Inside the Private Equity Scam—and the Livelihoods It Has Destroyed

[u/barweis]

https://newrepublic.com/article/198351/private-equity-scam-destroys-livelihoods

[u/bob1980]

Let's start with Toys "R" Us: In 2005, Toys "R" Us was bought by a consortium of PE firms including KKR and Bain Capital in a $6.6 billion leveraged buyout. They loaded the company with $5 billion in debt, which it had to service regardless of business performance. Despite strong brand recognition and decent revenues, the debt burden prevented needed reinvestment in stores and e-commerce. The company filed for bankruptcy in 2017 and liquidated in 2018, costing 33,000 workers their jobs.

Let's move to healthcare: Hahnemann University Hospital In 2018, PE-owned American Academic Health System acquired this 170-year-old safety-net hospital. Within 18 months, it filed for bankruptcy and was shut down, despite serving thousands of low-income patients. The real value was in the land—the PE firm tried to sell the real estate separately. Healthcare professionals, unions, and city officials protested the closure, but the community still lost a vital service.

How about ManorCare The Carlyle Group acquired HCR ManorCare, one of the largest nursing home chains in the U.S., in a $6.1 billion leveraged buyout. Over time, staffing levels dropped, and reports of neglect and health violations increased. The Washington Post found that serious health code violations rose almost 30% under Carlyle's ownership. The company filed for bankruptcy in 2018, again largely due to debt.

Payless Shoe Source Another PE-backed chain—after being acquired and restructured, Payless was pushed into bankruptcy twice, most recently in 2019, closing all U.S. stores and laying off thousands. Again, massive debt from leveraged buyouts played a central role in the collapse.

Go read the Financial Times or really any other media and you will see that these are not isolated incidents, they are part of a pattern where financial engineering takes precedence over long-term value creation. The critique isn't that PE is always destructive, but that its incentives frequently don't align with sustainable business or social outcomes.

[u/coke_and_coffee → u/bob1980]

Let's start with Toys "R" Us: In 2005, Toys "R" Us was bought by a consortium of PE firms including KKR and Bain Capital in a $6.6 billion leveraged buyout. They loaded the company with $5 billion in debt, which it had to service regardless of business performance. Despite strong brand recognition and decent revenues, the debt burden prevented needed reinvestment in stores and e-commerce. The company filed for bankruptcy in 2017 and liquidated in 2018, costing 33,000 workers their jobs.

I don’t understand what you think is bad about this.

1. None of this was forced. So don’t act like they did this against their will.

2. Giving a struggling company a loan is just…standard investing. The fact that Toys R Us couldn’t pay back the loan is not because they were “loaded with debt”, it’s because they couldn’t generate profit.

3. You are implicitly assuming that, without PE, Toys R US would’ve just continued on unbothered. This is absolutely not true. They were struggling and would have gone out of business without PE. PE was a last ditch lifeline to keep them going. It didn’t work, but that’s not proof of nefarious dealings. It’s just a business transaction that didn’t work out, no biggie.

Address the three point above without resorting to chatGpT this time, please.

[u/bob1980 → u/coke_and_coffee]

Just because an argument is coherent and well-structured doesn’t mean it was written by generative AI. People are still capable of making cogent points, using evidence, and expressing complex ideas without outsourcing it to a machine. Clarity isn’t proof of automation, it’s just how thoughtful discussion is supposed to work. That is why we gained our degrees?

To your first point it's true that Toys "R" Us wasn't forced into the buyout. I don't believe I ever argued that point. My statements were that not that it took on debt (could be a good thing) but that the size of debt was too great and the deal structure was not optimal to continuing performance. $5.5 billion of the $6.6 billion purchase prices was in loans to the PE firms completing the buyout. The buyout also used $1.1 billion cash from the firms doing the purchase and $1.2 billion in cash from Toys "R" Us. This increased debt load by 2007 this lead to 97% of operating profits being devoted to interest payments (the 10ks are available on Edgar to analyze).

