How vulture capitalists ate Toys 'R' Us • Hacker News Board

Re: How vulture capitalists ate Toys 'R' Us

#121

Post by harryh » Mon, Apr 23, 2018, 7:50 PM UTC

metabagel wrote: post #118

harryh wrote: post #113

Earlier quoted context omitted.

We do know actually: https://www.bloomberg.com/news/articles/2017-09-19/bain-kkr-...

Marketplace says that Bain and KKR still made money off of the deal. https://www.marketplace.org/2018/03/06/business/toys-r-us-an... "The private equity firms’ investors haven’t made money off this deal. But the firms themselves have. It’s unclear where Vornado ended up. But after collecting fees from Toys R Us, Bain and KKR each took home at least $15 million."

That says they earned revenue, not a profit. They did not earn a profit.

Re: How vulture capitalists ate Toys 'R' Us

#122

Post by JumpCrisscross » Mon, Apr 23, 2018, 7:50 PM UTC

metabagel wrote: post #117

JumpCrisscross wrote: post #109

Earlier quoted context omitted.

> We don't know how much they siphoned out of Toys 'R' Us over the last twelve years Yes, we do. It's disclosed in SEC and bankruptcy filings; they lost money [1]. [1] https://www.bloomberg.com/news/articles/2017-09-19/bain-kkr-...

Thanks for that. OK, so Bain and KKR made back $470 million in fees. Marketplace says that Bain and KKR made money off of the deal. https://www.marketplace.org/2018/03/06/business/toys-r-us-an... "The private equity firms’ investors haven’t made money off this deal. But the firms themselves have. It’s unclear where Vornado ended up. But after collecting fees from Toys R Us, Bain and KKR each took home at least $15 mi…

> But after collecting fees from Toys R Us, Bain and KKR each took home at least $15 million

With all due respect to you, the author of that article doesn't understand how PE funds work. (Most people don't. But one shouldn't write an article if that badly misinformed.)

Private equity funds are structured assuming portfolio companies won't vanish. They may lose some money. But between 1998 and 2010 only 4.9% of PE-backed companies defaulted, and of those, 72% did a Chapter 11 or pre-packaged bankruptcy [1]. As a result, when funds get fees or interests, the general partners are allowed to pay themselves a little something up front. If it turns out they overpaid themselves in year 1, they can make up for it by underpaying themselves in year 7.

Which makes a liquidation, like this one, nasty for the managers. First, their high water mark is toast. Second, most of that $15 million will find its way to the fund's limited partners. If the fund paid out its managers, clawback terms could be triggered. That means fuck year 7, you return the overpayment now.

Private equity managers are smart. But their limited partners aren't dunces. We've gone through cycles, up and down, with PE. The terms have "learned". Liquidations of PE-backed companies are rare. Nobody is walking away from this happy or whole.

[1] http://portal.idc.ac.il/en/schools/economics/about/documents...

Re: How vulture capitalists ate Toys 'R' Us

#123

Post by sbov » Mon, Apr 23, 2018, 7:52 PM UTC

rayiner wrote: post #67

listenallyall wrote: post #43

TOY shares had fallen from $40 to the low teens by 2004. By announcing a sale of the toy business, the stock rebounded and ultimately the sale to private equity closed at $26.75 per share. That Board knew they had a declining asset on their hands and sold out, at a large premium, rather than watching their equity slowly decline over the next decade. Anyone who despises private equity should be celebrating this story,…

Yeah, seriously, the author is nuts. I've got a 5-year old and I can't remember the last time I've been to Toys R Us. She knows how to pick stuff out on Amazon; for trinkets there's Target, and a lot of her "toys" now are on her iPad/digital. Suburban big-box retail stores aren't a growth area, and toy stores selling Chinese-made junk are probably among the worst situated. Unlike, e.g. clothes or food, there is littl…

I have a 3 year old and a 3 month old and we go to babies r us 1-2 times per month.

Our local Target has some choice of baby stuff but nothing like babies r us has. And with the problems of fakes I've ran into on Amazon, I would NEVER trust them with something like a carseat.

Re: How vulture capitalists ate Toys 'R' Us

#124

Post by agumonkey » Mon, Apr 23, 2018, 7:52 PM UTC

tspike wrote: post #102

jimmaswell wrote: post #72

Earlier quoted context omitted.

