New study shows 1.3 million US jobs lost in US private equity’s ‘Retail Apocalypse’, with more on the way
A new study of the employment impact of private equity ownership on US retailers documents the extent of debt-driven job destruction. Over the past decade some 600,000 jobs have been destroyed in the ‘Retail Apocalypse’. The multiplier effect on suppliers has meant the loss of over 700,000 additional indirect jobs. The job losses came at a time of overall employment expansion in the retail sector, but Wall Street investors wiped out 8 times more retail jobs than they created.
Debt and financial engineering destroyed these jobs, not Amazon or the internet. When Toys “R” Us abruptly closed shop last year and some 33,000 workers found themselves on the streets, the company was paying out USD 400 million in interest payments annually. When Bain, KKR, and Vornado acquired the company in 2005, it had a debt load of USD 1.86 billion. After the buyout, that swelled to USD 5 billion and the new owners continued to suck out cash, while interest payments took out 97% of the operating profit, leaving nothing for investment. Two-thirds of US retailers filing for bankruptcy over the last three years have been under private equity ownership, and bankruptcy procedures have allowed the funds to simply walk away from their pension obligations.
Shuttered stores and mass layoffs have brought handsome returns for investors. According to the UK Financial Times, KKR’s investment in Toys “R” Us came from a ‘Millennium Fund’ which reports an internal rate of return to investors of 16.4%. Bain’s investment in the bankrupt retailer came from funds which have been among the top quartile in performance. Much of the investment money has been supplied by employee pension funds in search of high returns.
Another recent study from researchers at California Polytechnic State University concluded that one out of five large companies under private equity ownership goes bankrupt within 10 years – against roughly 2% for those not burdened by the financial demands of a leveraged buyout. The authors’ understated conclusion: “Given the large number of recent high profile private equity-backed LBO bankruptcies, it is difficult for policymakers to ignore the impact of these controversial transactions on their constituents and society as a whole.”
There has been much discussion about “the future of work”, focusing on the automation and artificial intelligence threat to jobs. It’s time to bring financial engineering into that discussion. Profit-extraction through debt, not the internet, robots or scanning technology, killed 1.3 million retail and related jobs in the US, with more on the way.