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ABSTRACT
In this paper, we pursue a financialisation line of argument exploring the specific features of private equity finance, with a focus on the activity undertaken at scale by the largest management groups or firms. The largest private equity firms wield considerable resources, affect ownership patterns and have the capacity to acquire literally any company. What they do matters. The bankruptcy of Toys R Us and the more general ‘crisis of retail’ illustrate a ‘debt gamble’. A company’s capital structure is radically restructured and equity is reduced and replaced by debt. The gamble is that there will be no change to the external environment that the GP cannot adequately adjust to and that the GP will in fact be able to maintain debt servicing. Although bankruptcy is a ‘worse case’, we contend that from a financialisation perspective, there are a whole set of attendant issues.
Acknowledgements
Thanks to two anonymous referees and the designated editor for constructive comment and insightful suggestions.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Notes
1 Minority investor is a legal term; the investor has no voting rights.
4 Note, Gompers et al is a survey, so the dataset is slightly different.
5 However, see Appelbaum and Batt (Citation2019).
6 In 1993 Toys-R-Us sales constituted 21% of the US toy market whilst in 2005 this was 17% (compared to Wal-Mart at 25%). As the sector consolidated the company did not experience collapse, Amazon expanded to capture most of the sector.
7 The company appointed Credit Suisse 2004 to explore the possibility of a buyout. Once this became public it had an immediate effect on share price – causing it to increase by about 50% over twelve months.
8 According to the SEC 10-K filing of the newly consolidated acquisition entity in 2006 the consulting firm Gordon Brothers was also involved as a minority investor and $5.9 billion was paid for common stock and $766 million for other securities and expenses.
See p. 1: https://www.sec.gov/Archives/edgar/data/1005414/000119312507115768/d10k.htm
For the initial debt structures see p. 6 of the 2005 SEC 10-K filing: http://getfilings.com/o0001193125-05-090701.html#toc64690_8.
9 See pp. 20–21 of the 2005 SEC 10-K filing: http://getfilings.com/o0001193125-05-090701.html#toc64690_8.
10 Net earnings of $252 million for 2004 became a net loss of $384 million for 2005, but a return to net earnings based on engineering for some years thereafter.
11 Private equity have ‘SWAT teams’ which provide advice on rationalising operational systems (e.g. KKR’s Capstone). By 2016 40% of Toys R Us sales were categorised as e-commerce mainly a substitution. Covert (Citation2018) reports worker’s experiences of eroded terms and conditions.
12 These collate as:
13 And it was reported the UK entity waived £584.5 million it was owed by another Toys R Us entity.
14 A CVA is an insolvency arrangement intended to allow firms to streamline and avoid going into administration or full bankruptcy with more catastrophic job losses. Creditors vote on the CVA, which requires 75% approval to proceed.
15 The investment was eventually written down to zero by the funds, creating a tax write-off potential that would partially protect the internal rate of return in terms of accounting for the fund; still, more than $200 million in fees were charged to the acquisition over the duration.
16 In April 2019 lenders committed to convert £100 million of debt to equity and in May 2019 22 stores were closed as part of a CVA. The agreement facilitated new funding lines from debt-distress funds. Given the usual practices of these funds Debenhams future is not secure. As of early 2020 Debenhams was still carrying a reported £720 million in debt.
17 For corollary problems (see Baker and Wigan Citation2017, Morgan Citation2016, Citation2017, De Cock and Nyberg Citation2016, Rodrigues and Child Citation2010).
Additional information
Notes on contributors
Jamie Morgan
Jamie Morgan is Professor of Economic Sociology at Leeds Beckett University, UK. He coedits the Real-World Economics Review with Edward Fullbrook. RWER is the world’s largest subscription based open access economics journal. He has published widely in the fields of economics, political economy, philosophy, sociology, and international politics. His recent books include: Modern Monetary Theory and its Critics (ed. with E. Fullbrook, WEA Books, 2020), Economics and the ecosystem (ed. with E. Fullbrook, WEA Books, 2019); Brexit and the political economy of fragmentation: Things fall apart (ed. with H. Patomäki, Routledge, 2018); Realist responses to post-human society (ed. with I. Al-Amoudi, Routledge, 2018); Trumponomics: Causes and consequences (ed. with E. Fullbrook, College Publications, 2017); What is neoclassical economics? (ed., Routledge, 2015); and Piketty’s capital in the twenty-first century (ed. with E. Fullbrook, College Publications, 2014).
Muhammad Ali Nasir
Dr Muhammad Ali Nasir is a senior lecturer in the Leeds Beckett University, UK. His main areas of research interest are macro and monetary economics, international economics, econometrics, and energy and environmental economics. His work has been published in Scottish Journal of Political Economy, Journal of Post Keynesian Economics, Journal of Environmental Management, Energy Economics, the World Economy, Resource Policy and Journal of Economics Studies; he has recently been guest editor for Technical Forecasting and Social Change, Journal of Environmental Management, Resource Policy, and Quarterly Review of Economics and Finance.