Private Equity Wins Even When It Loses, Thanks to Debt Markets

Source: Nabila Ahmed and Sridhar Natarajan, Bloomberg, March 20, 2017

The Payless shoe company was already on its way to becoming another retail victim of the internet when the private equity guys showed up.

That the firms — Golden Gate Capital Inc. and Blum Capital Partners — weren’t able to turn Payless around after acquiring them in 2012 isn’t so surprising. That they’ve still made out so handsomely is.

As Payless shutters hundreds of stores and struggles to repay $665 million of debt, Golden Gate and Blum turned a profit on the deal. How? By having Payless borrow millions in the financial markets, a move that’s pushing the company to the brink. The firms have collected $350 million from Payless through debt-funded special dividends. Golden Gate and Payless declined to comment and Blum didn’t respond to requests.

Private equity firms have always borrowed to buy companies. But now, with debt so cheap, they’re layering on subsequent borrowing at an unprecedented clip to pay themselves, putting an additional, and at times fatal, financial strain on their newly acquired companies. From the start of 2013, private equity owners have taken out more than $90 billion in debt-funded payouts, according to data compiled by LCD, part of S&P Global Market Intelligence…..