When Private Equity Firms Bankrupt Their Own Companies

[Nevilledog]

https://www.theatlantic.com/ideas/archive/2023/05/private-equity-firms-bankruptcies-plunder-book/673896/

No paywall
https://archive.is/21vay

Private equity firms buy businesses in the hopes of flipping them for a profit a few years later. The idea is simple enough. But companies bought by private equity firms are 10 times as likely to go bankrupt as those that aren’t. The industry’s defenders claim that this is simply because private equity firms often buy teetering companies; no wonder, then, that a disproportionate number fail. Besides, they say, no firm wants its business to go bankrupt.

But what if that weren’t true? What if private equity firms not only tolerated but profited from the bankruptcy of their companies? (Here, I write in my personal capacity, and my views do not necessarily reflect those of the Department of Justice.)

Consider the case of Friendly’s. The ice-cream-and-diner chain was started by two brothers, Curtis and S. Prestley Blake, in the depths of the Great Depression. The Blake brothers ran the business as a family affair: Their mother made their coffee-flavored syrup, and each night, one brother would stay up making ice cream for the next day while the other slept. Through hard work, the Blakes succeeded, and from their first store they expanded to a second, and then to a third. When the United States entered World War II, the brothers closed their shop, saying that they would reopen “when we win the war”; when they did, they turned their business into a regional dining institution with dozens of locations across the Northeast.

When the Blake brothers finally retired, Friendly’s cycled through a series of owners until 2007, when it was acquired by the private equity firm Sun Capital. Under Capital’s ownership, Friendly’s struggled. Among other things, the private equity firm piled debt onto the business, and required it to sell and lease back the property for some 160 restaurants, a move that made a quick profit but saddled Friendly’s with a new, unending obligation. Ultimately, Sun Capital pushed the chain into bankruptcy.

*snip*

[ret5hd]

1. Mitt Romney is an expert at this.

[2naSalit]

10. That's where his million$ came from.

[IA8IT]

2. NY Times April 30,2023 Private Equity Is Gutting America -- and Getting Away With It

https://www.nytimes.com/2023/04/28/opinion/private-equity.html?searchResultPosition=1

Consider the case of the Carlyle Group and the nursing home chain HCR ManorCare. In 2007, Carlyle — a private equity firm now with $373 billion in assets under management — bought HCR ManorCare for a little over $6 billion, most of which was borrowed money that ManorCare, not Carlyle, would have to pay back. As the new owner, Carlyle sold nearly all of ManorCare’s real estate and quickly recovered its initial investment. This meant, however, that ManorCare was forced to pay nearly half a billion dollars a year in rent to occupy buildings it once owned. Carlyle also extracted over $80 million in transaction and advisory fees from the company it had just bought, draining ManorCare of money.

...................................................................

In 2018, ManorCare filed for bankruptcy, with over $7 billion in debt. But that was, in a sense, immaterial to Carlyle, which had already recovered the money it invested and made millions more in fees. (In statements to The Washington Post, ManorCare denied that the quality of its care had declined, while Carlyle claimed that changes in how Medicare paid nursing homes, not its own actions, caused the chain’s bankruptcy.)

...................................................................

Yet when Ms. Salley’s family sued for wrongful death, Carlyle managed to get the case against it dismissed. As a private equity firm, Carlyle claimed, it did not technically own ManorCare. Rather, Carlyle merely advised a series of investment funds with obscure names that did. In essence, Carlyle performed a legal disappearing act.

[IA8IT]

8. OP and this by same person..Brendan Ballou

Brendan Ballou is a federal prosecutor and served as special counsel for private equity at the Department of Justice. He is the author of the forthcoming Plunder: Private Equity’s Plan to Pillage America.

[LetMyPeopleVote]

3. Private equity firms rely on debt to increase returns

These firms can restructure a company in bankruptcy and wipe out trade creditors to make money in the new restructured company

[Farmer-Rick]

4. They raid the pension funds and

Dump their pension liabilities.

"But why go through this complicated process? Why would Friendly’s declare bankruptcy just to be sold from one Sun Capital fund to another? The answer was simple: pensions. At the time of bankruptcy, Friendly’s had $115 million in pension liabilities. By selling Friendly’s to one of its affiliates, Sun Capital reacquired its own company free and clear of those liabilities. These debts were pushed onto the Pension Benefit Guaranty Corporation (PBGC), a government-chartered insurer that rescues underfunded pensions, and whose work was paid for by other, more responsible, pension funds."

It f*cks over all the old workers who thought they had pensions but the filthy rich get to make more money. It's really simply a transfer of wealth from the pensioners and tax payers to the filthy rich. Capitalism on steroids.(Pensions, which are insured by the federal Pension Benefit Guaranty Corporation in case employers go bankrupt, still cover 26.2 million people across 23,400 single-employer plans.)

[JHB]

5. This has always been the case, from when the buzzword was "mergermania" or "hostile takeover"...

...or "leveraged buyout" to the present "private equity", the strategy has always been the same: extract the easy money to pay back the buyers, saddle the company with debt, sell off the most profitable parts, maintain it as a sort of zombie if it brings in enough revenue, or let it die -- especially parts that were deliberately saddled with liabilities, like pension obligations.

It's never called "redistribution of wealth" when the wealth gets redistributed upward.

[FakeNoose]

6. They start by firing all the long-time dedicated employees because they're the highest paid

... so it's easier for the private equity firms to raid the pension funds. They usually sell off the properties in the best locations, because they can get Big Bucks for those, while the poor-performing locations probably won't sell.

Hire young inexperienced people for almost nothing and give them no training. The regular customers stop coming in. Wow, now it's easy to find reasons to close up shop for good. "But hey, we tried!"

This is why Sears died a slow, horrible death.

[LetMyPeopleVote]

7. I have worked on the purchase of a couple private equity backed companies in bankruptcy

In NY, there is a very streamline auction process for buying a company out of bankruptcy. I worked on the purchase of one company in Dallas that had gone through four LBOs/restructings. My client sold the company five years later to a LBO firm

[keithbvadu2]

9. Buy out the company, cash out 'your' equity, leaving 'their' debt.

Buy out the company, cash out 'your' equity, leaving 'their' debt.

[ZonkerHarris]

11. Just like in GOODFELLAS when they "bust out" a restaurant

[dalton99a]

12. Kick

https://archive.ph/yFdQn