CEPR - Center for Economic and Policy Research

04/18/2019 | Press release | Distributed by Public on 04/18/2019 16:38

Regulations Needed to Stop Private Equity Abuses that Sank Major Grocery Chains

For Immediate Release: Thursday, April 18, 2019
Contact: Karen Conner, (202) 293-5380 x117, [email protected]

Washington DC - Since 2015 private equity firms milked seven major grocery chains of their assets and smothered them with debt, leaving behind a trail of bankrupt stores and more than 125,000 workers without a job. Private Equity Pillage: Grocery Stores and Workers At Risk is republished today by the Center for Economic and Policy Research (CEPR) with graphics that illustrate the private equity model.

Co-authors Eileen Appelbaum (CEPR's co-director) and Rosemary Batt (Cornell University) reveal the playbook of devious tactics used by private equity firms to acquire companies, (in this case grocery store chains) extract wealth for their investors, and ideally, resell the debt-crippled companies before they file for bankruptcy. Private equity owners are not considered joint employers along with the companies they acquire so they are not held responsible for failing to provide workers with the legally required 60 days' pay if a store is shuttered or for subjecting employees to unsafe working conditions.

'The multiple abuses by these private equity firms exist only because of loopholes in the law,' explains Appelbaum. 'Public policies can reduce incentives for the types of financial engineering that drove these grocery chains into bankruptcy.'

The article offers further safeguards, like legislation to limit the amount of debt that can be leveraged onto a company, including rent payments. Indeed, major federal bank regulatory agencies issued guidance to banks (since walked back by Trump administration regulators) to limit the debt they load onto companies to no more than six times EBITDA (earnings before interest, taxes, depreciation, and amortization).

Additionally, the US can follow the lead of Europe and give companies acquired by leveraged buyouts at least a two-year reprieve before paying dividends to private equity firms. Public-sector pension funds could be required to collect and make public information on what private equity-owned companies pay to the owner-firms in monitoring fees - payments that rob the companies of resources that could be used to improve their operations.