Hedge Funds, Equity Firms, and the End of Retail

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This week Sears announced that they will file for bankruptcy and close stores, continuing the trend of brick and mortar retailers falling victim to Amazon and Walmart. Another thing these retailers have in common is that are owned by huge private equity firms and hedge funds that have badly mismanaged them. Most of these companies surrendered to bankruptcy after being overloaded with debt, and it seems that even the smartest minds on Wall Street were unable to save them.

The majority owner of Sears was Eddie Lampert, a hedge fund manager. His company, ESL Investments, also owns the biggest stake in Kmart, bought after that retailer filed for bankruptcy in 2003 and was merged with Sears.

Toys ‘R’ Us, who closed its stores this past summer, was also managed by a private equity firm. Real estate investor Vornado Realty Trust and the private equity firms KKR and Bain Capital had controlling interests in the toy store. Bain Capital had also invested in the kid clothes retailer Gymboree, which has only recently emerged from bankruptcy.

The list doesn’t stop there, however. Payless ShoeSource, RadioShack, and Fairway were also managed by hedge funds and private equity firms, and all of those retailers ended up in bankruptcy. You can also add a long list of once popular mall retailers, such as Wet Seal, Claire’s, and the Limited, which all shared the same fate, and, of course, had hedge funds in charge of their business interests. One of the biggest retailers that recently went out of business was Sports Authority, who struggled for some time before closing down in 2016. It was owned by Leonard Green & Partners, a private equity firm.

Experts say that the hedge funds have destroyed jobs across the nation. Instead of focusing on the overall health of a retailer, these firms do all they can to extract financial gains out of the retailers, which in turn forces them to close.

Mismanagement isn’t the only factor of these many bankruptcy and retailer closures. Sears was unable to transform itself with the changing times. Other retailers, such as Best Buy and Walmart, have been able to keep their brick and mortar stores going while also increasing their online presence. But hedge funds and equity firms don’t have the expertise to oversee a transition to online commerce, as they lack the long-term vision necessary to make such a change.

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