At The FT, Patrick Jenkins sounds a warning about the private equity market. He suggests that the recent flurry of retail failures is a sign that all is not well in private equity. He writes:
Few commentators today are forecasting an imminent housing crash. But something similar may be threatening a segment of the global economy — with potentially more serious consequences.
The private equity market, which relies on leveraged borrowing much like a mortgage on a house, is showing some early signs of stress — and you do not have to look far to spot it.
The UK high street is under pressure from all sides — rampant online competition, higher rents and rates and a failure to modernise are all to blame. But for many businesses it has been the burden of high-yield debt, often issued as a consequence of private equity ownership, that has been their undoing.
The latest casualties have been restaurant chains. PizzaExpress, Byron, Zizzi — name a chain and the chances are it has overexpanded and struggled under private equity ownership.
Earlier, buyout groups had focused on high-street retailers. The demise this week of Debenhams is a reminder of the long-term damage that aggressive private equity ownership can wreak: barely three years in the hands of CVC, TPG and Merrill Lynch a decade and a half ago left the business with pricey property leases after the owners sold off freehold shops, and debt leapt 2,000 per cent higher to £1.9bn. It never recovered. Last year Toys R Us, owned by KKR and Bain Capital, failed for similar reasons with the loss of 30,000 jobs.
Read more here.
Jeremy Jones, CFA
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