Private Equity’s Highly-Leveraged Bet on Retail Puts a Million Jobs at Risk During the COVID-19 Crisis

May 20, 2020

Over the last decade at least 600,000 people working at private equity-owned retailers have lost their jobs due to bankruptcies and store closures. Just since last summer, private equity-owned retailers such as Fairway, Art Van Furniture, and Fred’s have shut their doors. Yet for all the lost jobs, as of 2019 private equity-owned retailers still employed around a million workers in the US.

As the COVID-19 pandemic ravages the retail industry, private equity’s aggressive use of debt and collection of billions of dollars of dividends and fees from retailers raise particular concern for the industry and retail workers:

According to the Bureau of Labor Statistics, the number of retail jobs in the U.S. fell by 2.1 million in April.[i]
The leveraged loan default rate for US retail hit a record high at 10.34% and is expected to continue climbing substantially.
The Wall Street Journal reported that as of April 20, twenty-seven of the 38 retailers with the weakest credit profiles were owned by private-equity firms.

Recent media coverage:

Wall Street Journal, May 10, 2020: “Coronavirus Unravels Private-Equity Playbook for Some Retailers”

New York Times, May 14, 2020: “The Pandemic Helped Topple Two Retailers. So Did Private Equity”

As private equity-owned retailers with tens of thousands of workers go bankrupt, many of their private equity owners are sitting on record-breaking piles of cash waiting to be invested.

Below is a list of private equity-owned retailers that have filed for bankruptcy or are particularly at risk during the COVID-19 pandemic.

J. Crew – TPG, Leonard Green & Partners

TPG and Leonard Green & Partners-owned clothing retailer J. Crew became the first major retailer to go under during the pandemic when it filed for Chapter 11 bankruptcy on May 4, 2020. The company had struggled for years to recover from the high debt burden imposed by the private equity firms’ leveraged buyout, which stood at $1.7 billion in March.[ii] The firms contributed just $1.1 billion equity for the $3 billion buyout deal.[iii]

Despite J. Crew’s high debt burden, TPG and Leonard Green continued to collect fees and dividends from the company. Since their acquisition in 2011, the firms paid themselves $765.9 million in management fees and debt-funded dividends.[iv]

See our recent post “Leonard Green and TPG-led Owner Group Collected $765 Million in Fees and Dividends From Bankrupt Retailer J. Crew.”

TPG has $32 billion available capital to invest. Leonard Green has almost $17 billion in available capital.[v]

Neiman Marcus – Ares Management, CPPIB

Luxury clothing retailer Neiman Marcus filed for bankruptcy on May 7, 2020 with around $5 billion in debt and other liabilities. Fifteen years of private equity ownership and two leveraged buyouts left the company with insurmountable debt.[vi]

Private equity firms Warburg Pincus and TPG first acquired Neiman Marcus in 2005 for $4.9 billion and later added Leonard Green & Partners as a minority investor. In 2013 the consortium sold the company to Ares Management and the Canada Pension Plan Investment Board (CPPIB) for $6 billion.[vii]

Despite its high levels of debt, Neiman Marcus’ various private equity owners collected over $500 million in fees and dividends from the company over the last decade. Warburg Pincus and TPG reaped the majority of the dividends with a payment for $449.3 million in 2012..[viii] In 2014, Ares and CPPIB charged Neiman Marcus a $17.4 million fee for its own acquisition.[ix]

Dividends and Fees Collected by Neiman Marcus’ Private Equity Owners:

($ millions)

	Dividends	Ares, CPPIB fees	TGP, Warburg Pincus fees	Total
2019
2018		$0.3		$0.3
2017		$0.1		$0.1
2016		$0.3		$0.3
2015		$0.4		$0.4
2014		$17.4	$2.8	$20.2
2013			$10.0	$10.0
2012	$449.3		$10.0	$459.3
2011			$10.0	$10.0
Total	$449.3	$18.5	$32.8	$500.6

Source: Neiman Marcus SEC form 10-Ks

In mid-March the COVID-19 pandemic forced Neiman Marcus to temporarily close all 43 of its stores and furlough almost all of its 14,000 employees.[x]

Neiman Marcus is reportedly considering closing some stores permanently in the bankruptcy.[xi]

Ares has $149 billion in assets. CPPIB has $346 billion in assets. [xii]

Academy Sports & Outdoors – KKR

Private equity firm KKR acquired Academy Sports & Outdoors in 2011.[xiii] Academy Sports operates 259 stores in 16 states and has more than 22,000 employees.[xiv]

Academy Sports has been distressed since early last year, when its credit rating was dropped to Caa1 due to weak operating performance and high leverage.[xv] Moody’s downgraded Academy Sports again in April 2020 with an elevated probability of default, citing headwinds caused by the COVID-19 pandemic, high leverage, and projected earnings deterioration.[xvi]

Over the course of its nine-year ownership, KKR has collected nearly $900 million in dividends from the Academy Sports.[xvii] Its most recent dividend payment was for $200 million in June 2015.

In April, Academy Sports said that a “substantial number” of employees at its corporate office and distribution centers have been furloughed.[xviii] It considers itself an essential retailer. As of April 29, 2020, all Academy Sports stores are open.

