How Private Equity Ruined a Beloved Grocery Chain

These people are parasites, who profited from the tax decreases on the very rich passed by Trump and the republican Congress.

https://www.theatlantic.com/ideas/archive/2020/02/how-private-equity-ruined-fairway/606625/?utm_source=pocket-newtab

February 16, 2020
Eileen Appelbaum, Co-director of the Center for Economic and Policy Research
Andrew W. Park, Financial researcher

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.

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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.

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Most companies mean to stay in business for the long term, and those in the industries most exposed to the business cycle know that low debt and no rent are the keys to surviving hard times and then prospering when the good times return. The motivation is very different for private-equity owners, who operate under a shorter time frame, often just three to five years, before moving on. For them, low levels of debt and high levels of real-estate ownership present a get-rich-quick opportunity.

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.

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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.

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Fairway, like Gymboree, Toys “R” Us, and so many other retailers before it, failed because it was saddled with debt and could not adapt to meet new competitive pressures. And, as in the case of Fairway, the private-equity firms that owned these other failing companies still managed to recoup their investments and make a profit. They extracted value by collecting advisory fees, paying themselves dividends, or stripping away a company’s assets. While the private-equity firms profited, the bankrupt company’s workers paid the price. When Toys “R” Us closed in 2018, 31,000 workers lost their job. When A&P went out of business in 2016, 21,000 workers lost their job and pension benefits.

A lack of transparency disguises private equity’s role in the retail apocalypse. When General Motors in November 2018 decided to halt production at five North American plants and cut up to 15,000 jobs, Congress summoned the company’s CEO, Mary Barra, to answer for its decision. In contrast, few people outside finance know what Sterling or KKR or Blackstone is. Even after companies owned by private-equity firms go bankrupt, the investors suffer no public approbation or damage to their professional reputation. They can still raise money from pension funds and other institutional investors to buy out other companies under the guise of saving them.
[It would help if articles such as this would name the people who own the private equity companies.]

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