A problem is that in a retail store, you might walk by something new and want to try it. On Amazon et al you're largely going to stick with what you know, and the site's recommendations are probably not going to stray much. Additionally, walking out of a store with something is a nice experience, maybe reading the manual on the way home, instead of waiting a week to get something unless you have prime or pay for fast…

I hadn't been into one in ages, but about six months ago I went into one with my toddler and was shocked how completely un-interactive the experience was. There was almost nothing for him to play with. Just aisle after aisle of hermetically sealed boxes with bright fluorescent lighting and sullen employees. Couldn't see what the value add was. I'll take my local toy shop, thanks.

Honestly, that's what I remember of Toy R Us.. the immensity of it. To the roof shelves, packed with fantasies(fetishes) I could barely see so high were the boxes. And I left mind numbed by this (positively so, if you can call this pornographic level of toy need positive).

Re: How vulture capitalists ate Toys 'R' Us

#125

Post by agumonkey » Mon, Apr 23, 2018, 7:55 PM UTC

ISV_Damocles wrote: post #78

jimmaswell wrote: post #72

Earlier quoted context omitted.

A problem is that in a retail store, you might walk by something new and want to try it. On Amazon et al you're largely going to stick with what you know, and the site's recommendations are probably not going to stray much. Additionally, walking out of a store with something is a nice experience, maybe reading the manual on the way home, instead of waiting a week to get something unless you have prime or pay for fast…

What you've described doesn't sound like a value-add at all to me. In stores they can manipulate your senses to get you to make emotion-based purchases whether or not it makes economic sense or if you're going to actually get your money's worth out of the product. You only think it's better reading the manual on the way home and not waiting a few days because you're still riding that emotional high. I much prefer the…

This is the experience IMO. Someone talked about this about old video games. Atari boxes were so pretty, yet the games had nothing to do with the box art (8 bit graphics can only get you so far). But the imagination bootstrap it gives made the game pleasurable. It's all fake anyway.. make believe.

I feel this era is going way too much into sound/engineered decision making for mundane human life, and I say it's detrimental.

Re: How vulture capitalists ate Toys 'R' Us

#126

Post by agumonkey » Mon, Apr 23, 2018, 7:56 PM UTC

jjeaff wrote: post #99

ISV_Damocles wrote: post #78

Earlier quoted context omitted.

What you've described doesn't sound like a value-add at all to me. In stores they can manipulate your senses to get you to make emotion-based purchases whether or not it makes economic sense or if you're going to actually get your money's worth out of the product. You only think it's better reading the manual on the way home and not waiting a few days because you're still riding that emotional high. I much prefer the…

>that detachment helps you keep a more level head while purchasing I kind of doubt that this is really the case in practice. There is detachment from the walk by impulse buys. But there is also detachment from the part where you spend your money. One click purchases are just too easy. And Amazon suggestions are getting better all the time at convincing you to buy more and more. Not to mention the discounts on auto de…

And the deals on "plus" items. I spent a few hours once to find other items to buy in order to reach the required 25$ to get that first item rebate.. madness.

Re: How vulture capitalists ate Toys 'R' Us

#127

Post by bhouston » Mon, Apr 23, 2018, 7:57 PM UTC

JumpCrisscross wrote: post #115

bhouston wrote: post #104

Earlier quoted context omitted.

According to my calculations in this comment they are at least close to net zero: https://news.ycombinator.com/item?id=16906549 Which is pretty good outcome for them given TRU has failed completely.

You overestimate interest and fees, paid by Toys 'R' Us to the PE firms, by over 100%. We know the actual numbers from SEC and bankruptcy filings [1]. [1] https://www.bloomberg.com/news/articles/2017-09-19/bain-kkr-...

So either the interest amount of $435M per year (which is roughly 15% interest on 6.6B) is incorrect from the original article or they receives less than 20% of that interest? Strange.

$270M over 13 years from $1.1B in loans? ($270M = $470M - the $200M in fees.) That seems incredibly low interest. I am suspicious. LBO firms do not give low interest loans to their targets.

If we assume an interest rate of 5%, you get 50M in interest a year on 1B. 13 years will yeild $750M in interest.

Did these LBO firms really offer loads at something like 1.5%?

Something isn't adding up.

