When former Massachusetts Gov. Deval Patrick (D) announced his presidential candidacy in November, he made clear immediately that he was not running in the populist lane.
In an interview on the day of his announcement, Patrick, who had spent almost five years prior to his White House bid as a managing director at the private equity firm Bain Capital, claimed he “didn’t buy” then-President Barack Obama’s attacks on Bain during a 2012 reelection campaign that Patrick co-chaired.
But weeks into a campaign that has yet to really take off, Bain’s critics are demanding answers from Patrick about how he would handle a private equity industry that many critics consider predatory.
Bain is the subject of particular scrutiny of late because of its role in the dissolution of Toys ‘R’ Us. The company’s 30,000-plus laid-off workers, who fought tooth and nail for a fraction of the severance to which they had previously been entitled, blame Bain and its partners for saddling Toys ‘R’ Us with debt and extracting $470 million in fees that prevented the company from thriving ― only to discard it when it was no longer a source of profit.
“It’s a ‘heads-I-win, tails-you-lose’ structure.”
- Jim Baker, Private Equity Stakeholder
HuffPost spoke with Ann Marie Reinhart, who worked at Toys ‘R’ Us locations in Long Island and North Carolina from 1988 to 2018, about her ordeal and her thoughts on Patrick’s candidacy.
“My question for him would be, how could someone with your background ... lean in to help us fight Wall Street and private equity?” she said. “Because they’re killing so many jobs.”
The Patrick campaign responded by emphasizing that the former governor arrived at Bain in 2015, about a decade after the acquisition of Toys ‘R’ Us and did not participate in managing the firm’s investment in the retailer. (In fact, Patrick helped establish what the firm calls its “double impact” fund, which connects investors to opportunities that purport to yield a positive social return, as well as the standard financial one.)
“The layoffs at Toys ‘R’ Us and their human impact are devastating,” Aleigha Cavalier, communications director of the Patrick campaign, said in a statement. “Governor Patrick is a capitalist, but supports robust regulation and strong enforcement of laws to protect workers, consumers, and our planet. He believes in the private sector’s ability to innovate and create jobs and economic opportunity for everyone, everywhere.”
A System ‘Stacked In Favor’ Of Private Equity
The saga of Toys ‘R’ Us is a microcosm of what experts maintain are the misaligned incentives that plague the largely unregulated private equity sector.
Even private equity critics admit that not all private equity investments end in catastrophe for the companies they invest in and the workers those companies employ; many even add value.
But a powerful subset of private equity firms ― many of them larger in size ― are exploitative, turning companies into ATMs with little regard to their long-term fate. One way private equity firms pump businesses for profit is by taking on major debt to purchase or invest in a company ― a practice known as a “leveraged buyout,” or LBO. The firms can then transfer the debt to the company that has been purchased, which doubles as a tax reduction strategy by inflating the liabilities on a company’s balance sheet.
The leveraged buyout system shifts risk onto the companies that private equity firms purchase while assuring the investors a steady stream of money even if the company goes under. To generate returns for their investors and service the debt they have accrued, private equity firms often sell company assets and reduce labor costs through layoffs and pay and benefit cuts for remaining employees.
What’s more, thanks to the lucrative “carried interest” tax loophole, partners in private equity firms pay a lower tax rate on the profits they receive from their investments than many middle-class workers pay on their salaries.
“It’s a ‘heads-I-win, tails-you-lose’ structure,” said Jim Baker, executive director of Private Equity Stakeholder, a watchdog group funded by labor unions and liberal foundations. “The system is very much stacked in favor of private equity firms currently.”
The Human Face Of The Toys ‘R’ Us Takeover
The leveraged buyout of Toys ‘R’ Us follows the pattern of big funds squeezing returns from a mature company wherever they can find them. In 2005, Bain joined with the private equity firm Kohlberg Kravis Roberts and the real estate investment fund Vornado Realty Trust to purchase Toys ‘R’ Us for $6 billion. The deal saddled Toys ‘R’ Us, a profitable company facing competition from other retail mega-mergers, with $5 billion in debt.
After the takeover, Reinhart saw a slow trickle of cutbacks. First, the company laid off some of her colleagues and cut the hours of many others, depriving them of health insurance in the process. Later, budget cuts forced her to pay for cakes on her colleagues’ birthdays out of her own pocket. During the Great Recession, the company capped its pool for raises, freezing her pay at $16 an hour for several consecutive years.
Nothing compared to the series of events that shook her world beginning in September 2017 when the company declared bankruptcy. Top executives assured her and other store managers in December that bankruptcy would be good for the company, but weeks later, they announced that she and more than 30,000 other employees would be laid off as the company shuttered 182 stores. When the liquidation was complete in April 2018, she was outraged to learn that investors were able to jettison away the employees’ severance benefits during the bankruptcy proceedings.
“Companies like KKR and Bain paid themselves back, but the ones who took the risk for their gamble were Toys ‘R’ Us workers.”
- Jim Baker, Private Equity Stakeholder
“Companies like KKR and Bain paid themselves back, but the ones who took the risk for their gamble were Toys ‘R’ Us workers,” Baker said.
Reinhart, who felt betrayed by a company to which she had dedicated three decades of her life, became active in United for Respect, a foundation-funded advocacy group for non-union retail workers. They clamored publicly for their severance benefits, demanding a $75 million fund to pay what was owed to the company’s 30,000-plus workers.
Facing negative media attention and increased pressure from Democratic members of Congress, Bain and KKR agreed in November 2018 to contribute $10 million each to a severance fund without any help from their third partner, Vornado.
Reinhart received $5,000 from the fund and a much smaller sum from a class-action lawsuit that the workers filed. The figure is still a fraction of what Reinhart would have received under the original terms of her severance.
Getting laid off has been financially crushing for Reinhart. She went without health insurance for about a year, an experience that she called “scary.” The “lowest” moment for her was when she decided to forego a new asthma inhaler to pay for her husband’s diabetes medicine when she learned that the inhaler would cost $250.
It’s cases like Reinhart’s that have prompted Patrick’s more progressive competitors in the presidential field to come up with ambitious ideas for overhauling private equity and other forms of activist investment. For example, Democratic Sen. Elizabeth Warren of Massachusetts introduced the Stop Wall Street Looting Act in July with support from presidential rival Bernie Sanders, a Vermont independent, and other senators.
The bill would completely revamp the private equity business by, among other changes, ending the favorable tax treatment that the funds get for debt they incur to invest in companies and on profits they earn from those investments.
Short of endorsing the legislation, it is incumbent upon private equity executives like Patrick to demonstrate their commitment to curbing the industry’s excesses, Baker argued.
“What we would want to see from Deval is the same thing we want to see from other private equity managers, which is that when private equity firms like Bain gamble in companies, workers like those in Toys ‘R’ Us aren’t the ones left struggling,” he said.
Patrick’s campaign would not say whether he supports Warren’s bill, or otherwise specify how he plans to regulate the industry.