Private equity looting bankrupted J. Crew

J. Crew announced that it was entering bankruptcy in May 2020, the first major national retailer to fail after the start of the Coronavirus economic downturn, putting 14,000 employees at more than 450 retail stores throughout the United States.

One Democratic congressional candidate says the seeds of J. Crew’s demise were planted years earlier when private equity firms saddled the retailer with debt in a leveraged buyout and siphoned away the company’s most valuable assets.

"J. Crew’s bankruptcy is a result of the same kind of private equity-imposed debt that destroyed Toys R Us and left thousands of workers without a job or the pension they earned over years of loyal service," said Lisa McCormick. "In 2011, TPG Capital and Leonard Green & Partners bought J. Crew in a $3 billion leveraged buyout, then forced the company to borrow another $787 million, which was paid to the profiteering predators."

"A little financial engineering enabled TPG and Leonard Green to recover their initial investment, while leaving J. Crew burdened with much greater debt to other creditors but stripped of its intellectual property and other assets," said McCormick, who is seeking the Democratic nomination in New Jersey's 12th Congressional District. "J. Crew’s unsustainable debt load and offshoring of valuable assets made it impossible for the retailer to survive the economic downturn resulting from the COVID-19 pandemic."

"These tactics enriched a few private equity owners, leaving J. Crew with insufficient financial resources or flexibility to withstand turbulent times," said McCormick, who earned 159,998 votes statewide in 2018, when she challenged a corrupt U.S. Senator in the Democratic primary. "J. Crew’s demise robs thousands of works of their jobs, steals money from other investors and drives a knife into the heart of America's recovery effort. It was done on purpose, for fast profit."

Although the Coronavirus economic downturn exacerbated the company’s struggles, the private equity-imposed debt loads and financial engineering made J. Crew’s bankruptcy almost inevitable — putting more than 14,000 workers at risk of losing their jobs.

McCormick said private equity "vultures" frequently extract value and profits from their portfolio companies though leveraged buyouts, exorbitant management fees, and debt-financed dividend payments that can leave the target portfolio firms so burdened with debt that they collapse, laying off workers (like at Toys “R” Us, Shopko, Art Van Furniture, and more) and squandering investors’ money, including that of pension funds.

In recent years, private equity firms have pushed the boundaries even further by blatantly snatching assets away from their troubled companies, leaving the portfolio firms in even more precarious positions and preventing investors and debtholders from recouping their losses.

Over the past decade, private equity firms and hedge funds have rapidly expanded into retail, snapping up over 80 major retailers.

"Privately-owned retailers were the vast majority of retail bankruptcies," said McCormick.

Ten out of the 14 (or 71 percent) of the largest retail chain bankruptcies since 2012 were at private equity-acquired chains. Among retailers that filed for Chapter 11 bankruptcy in 2016 and 2017, two-thirds were backed by private equity.

J. Crew announced that it was entering bankruptcy in May 2020, the first major national retailer to fail after the start of the Coronavirus economic downturn, but the company's fate was sealed when private equity firms TPG Capital and Leonard Green Partners saddled the retailer with debt in a leveraged buyout and siphoned away J. Crew’s most valuable assets.

Although the Coronavirus economic downturn exacerbated the company’s struggles, the private equity-imposed debt loads and financial engineering made J. Crew’s bankruptcy almost inevitable — putting J. Crew’s more than 14,000 workers at risk of losing their jobs.

Private equity firms frequently extract value and profits from their portfolio companies though leveraged buyouts, exorbitant management fees, and debt-financed dividend payments that can leave the target portfolio firms so burdened with debt that they collapse, laying off workers (like at Toys “R” Us, Shopko, Art Van Furniture, and others) and squandering investors’ money, including that of pension funds.

But in recent years, such firms have pushed the boundaries even further by blatantly snatching assets away from their troubled companies, leaving the portfolio firms in even more precarious positions and preventing investors and debtholders from recouping their losses.

The private equity owners of financially troubled preppy clothing retailer J. Crew pioneered an additional looting tactic when they were among the first to successfully use offshore transfers to insulate valuable assets from lenders.

TPG Capital and Leonard Green Partners pioneered the “J. Crew trapdoor” to shield assets as they planned to lead the company into its 2020 bankruptcy. The private equity tactic to siphon assets away from debt holders also became known inside the financial industry as getting “J. Crewed.”

McCormick said that if she is elected to Congress, she would join as a co-sponsor of H.R.3848 - Stop Wall Street Looting Act, and she questioned why her primary election opponent has failed to endorse this important legislation.

Warren (D-Mass.), Tammy Baldwin (D-Wisc.), and Sherrod Brown (D-Ohio), along with Representatives Mark Pocan (D-Wisc.), and Pramila Jayapal (D-Wash.), almost a year ago introduced the Stop Wall Street Looting Act, a comprehensive bill to fundamentally reform the private equity industry and level the playing field by forcing private equity firms to take responsibility for the outcomes of companies they take over, empowering workers, and protecting investors.

Joining those lawmakers in sponsoring the legislation were Senators Kirsten Gillibrand (D-N.Y.), Bernie Sanders (I-Vt.) and Representatives Barbara Lee (D-Calif.), Jesús "Chuy" García (D-Ill.), Ayanna Pressley (D-Mass.), Rashida Tlaib (D-Mich.), Jan Schakowsky (D-Ill.), Ro Khanna (D-Calif.), and Raúl Grijalva (D-Ariz.).

Since the bill was proposed on July 18, 2019, Rep. Bonnie Watson Coleman has not signed on as a co-sponsor of the Stop Wall Street Looting Act or otherwise indicated if she would support it.

"Workers' jobs, benefits, and pensions have been wiped out by private equity executives looking to make a quick buck, but our tax code encourages this behavior instead of preventing it," said McCormick. "We must take on predatory practices of private equity firms and fight to protect and empower workers and ensure that communities, workers, and their families have a voice in the economy instead of letting them become collateral damage in the destructive business decisions of private equity."

"People who have worked hard their whole lives to earn a pension deserve to be able to rely on that money still being there when they retire," said Rep. Rashida Tlaib, one the the measure's co-sponsors. "They do not deserve greedy Wall Street firms raiding their earnings and playing games with their futures. We need to stand up for workers and communities in the face of toxic corporate greed, and the Stop Wall Street Looting Act is a powerful tool in that fight."

"For far too long, Washington has looked the other way while private equity firms take over companies, load them with debt, strip them of their wealth, and walk away scot-free -leaving workers, consumers, and whole communities to pick up the pieces, " said Senator Elizabeth Warren, who authored the Stop Wall Street Looting Act. "Our bill ends these abusive practices by putting private investment funds on the hook for the decisions made by the companies they control, ending looting, empowering workers and investors, and safeguarding the markets from risky corporate debt."