owned retail bankruptcies — more than half (56 percent) of all retail bankruptcies were owned by private equity” (AFAR Team, para 5). This statistic is alarming and a clear indicator of the discrepancy between non-private equity and private equity-owned retailers.

Combatting this Issue

To combat Private Equity’s corruption in the retail sector, consumers need to rise up and raise awareness to bring change. Consumers can boycott certain retailers acquired by Corrupt Private Equity firms. Consumers can also start strikes with posters exposing corruption in front of corrupt Private Equity firms. This should pressure legislators to take action against Private Equity’s actions in the retail sector

  I was Born and raised in Queens NY and I come from two Peruvian parents who immigrated here to give me better opportunities. I am the first one to attend college in my family. In High School, I got interested in finance through my time reselling sneakers, merchandise, and random products such as fridges and cards. The reselling community moved on to investing in NFTs and stocks. I also moved into personal finance as well with the wave. I invested in NFTs such as NBA Topshot and Bored Apes. Overall, NFTs taught me how to start to invest and how to forecast and research markets to increase profits. I didn’t invest in any stocks because I wasn’t legally allowed to but I started to learn more about rate hikes, CPI reports, and financial statements. Also, I got even more interested in finance through my SL Green Internship where we had a workshop with the VP of Finance who taught us Real Estate valuation and underwriting. Although I understood some of the presentations it sounded very interesting and I understood the basic concepts such as valuation. Since Real Estate Acquisitions generally took a really long due to legality issues and tenants refusing to sell their property. I was deterred by the long process of Real Estate Acquisitions that spanned various years and was more focused on companies that took 3-6 months. Naturally, this drew me into M&A but specifically in Investment Banking where we serve as a sell-side/buy-side advisor to companies. In M&A for businesses, we focus on providing financial valuation (Comparable Company Analysis, Precedent Transactions Analysis, Discounted Cash Flow Analysis, and occasionally Accretion/Dilution Analysis) and identifying synergies to show why an acquisition of a company can expand, decrease costs, or increase productivity for the buyer. I also found that my previous market knowledge is heavily tied into M&A more than Real Estate because in order to make up your assumptions for a Discounted Cash Flow Analysis you need to tie in the industry performance and the future outlook of the macroeconomy to make sure your assumptions are accurate. M&A is a very client-focused industry as well and involves a lot of communication, teamwork, and leadership skills. These skills resonate with my love for mathematics and meeting new people and working with groups. I hope to leverage my skills to break into M&A and work on some of the biggest and most diverse transactions.