Private Equity’s $36B Bet on Retail Continues To Disappoint

Private Equity’s $36B Bet on Retail Continues To Disappoint

Private equity funds poured an eye-popping $36 billion in brick-and-mortar retail chains before 2007, hoping good return on their investments. But the reality turned out to be entirely different. The company that showed the most faith in the future of U.S. retailers is Bain Capital LLC. The Mitt Romney-led private equity firm acquired a stake in four retailers between 2004 and 2007 for $17 billion, according to Bloomberg estimates.

Private Equity's $36B Bet on Retail Continues To Disappoint

Bain Capital’s biggest bet, Toys “R” Us Inc is falling more rapidly than others. The company’s sales dropped significantly during the holiday season, and soon CEO Gerald Storch parted ways with Toys “R” Us Inc. Private equity firms had a plan that goes like this: finance the buyouts with debt, reduce costs and take the company public. But Bain Capital’s acquisitions didn’t follow that route. Perhaps because it showed a lot of faith in specialty retailers right when, Inc. (NASDAQ:AMZN) started crushing them. Of course, Bain had once tried to take Toys “R” Us Inc public in 2010, but canceled the offering.

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Only one major retailer acquired by a private equity firm has gone public – the discount store chain Dollar General Corp, which was purchased by KKR & Co. L.P. (NYSE:KKR). All the other major private equity buyouts remain private. If you look at the specialty retailers already trading publicly, the scenario seems gloomy. Circuit City Stores Inc (PINK:CCTYQ) and Borders Group, Inc. (PINK:BGPIQ) didn’t survive the economic crisis. And the companies that did survive, have seen their stock value diminishing with time. Best Buy Co., Inc. (NYSE:BBY) and Barnes & Noble, Inc. (NYSE:BKS) reported weakening sales and widening losses. A consortium of private equity firms also tried to acquire Best Buy Co. (NYSE:BBY) for $11 billion, but the deal couldn’t materialize.

Most of the retailers are struggling, irrespective of whether they are owned by private equity firms. Hedge fund manager Bill Ackman of Pershing Square Capital has been betting big on J.C. Penney Company, Inc. (NYSE:JCP) since 2010. But the struggling retailer has refused to show any signs of a turnaround. A couple of weeks ago, J.C. Penney shares tanked further after Ackman aide Vornado Realty Trust (NYSE:VNO) dumped its 40 percent stake in the retailer.

The trouble brick-and-mortar retailers is that frugal consumers are turning towards the Web for convenience and lower price. The transparency of prices online has also affected the conventional retailers’ margins because consumers tend to comparison shop.

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