Re: How vulture capitalists ate Toys 'R' Us

#128

Post by mbesto » Mon, Apr 23, 2018, 8:00 PM UTC

JumpCrisscross wrote: post #92

metabagel wrote: post #85

Earlier quoted context omitted.

I think you may have missed the part where Toys 'R' Us' debt skyrocketed from $109M to $5B due to the leveraged buyout. The interest on that debt as well as the exorbitant management fees did Toys 'R' Us in. https://www.bloomberg.com/news/articles/2018-03-09/toys-r-us...

> the exorbitant management fees These are charged to the fund ( i.e. the investors), not the company. PE firms charge companies transaction fees. "Toys 'R' Us does say in its SEC filings that $47 million in transaction fees that it owed KKR, Bain and Vornado, have been waived. The advisory fees were also voluntarily reduced by the investment firms in recent years" [1]. Private equity isn't VC. When a holding goes bu…

> the fund loses a lot of money

This isn't equivocally true. It all depends on how levered the investment is and how much debt they pulled off the books to pay back the banks (or their fund). The stereotypical PE fund looks like this: buy company for $100M with 50% debt and 50% equity. Meaning, investment banks give them $50M to buy the company at market rates and the PE firm spends the other $50M from their fund. Load the company up with debt and then pay off the senior credit facilities with the profits while the business slowly dies. In other words, it's very possible that PE firms and their lenders earn profits even if their portfolio companies go bankrupt.

In the case of Toys R Us specifically, it appears they did a 17%/63% levered split...which frankly is exorbitant. Most market norms are more around 50/50:

sank $1.3 billion of equity into the takeover of the Wayne, New Jersey-based toy company, financing the rest with debt, according to company filings.

https://www.bloomberg.com/news/articles/2017-09-19/bain-kkr-...

> That, in turn, sharply limits what fund managers can do and how much they can pay themselves

What are you referring to when you say "fund managers"? The LPs? The LPs are super diversified, so that's irrelevant. The GPs make their base salary from management fees and their bonus from carry on the return of the fund. The idea that a fund "loses" money isn't that black and white...their are intricacies into how this plays it out.

Source: Wife is a PE firm founder and I advise PE firms.

Re: How vulture capitalists ate Toys 'R' Us

#129

Post by JumpCrisscross » Mon, Apr 23, 2018, 8:00 PM UTC

bhouston wrote: post #127

JumpCrisscross wrote: post #115

Earlier quoted context omitted.

You overestimate interest and fees, paid by Toys 'R' Us to the PE firms, by over 100%. We know the actual numbers from SEC and bankruptcy filings [1]. [1] https://www.bloomberg.com/news/articles/2017-09-19/bain-kkr-...

So either the interest amount of $435M per year (which is roughly 15% interest on 6.6B) is incorrect from the original article or they receives less than 20% of that interest? Strange. $270M over 13 years from $1.1B in loans? ($270M = $470M - the $200M in fees.) That seems incredibly low interest. I am suspicious. LBO firms do not give low interest loans to their targets. If we assume an interest rate of 5%, you get…

> they receives less than 20% of that interest?

They hold less than 20% of the debt. Most of their investment went in as equity. That's wiped out.

> LBO firms do not give low interest loans to their targets

PE buys equity and subordinated debt. Sub debt has high rates and wonky structures. In this case, I believe it was pay in kind, "a type of high-risk loan or bond that allows borrowers to pay interest with additional debt rather than cash" [1]. Nice feature if the debt is repaid. Less fun when it's wiped out.

[1] https://en.wikipedia.org/wiki/PIK_loan

Re: How vulture capitalists ate Toys 'R' Us

#130

Post by gowld » Mon, Apr 23, 2018, 8:01 PM UTC

lmm wrote: post #33

Retric wrote: post #7

Earlier quoted context omitted.

A slowly dying company is still successfully serving some customers and employing people. So, early failure really is worse for both society and the companies workers. Further, leveraged buyouts are funded with loans, those lending money also lose out.

> A slowly dying company is still successfully serving some customers and employing people. An unprofitable company is an overall loss by definition - sure it's providing some value to some people, but it's consuming more value than it produces. Killing the company quickly frees up the things it was consuming to be used for more productive things. Those buildings can be used for better businesses, or replaced with ho…

No, it's not. "Profits" are after money sent to vendors and employees, who are profiting. Only shareholders are losing in an unprofitable company.