It started out as just a summer job, in 1998, at the Toys ‘R’ Us where her sister worked in Chula Vista, California. Giovanna De la Rosa, born and raised just across the border in Tijuana, Mexico, had just turned 18. She ended up liking the job so much, she worked there for the next 20 years.
“It was like a family, a really fun place to work at and the company took care of us as employees,” De la Rosa says today. “I had really good pay for it being 1998, holidays off, flexible scheduling. I put myself through college while I was working there.”
De la Rosa married (and later divorced) one of her colleagues there. They practically raised their son at the store. Another pair of colleagues got married at the customer services desk. On the weekends, De la Rosa says, the store used to host Pokemon card tournaments and other community events with kids as young as six competing with people in their teens and twenties. The store being so close to the border, these were weekly international gatherings.
“We had a huge customer base that came across the border because there’s nothing like this in Mexico. People would plan their whole Saturdays around coming here, some spending hundreds of dollars at the store, some just for the events,” De la Rosa says. “The kids didn’t mind it taking two hours to cross the border because they were coming to Toys ‘R’ Us. This was a place where people would go and spend time with their kids. In an era when kids spend so much time on their phones or tablets, for at least these few hours every Saturday and Sunday morning you wouldn’t see any of that.”
Now all of that is gone. The Chula Vista Toys ‘R’ Us was one of 800 remaining locations the company closed last year, putting some 33,000 employees out of work. De la Rosa is one of many who have joined United for Respect, a national organization fighting back against what some see as the main culprit behind the demise of the iconic toy store chain — not Amazon or other online retailers, not Wal-Mart, not the rise of dollar store chains, but the private equity firms that bled Toys ‘R’ Us dry.
“We’ve exchanged so many stories, so many similarities, it’s been amazing to see the impact of the brand and the company on communities, which is why we were so heartbroken that these private equity firms didn’t consider that impact,” De la Rosa says.
United for Respect recently helped introduce the “Stop Wall Street Looting Act,” sponsored by Senator Elizabeth Warren (D-MA), along with a corresponding bill introduced in the House of Representatives. Supporters believe the act, if passed, would stop private equity firms from doing to others what they’ve done to Toys ‘R’ Us, Sears, Kmart, Payless and other iconic retail brands — not to mention local newspapers and even hospitals.
“As private equity enters into more and more pieces of the economy, more and more lines of business, more things that touch our lives from multiple directions, there are a thousand reasons why local organizations and local officials should be interested in this,” says Lisa Donner, executive director of Americans for Financial Reform, the nonpartisan and nonprofit coalition of more than 200 groups which helped draft the bill. “Sometimes it can feel like it’s beyond anyone’s control, that it’s the market just driving these things, and it’s just happening naturally, but it’s not. There are rules that enable it to be this way and you can change those rules.”
As part of a larger coalition, United for Respect and Americans for Financial Reform also just released a report, “Pirate Equity: How Wall Street Firms are Pillaging American Retail,” detailing private equity’s hold on retail and what they see as its outsized role in retail job losses. The private equity industry has grown tremendously over the past decade, from managing $1 trillion in assets prior to the 2008-2009 financial crisis to managing a record $5.8 trillion in 2017. These firms now control retail companies employing some 5.8 million people — more than a third of all retail employees overall.
In the last 10 years, the report claims, nearly 600,000 employees at retail companies owned by private equity firms and hedge funds have lost their jobs. An estimated 728,000 indirect jobs have been lost at suppliers and related local businesses, meaning private equity firms are responsible for more than 1.3 million job losses in total, according to the report. The job losses disproportionately affect women and people of color. In the retail clothing sector, more than 76 percent of workers are women, and 43 percent are black, Asian, or Latinx. In the general merchandise sector, nearly half of workers are black, Asian, or Latinx, and 60 percent are women.
And the losses go beyond jobs and community gathering places, advocates say.
“The fact that stores are going out of business and there’s a vacant space matters, that’s a hole that makes the next hole harder to fill,” Donner says. “And then there’s all the things that a diminished tax base means for a community, which hurts everyone, not just the people who were employed in that particular place.”
There is little dispute over the fact that Amazon and other online retailers have significantly changed the retail landscape, moving more and more spending online and away from brick-and-mortar locations. But advocates for the Stop Wall Street Looting Act argue that the scale of closures is far beyond what they might be without private equity’s involvement. According to the Pirate Equity report, ten out of the 14 largest retail chain bankruptcies since 2012 were at private-equity-acquired chains, and 70 percent of 6,683 retail store closures in the first three months of 2019 were at private-equity-owned companies.
