Should the former private equity owners of Toys "R" Us pay around $70 million in severance to the company's 33,000 laid-off employees?
This is not an academic question. It's become the subject of some public pension investment committee meetings, prompted by a lobbying campaign by left-leaning nonprofit advocacy groups, and has gotten the private equity industry's attention.
This issue is far more complex than the pro-severance forces are making it out to be. For starters, the private equity firms didn't favor liquidation. They wanted to engage with one of several offers that would have kept many of the U.S. stores operational, but a small group of creditors felt differently (and by that point had control). There is no push to demand severance from those creditors, even though some of them have public pension money themselves and will make money on Toys once all is said and done.
Second, there are many others who lost out on Toys "R" Us, including small toy-makers who are above workers in the payback pile, but who are unlikely to see a penny.
Finally, the pro-severance folks are a bit liberal (no pun intended) with their math. They argue the PE firms took out $464 million, by adding up advisory fees ($185m), expenses ($8m), transaction fees ($128m) and interest on debt held by the sponsors ($143m). Yes, we were first to point out how the general partners may have gotten back more than they put in. But some of those fees were shared with LPs — including the now-aghast public pensions — while the interest was held in CLOs that had their own investors. In other words, PE "profit" was much smaller than claimed (although, on the flip side, you could argue the firms collected management fees on Toys-related capital that ended up being set on fire... again, it's complicated).
But, but, but: Despite all of those quasi-mitigating factors, PE firms do have moral obligations to portfolio company employees. You break it, you own it (even if you technically broke it while owning it, which caused someone else to own it).
Bottom line: The PE firms should pay at least some of the severance, or figure out some other form of compensation. And I have a sense that they might. Not because of preening public pension staffers or legal obligations, but because it's the right thing to do. Sometimes it's just that simple.
Source: Giphy
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