Question

Over the past 20 years, private equity firms and hedge funds have bought over 80 major retailers in the US and Canada. The chains they own employ more than 1 million of the 15.8 million U.S. retail workers. At the same time, a large share of these private-equity-owned retailers went bankrupt, and they account for about 70% of store closings in 2019. Why have private equity firms bought so many retailers? Why private-equity owned retailers are more likely to file for bankruptcy?

Answer 1

Private-equity firms are in the business where they look for companies where there is underperformance and there is possibility of turnaround and high profit in short-term and private equity firm are always in lookout for such firms where they can invest in such companies and can easily generate high returns. Retail industry has been struggling a lot especially with the e-commerce giants like Amazon and traditional retailer like Walmart and because of the high discount offered by these companies these retail firm has been struggling financially. For private equity firms there is belief that the change in management is the solution is the key to turnaround so a large number of private equity firms has bought retailers but the outcome of that deal has not been that much successful because those retailers are still struggling financially. The reason why bankruptcy situation arises is private equity firms take high leverage while making up investment and with high leverage there is probability of high return but also it comes with high risk. E-commerce companies has completely changed the way people buy things and these retailers have not been able to keep up with and with high leverage if you are not generating high revenue bankruptcy is not far away.