Private equity’s bad optics
With the bankruptcy of accessories retailer Claire’s, it may “only be a matter of time before popular opinion turns against the world of private equity,” said Jared Dillian. Claire’s failed largely because of its 2007 leveraged buyout; in these “debt-laden deals,” private equity groups buy a company on borrowed money and then try to make it more efficient, with the aim of selling it at a profit—all the while extracting handsome fees. Sometimes it works, but a “growing” number of purchased companies are collapsing under the “staggering” amount of debt that is shifted onto them. That’s what happened with Claire’s, which had been burdened with a $2.2 billion debt. It’s also what happened last month with Toys R Us, which was unable to manage the $400 million in annual debt payments from its 2005 leveraged buyout. More of these bankruptcies are coming—and with them, job losses for workers. The optics of that won’t be good; Leon Black, the head of Apollo Global Management, which oversaw the Claire’s buyout, took home $191.3 million last year. If more companies start to go belly up for no other reason than “vulture capitalists” loading them with debt, “private equity may not be able to survive the onslaught” of public criticism that will ensue.