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Toys 'R Us closed its flagship store in Times Square in 2015. (RW/MediaPunch/IPX / AP)

When Toys "R" Us filed for Chapter 11 bankruptcy last month, there was a lot of talk about how the company's private equity owners were out the $1.3 billion they invested back in 2005. But it's not exactly true.

Bottom line: Private equity funds can get paid big fees by their own portfolio companies, and don't always distribute those monies to their own investors.

Specifically, I've calculated at least $180 million that Toys "R" Us paid its sponsors in management and advisory fees, not inclusive of an $81 million transaction slug nor fees and interest related to subsequent debt financings. All of that comes via federal regulatory filings.

Assuming the equity check was split evenly among the three sponsors — Bain Capital, KKR and Vornado — it would work out to around $433 million each. Bain has an abnormally high GP commit of 10%, so that means Bain partners paid out around $43 million. But the fund received around $61 million in management and advisory fees related to the deal, which puts it in the black. LPs, of course, were wiped clean. KKR's relevant fund had a 57.5% offset for such fees but a smaller GP commit, so it too brought back more than it sent out. Some alignment of interests.

Caveats: Yes, private equity funds should be judged portfolio-level, and both relevant funds here performed well. Moreover, the sponsors spent tons of time working on Toys "R" Us (i.e., opportunity cost), didn't employ any dividend recaps and LPs knew the offsets (or lack thereof) upon investing. In fact, a Bain source puts its own time spent on Toys at 72,000 hours. But...

Takeaway: We've seen a strong move toward 100% advisory fee offsets in recent years, caused both by LP agitation and SEC scrutiny. Situations like Toys "R" Us are a stark reminder why that trend should continue and never backslide.

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Photo: Fars News Agency via AP

The assassination of Mohsen Fakhrizadeh, the architect of Iran’s military nuclear program, is a new height in the maximum pressure campaign led by the Trump administration and the Netanyahu government against Iran.

Why it matters: It exceeds the capture of the Iranian nuclear archives by the Mossad, and the sabotage in the advanced centrifuge facility in Natanz.

Scoop: Biden weighs retired General Lloyd Austin for Pentagon chief

Lloyd Austin testifying before Congress in 2015. Photo: Chip Somodevilla/Getty Images

Joe Biden is considering retired four-star General Lloyd Austin as his nominee for defense secretary, adding him to a shortlist that includes Jeh Johnson, Tammy Duckworth and Michele Flournoy, two sources with direct knowledge of the decision-making tell Axios.

Why it matters: A nominee for Pentagon chief was noticeably absent when the president-elect rolled out his national security team Tuesday. Flournoy had been widely seen as the likely pick, but Axios is told other factors — race, experience, Biden's comfort level — have come into play.

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Illustration: Sarah Grillo/Axios

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  4. Economy: Safety nets to disappear in December Black Friday shopping across the U.S., in photosAmazon hires 1,400 workers a day throughout pandemic.
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