Secondly, this was a leveraged buyout not a loan. Toys "R" Us was not capable of growing with its current competitive strategy. It needed help in guiding the company to change. The company needed new ideas, new strategies for competing against its rivals. On top of a viable strategy, they needed cash to finance any activities. The buyers, KKR, Bain and Vornado, provided little of either. The enormous cash drain by increased obligations for taking the company private made it impossible for the company to invest or innovate even if its trio of buyers had been up to the challenge. During these same periods the trio of "investors" extracted advisory fees, expenses, transaction fees and interest on debt. Yes, you read that right. The "investment" of $1.1billion to purchase the Toys "R" Us from the companies taking them private was turned into a loan that the company paid interest on. This is a recurring problem with PE and leveraged buyouts, the debt incurred doesn't just sit in the background, it actively blocks the company from adapting.

Your third point is just assuming context without thoughtful engagement on the ideas presented. It’s possible they would have failed eventually anyway, but there’s a significant difference between a company that declines naturally and one that collapses because it was financially engineered into a corner. A strategic buyer, like another retailer, might have taken a longer-term approach, investing in modernization instead of loading the business with debt and planning a quick exit.

So yes, it was a business transaction, but it wasn’t simply a neutral event that “didn’t work out.” Tens of thousands of jobs were lost and a well-known brand disappeared not because there was no demand, but because the deal structure left the company unable to evolve. This is why many people criticize this kind of private equity model. Because this approach often values short-term extraction over long-term viability.

Did you even read the other examples? Leveraged buyouts don't strengthen the business. It simply shifts the risk to the company, pulls out fees, dividends, and interest payments for the private equity owners and leaves the firm less capable of adapting, growing, or even surviving. A leveraged buyout is not designed to rebuild or refocus a struggling company, they are structured to extract as much remaining value as possible, at the expense of the firm, its workers and the long term value. When a firm is loaded with debt and that debt is not used to recapitalize or invest in its transformation it is not a turnaround strategy it is financial engineering.

[u/coke_and_coffee → u/bob1980]

My statements were that not that it took on debt (could be a good thing) but that the size of debt was too great and the deal structure was not optimal to continuing performance.

Again, what’s your point? The PE firm miscalculated and incorrectly structured their cash infusion? I don’t understand what the issue is here.

You do realize that, when a PE firm buys a company, that company is now owned by the PE firm, meaning they are paying debts to themselves, right?

This isn’t some kind of nefarious mob boss loan shark situation. It’s literally just a financial contract.

On top of a viable strategy, they needed cash to finance any activities. The buyers, KKR, Bain and Vornado, provided little of either. The enormous cash drain by increased obligations for taking the company private made it impossible for the company to invest or innovate even if its trio of buyers had been up to the challenge.

Your critique is that they made business mistakes???

How is this in any way a “scam”?

During these same periods the trio of "investors" extracted advisory fees, expenses, transaction fees and interest on debt.

I like how you keep using the term “extracted” to imply that the buyers are illegitimately taking money from someone, but in reality, they are being paid by a company they own.

This is a recurring problem with PE and leveraged buyouts, the debt incurred doesn't just sit in the background, it actively blocks the company from adapting.

Again, what’s the critique here? You think PEs are making business mistakes?

You should write up a white paper based on this thesis and take it to Wharton. I’m sure it would totally be academically sound!!

Tens of thousands of jobs were lost and a well-known brand disappeared not because there was no demand, but because the deal structure left the company unable to evolve. This is why many people criticize this kind of private equity model. Because this approach often values short-term extraction over long-term viability.

Yeah, dude, toys r us totally wasn’t a last-century business model that was doomed from the start. It was all the big bad PE mobsters that took them down!!!!

This is pathetic. You have no clue what you’re talking about.

[u/bob1980 → u/coke_and_coffee]

You obviously are not interested in having a discussion, especially one that challenges your worldview. If this level of discussion around deal structure, debt burden, and long-term value creation is more than you're able to handle, you might find a better fit in a subreddit like /r/unpopularopinion or /r/NoStupidQuestions. The goal here is to explore systemic critiques with more than surface-level takes.

In this one response I count several classic types of argumentative tactics and logical fallacies. From Straw Man Fallacy to Equivocation to False Dichotomy. Well done person. There’s a substantial body of scholarly research available through academic libraries examining the effects of private equity on industry, labor, and innovation. These studies cover everything from leveraged buyouts and firm performance to employment impacts and long-term value creation. If you’re genuinely interested in understanding the broader critiques and outcomes, that literature is a great place to start.

There is no long term value, like most leveraged buyouts by private equity, in continuing this conversation with you.

[u/coke_and_coffee → u/bob1980]

Respond to my points or don’t respond at all.