To better understand how private equity investment has affected the contemporary retail industry, Retail Dive collected data provided by Debtwire, Pitchbook and other sources, as well as from our own research. Our goal was to build as comprehensive a list as possible of private equity acquisitions, narrowed to those retailers relevant to our audience, going back more than 15 years. We then tried to track outcomes of those mergers by looking at Moody's ratings, Chapter 11 filings and other data. The full series can be found here.
Some private equity players are drawn to retail more than others. Some can't seem to stay away from the industry. Along with the cash flow retail businesses provide, which make them attractive acquisitions for investment firms, some funds try to capitalize on their experience in retail.
Unlike most buyers of public stock, private equity firms are not passive investors. The stated goal of many private equity players (after bringing large returns to their funders) is often to improve the management and competitive position of the firms they buy up. It follows that they might develop a specialty in an industry.
Philip Emma, a retail analyst with Debtwire, said for private equity firms specializing in retail it takes a "comfort level" with the industry and "the ability to believe they can bring something to the table in terms of managing the business more efficiently.
"'Why should you sell to us? Well, we have experience owning retailers. We understand the process,'" Emma said, explaining how firms approach acquisitions. "'We know the landlords. We know the distributors, we know the suppliers'. … You have some firms that specialize in certain industries because they've done those deals, and they know the companies and they know the industry."
The most prolific acquirers of retailers in data compiled by Retail Dive all bought nine retailers each. Those private equity firms were Leonard Green & Partners, Golden Gate Capital, Sycamore Partners and Freeman Spogli & Co. All of them, it's worth noting, have had at least one acquisition file for bankruptcy after they bought it. (Retail Dive's analysis was based on data provided by Debtwire, Pitchbook and our own research.)
Other major acquirers include Sun Capital Partners (eight acquisitions), Bain Capital (seven), Ares Capital (six), Apax Partners (five) and Apollo (four).
Those firms' acquisitions have several bankruptcies among them as well, except Ares. Sun Capital — which invests heavily in retail and consumer brands — saw four acquisitions go bankrupt, far more than any other firm's acquisitions.
Among other firms, two of Bain's acquisitions have filed (Toys R Us and Gymboree), two of Apollo's and one of Apax's (rue21).
Retail's most prolific acquirers
|PE buyer||Acquisitions||Major deals||Bankruptcies|
|Sycamore||9||Nine West, Belk, Hot Topic||2|
|Leonard Green||10||BJs, David's Bridal, J. Crew, Sports Authority||1|
|Freeman Spogli||9||Boot Barn, H.H. Gregg||1|
|Golden Gate Capital||9||Payless, PacSun, Eddie Bauer||2|
|Sun Capital||8||The Limited, Musicland||4|
|Bain Capital||7||Burlington, Toys R Us, Gymboree||2|
|Ares||6||GNC, Neiman Marcus, 99 Cents Only||0|
Source: Debtwire, Pitchbook, Bankruptcydata.com, AlixPartners, Retail Dive
Along with applying expertise, firms that buy heavily into retail can also find ways to blend their investments and create synergies out of them. John Potter, PwC's U.S. consumer markets leader, told Retail Dive in an interview that private equity owners can also benefit from scaling expertise in digital commerce and logistics across multiple retail and retail-adjacent investments. "Logistics is very palatable in the B2B world," he said. "Especially in the world of e-commerce … logistics became the linchpin of success."
Looking for returns
Sycamore provides some useful examples on working across retail investments. After acquiring the intellectual property to Wet Seal out of bankruptcy, Sycamore added Wet Seal as an exclusive label to Belk department stores, which Sycamore also owns. Golden Gate Capital, which owns Eddie Bauer and Pacific Sunwear, combined the two apparel retailers this year into a single operating company with a "shared services platform" generating about $1.5 billion in sales.
Sycamore has reportedly found other creative ways to make money from its various retail acquisitions. According to the Wall Street Journal, Sycamore "extracts returns from clothing chains by acting as a middleman between them and suppliers, using a company it owns to sell inventory to the retailers, sometimes as they struggle to remain solvent." The Journal also reported that Sycamore has told investors its returns "need not depend" on successfully identifying growth opportunities for its retail targets.
Yet more problematically, others have accused Sycamore of drawing money from its retail acquisitions through financial engineering that set purchased companies up for default.
Lenders to Nine West, which Sycamore acquired in 2014 through the leveraged buyout of the Jones Group, alleged in a court filing that the private equity firm diced up Jones and sold off pieces essentially to itself. Sycamore, according to the lender group, then resold those assets for hundreds of millions in profit while leaving the remaining Nine West holding company with more than $1.5 billion in debt. (Sycamore spokespeople did not respond to requests to participate in this story series.)
And then there's Bain, which saw two acquisitions in 13 years go bankrupt. (Another Bain acquisition in toy retail, KB Toys, went bust but that buyout didn't make Retail's Dive's list as it was outside of the time frame we examined.)
"Bain Capital is known to be a pretty savvy investor," Nick Egelanian, president of retail real estate consulting firm SiteWorks, told Retail Dive in an interview. "I think the thing with these kinds of companies is they tend to be very strong financially, very good operationally… but not always in tune with the bigger picture in retail." (Bain declined to participate in this article series.)
In the case of Gymboree, Debtwire's Emma said Bain's goal and that of management "was to take a relatively small part of the business and tailor the company to consumers looking for more value by expanding their value channel. "So essentially what they did is they cannibalized their own sales," he said. "In effect they were in some ways competing against themselves." He added, "Consumers like to feel like they're getting a deal… so the underlying reasoning was right; the consumer demand for value wasn't wrong. In hindsight, the approach they took was wrong."
And of course, not all Chapter 11s end the same way. Gymboree emerged slightly smaller and this year launched a broad rebranding effort and assortment change, to mixed reception. While it faces several strong competitors in its sector, the children's apparel retailer is still kicking around. Toys R Us, on the other hand, was forced into liquidation. The complexity of the latter's capital and ownership, structure, business and competitive environment all contributed to its undoing. Bain can plausibly escape full blame.
"Toys R Us was much more a result of the Amazon effect and strategic decisions that were made to highlight the Baby business… and that didn't quite work out," Emma said. In Toys R Us, he added, "there was an untapped value in the real estate and the assets of the business."
"The rationale was more tied in with there's this value in the real estate that can be unlocked," he said. "When you add debt to a company to make it private, you're taking away some of the cushion toward a downside because it's lateral toward debt. If Toys R Us had never been taken private, it wouldn't have changed its fate… it just would have given them more assets that they could have used to continue to stay afloat."
But most all those firms have had successes too. Bain put the off-price retailer Burlington up for IPO seven years after acquiring it. According to PE Hub, the firm made more than four times its investment back through the offering. The firm also made more than twice its money back after putting Michaels, which Bain acquired in 2006, up for IPO.
"Certain private equity investors have succeeded and failed. Many private equity investors are persistent in the sector," Potter said. "I can think of funds that have had multiple failures. Looking for causality and correlation is key."