Shopping Centers Today is the news magazine of the International Council of Shopping Centers (ICSC)
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20 S C T / S E P T E M B E R 2 0 1 7 how to operate a retail company." Muddying the situation is an accounting method that no longer requires fund investors participating in private-equity buyouts to pay for their shares when a deal is struck. The private equity firms instead tap so-called subscription credit lines to complete the buy and only later ask for investor money. This practice tends to inflate funds' annualized results, wrote Howard Marks, co-chairman of Oaktree Capital Management, in a company newsletter. The practice can also be gamed to increase fee payments to general partners, Marks wrote. In its Global Private Equity Report 2017, Bain & Co. says private equity firms have not had time to adjust their acquisition models because the retail industry has changed so rapidly. Often overlooked are retail price erosion, cost inflation, capital expenditures, reinvestment costs and the need to respond rapidly to changing product mixes. "Companies in fast-moving consumer goods or fashion retailing, for example, have to contend with sudden shifts in consumer taste that can reshuffle their product mix in a matter of months or weeks," reads the report, which notes that the need to ramp up marketing programs to increase revenue is overlooked too. Though private equity managers are unable to predict every industry shift, "they can anticipate the risk through a version of scenario planning that lays out a best and worst case for each product line," the report says. Defenders of private equity acquisitions say these investors have a history of providing long-term capital to transform acquired companies into healthier businesses. Many large institutional investors, including CalPERs and TIAA (formerly TIAA- CREF), actively invest in private equity funds. TIAA, in fact, has done so for two decades, a strategy that "provides access to illiquid investments that historically have generated attractive risk-adjusted returns," according to its website. Such co-investments offer "unique investment opportunities alongside experienced private equity fund managers," the organization said. For a long time, retail executives deliberated the complexities of operating as a public company, Green says. "Now they talk about the challenge of being a private company." To be competitive "you've got to have adequate dollars available to pay people to keep you up and running," he said, "and these companies aren't getting that under private equity ownership." So why do the CEOs, shareholders and other company officials of struggling companies consent to private equity takeover? Many times the top executive is offered a bonus, and shareholders are offered a substantial stock premium and unusually generous dividends, notes Davidowitz. "The CEO says to himself: 'How can I turn this down? I am supposed to be working for the shareholder.' And it's all done with borrowed money, of course," said Davidowitz. The net result is often liquidation, he says. Deal scenarios change when a family owns a retail company, as is the case with Nordstrom, says Davidowitz. At press time Nordstrom family members were in talks with potential private equity partners that include Apollo Global Management, KKR & Co. and Leonard Green & Partners to take the luxury chain of 354 stores private. Family-held retailers are less likely to accept risky deal structures, because the decisions are shared among the family members, who usually want to ensure the company's survival as a legacy, says Davidowitz. Too many struggling and bankrupt retailers simply failed to adjust their business models fast enough to accom- modate meaningful e-commerce trade, Hutensky says. "As the announced purchase of Whole Foods by Amazon demonstrates, online-only retailers have embraced the necessity of the brick- and-mortar stores as a part of any retail strategy," Hutensky said. "Successful retailers are providing their customers with a great experience both online and in the store." More bankruptcies are coming, many say, particularly if the retailers turn to private equity. "In the past seven years or so," said Green, "private equity has gone from turning retailers around by cutting expenses to using creative debt financing when they saw a lot of these retailers weren't going to make it." n S T O R E F R O N T S Too many struggling and bankrupt retailers simply failed to adjust their business model fast enough BY INAHUANG - COMMONS.WIKIMEDIA