KKR has $34 billion in capital available to invest.[xix]

Guitar Center – Ares Management

Guitar Center is owned by Ares Management.

In April, Moody’s downgraded Guitar Center’s credit rating to Caa3 with a negative outlook, signaling especially high risk. Moody’s noted that the company’s high leverage, which stood at 7.1x EBITDA in February 2020, raises the probability of a default.[xx]

Guitar Center was at risk of debt restructuring or bankruptcy before the pandemic began as it struggled under debt from multiple private equity owners over the past decade.[xxi]

Bain Capital took Guitar Center private in 2007 for $2.1 billion, saddling the company with $1.6 billion in debt. In 2014 Ares, Guitar Center’s primary creditor, took control of Guitar Center through a $500 million debt-for-equity swap.[xxii]

While Guitar Center missed debt payments in April, the company sold new bonds in May to belatedly fulfill those obligations and stave off default.

Guitar Center furloughed 9,000 of its estimated 11,000 employees in April.[xxiii]

Ares has $149 billion in assets.[xxiv]

Petco – CVC Capital Partners, CPPIB

Petco is owned by CVC Capital Partners and Canada Pension Plan Investment Board (CPPIB).

In April, Moody’s downgraded Petco’s credit rating to Caa1 due to “weak operating trends and high financial leverage that stems from the acquisition of the company by the CVC Capital Partners Advisory (U.S.) and Canada Pension Plan Investment Board in January 2016.”[xxv]

Petco has been deemed an essential business for its sales of pet supplies, but workers have raised concern for continuing non-essential services, such as new shipments of birds, small mammals, reptiles and aquarium fish, that create unnecessary risk. As of mid-April, Petco was still operating dozens of its in-store pet salons even in places where it was considered non-essential, possibly violating state stay-at-home orders.[xxvi]

In April, Petco announced furloughs, pay cuts, and reduced hours for its 27,000 employees.[xxvii]

CVC Capital has $28 billion available capital to invest. CPPIB has $346 billion in assets.[xxviii]

Bass Pro Shops – Goldman Sachs Group, Pamplona Capital Management

Goldman Sachs and Pamplona Capital Management are investors in sporting goods retailer Bass Pro Shops.

In March, Moody’s affirmed Bass Pro’s Ba3 credit rating and changed its outlook to negative, noting high leverage and “aggressive financial strategies, including its use of cash flow and incremental debt for member distributions and redemption of preferred equity issued by Bass Pro’s parent.”[xxix]

Bass Pro’s owners appear to have taken out at least $400 million in debt-financed dividends: one dividend in March 2012 for $100 million and one in May 2015 for $300 million. According to data provider Pitchbook, Bass Pro underwent a dividend recapitalization for an undisclosed amount in November 2013.

Bass Pro has initiated several sale-leaseback transactions since the Goldman Sachs and Pamplona Capital investment, including in November 2017, June 2019, and January 2020.

In April, Bass Pro announced that it was “drastically scaling back operations” by reducing staff through furloughs and layoffs.

Pamploma has $3.5 billion in assets waiting to be invested. Goldman Sachs has $1.8 trillion assets under management.[xxx]

Belk – Sycamore Partners

Sycamore Partners acquired Southern department store chain Belk in 2015 for nearly $3 billion.[xxxi] Sycamore’s ownership has added debt to total $1.6 billion due this year.[xxxii]

Moody’s downgraded Belk’s credit rating in April to Caa1 with a negative outlook, indicating high probability of default.[xxxiii]

Weeks earlier, Belk furloughed most of its 22,000 employees and implemented pay reductions for those who remain working. However, layoffs at Belk began before the pandemic—in mid-February the company announced 80 layoffs at its headquarters as part of a corporate restructuring.

Sycamore Partners has $15 billion in assets. [xxxiv]

[i]https://www.retaildive.com/news/retail-jobs-fall-by-21m-in-april/577651/

[ii]https://investors.jcrew.com/static-files/7e60f08e-e8c7-454b-8b7c-d78ec412efcc

[iii]https://www.wsj.com/articles/coronavirus-unravels-private-equity-playbook-for-some-retailers-11589115600

[iv] J. Crew SEC filings. See: https://pestakeholder.org/leonard-green-and-tpg-led-owner-group-collected-765-million-in-fees-and-dividends-from-bankrupt-retailer-j-crew/

[v] Pitchbook, accessed May 19, 2020.

[vi]https://www.washingtonpost.com/business/2020/05/07/neiman-marcus-bankruptcy-chapter11/

[vii]https://www.wsj.com/articles/neiman-deal-is-boon-to-tpg-warburg-pincus-1378771934

[viii]https://www.wsj.com/articles/neiman-deal-is-boon-to-tpg-warburg-pincus-1378771934

[ix]https://www.sec.gov/Archives/edgar/data/1358651/000135865114000009/a2014080210-k.htm#s4B9194974EDD321E633215E90030B098

[x]https://www.forbes.com/sites/laurendebter/2020/05/07/neiman-marcus-files-for-bankruptcy-felled-by-store-closures-and-too-much-debt/#1ca20cf78e9a

[xi]https://www.washingtonpost.com/business/2020/05/07/neiman-marcus-bankruptcy-chapter11/