The private equity game plan for bleeding companies dry is deceptively simple — and, for now, entirely legal. Alone or in partnership with others, private equity firms acquire a business with something of value, say an iconic brand or prime real estate or some combination thereof. Then they make that underlying business borrow tons of money, often on the pretense of investing in future growth, but instead use the cash to pay themselves management fees and dividends, or pay out bonuses to complicit executives — all the while cutting wages, pension payments and other costs to keep companies barely afloat. Eventually, the underlying business goes into bankruptcy because it can’t pay back what it borrowed.
Even after declaring bankruptcy, Toys ‘R’ Us went to court to request permission to pay $14 million in bonuses to its top executives in order to “help encourage executives to focus on driving up sales as the holidays approach.” A judge approved the request.
In some cases, like many Sears or Kmart locations, the private equity firm transfers the company’s real estate into its ownership and then rents the buildings back to the retailer. Once the retailer folds, who knows — the firm may even rent or sell the property to Amazon.
The Stop Wall Street Looting Act has been “reverse engineered” specifically to ban or discourage the key tactics used to raid companies for billions in investor profits and leave them for dead. It would start by putting private equity firms on the hook for the debts of companies they acquire, while also limiting other investment managers and lenders from facilitating new loans to underlying companies that are already saddled with debt. It would also eliminate or limit the ability of private equity firms to pay themselves huge monitoring fees and bonuses or dividends from underlying company profits. There are tax code reforms as well, such as closing the “carried interest loophole,” which infamously allows private equity firms to pay an ultra-low tax rate on the income from derived from these tactics.
The bill would also hold private equity firms responsible for certain pension obligations of the companies they acquire, as well as make it easier for former employees to recover wages or compensation lost as a result of bankruptcy proceedings.
So far, one of the biggest victories De la Rosa and her former colleagues have celebrated was a court decision last year forcing two of the company’s three private equity owners to pay into a $20 million hardship fund to partially cover the severance pay that Toys ‘R’ Us owed them before those obligations were terminated as a result of bankruptcy proceedings. De la Rosa and other former Toys ‘R’ Us employees continue issuing demands to private equity firms to pay into the hardship fund, including the private equity firms that made loans to Toys ‘R’ Us after it was acquired by private equity.
Private equity industry advocates have mobilized against the Stop Wall Street Looting Act.
“Private equity is an engine for American growth and innovation – especially in Senator Warren’s home state of Massachusetts. Extreme political plans only hurt workers, investment, and our economy,” said the American Investment Council, a private equity industry group, in a statement.
The American Investment Council also noted that private equity is the highest performing asset class for public pension funds. Private equity investment returns thereby support the retirements of schoolteachers, first-responders and other dedicated public servants around the country at a time when public pension funds face a $1.4 trillion shortfall, the council said.
Besides public pension funds, many university endowments and private foundations have come to rely on private equity firms to meet their annual goals for investment income that funds university budgets or foundation grants. A growing number of university endowments and foundations have been deciding those returns aren’t worth chasing.
The loss of iconic retailers and the jobs, tax bases and commercial spaces they support is hardly the only impact of private equity for cities to consider. Over the past decade, private equity firms have made major encroachments into housing. A private equity firm is now the largest home rental company in the country; in New York City, 62 percent of affordable single family home purchases in 2017 were made by investors instead of homeowners. In larger apartment buildings, New York City tenants have been fighting back for years against what they’ve coined “predatory equity.”
The Stop Wall Street Looting Act currently does not address any possible private equity abuses in housing, but the issue is not lost on Donner.
“If we’re looking for how to identify the factors that are systematically increasing inequality and increasing precariousness and economic vulnerability, private equity firms are really powerful factors behind all that,” Donner says.
Some think private equity should be banned entirely. The Stop Wall Street Looting Act is a bit more targeted than that.
“We’re not saying you can’t invest, we’re not saying you can’t aggregate your investments, we’re not saying you can’t be a certain kind of investment vehicle,” Donner says. “We’re just saying you can’t engage in certain predatory practices.”
This article is part of The Bottom Line, a series exploring scalable solutions for problems related to affordability, inclusive economic growth and access to capital. Click here to subscribe to our Bottom Line newsletter. The Bottom Line is made possible with support from Citi.
Oscar is Next City's senior economics correspondent. He previously served as Next City’s editor from 2018-2019, and was a Next City Equitable Cities Fellow from 2015-2016. Since 2011, Oscar has covered community development finance, community banking, impact investing, economic development, housing and more for media outlets such as Shelterforce, B Magazine, Impact Alpha, and Fast Company.