The Grim Secrets of Private Equity

The Grim Secrets of Private Equity

In its most illuminating moments, Two and Twenty walks us through a detailed series of deal sketches,
based on real events, where the company Khajuria only calls “The Firm”
identifies against-the-grain investment opportunities to exploit with
sophisticated financial engineering. Just about all of these sketches involve
what’s known as a leveraged buyout, where the Firm borrows a mountain of cash
to acquire a private company’s “distressed assets,” or assets nearing
bankruptcy. Using this newly-borrowed war chest, the Firm takes the company
private, assigns it a monstrous amount of debt, and wrests near-complete
control over the company’s management. In most cases, the company is subject to
a highly extractive debt schedule until the Firm can bring the company public
again at a much higher price, allowing the Firm to collect a pretty penny for
its clients (i.e., institutional investors and pension funds) and for itself
(through management and performance fees). “This process,” Khajuria writes, “is
dynamic and iterative and comprises a vital part of the private equity job,”
which, he claims, requires a high level of “empathy and emotional IQ.” 

Dynamic as Khajuria’s sketches might be, the empathy he
mentions is hard to see in them. Consider the Firm’s takeover of “Foodmart,” a
grocery retailer with a strong presence in relatively affordable cities across
America. Foodmart’s stores, Khajuria writes, are “popular with a loyal
middle-class clientele, but they have aged and are somewhat down-market.
Affluent white-collar young people tend to shop elsewhere, even if they have to
pay higher prices. The company’s stodgy brand does not appeal to them.”
Treating it as self-evident that “down-market” businesses are necessarily
failing ones, the Firm decides that Foodmart will “transition upmarket,” which
naturally involves raising the company’s prices. After twelve months, the
investment has turned sour due to “dissatisfaction in communities” where stores
had been shuttered as a result of the rebrand, prompting the Firm, in its
infinite wisdom, to simply “ditch the aspiration to be upmarket” and ensure
that “nothing about the company will smack of Wall Street.”

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