In the modern business landscape, private equity firms have come to play an increasingly dominant role in corporate takeovers. This is often accomplished with leveraged buyouts (LBOs), wherein buyers acquire corporations using largely borrowed money with “debt as the main source of consideration”. [1] While supporters of LBOs argue that these acquisitions serve to revive struggling companies by way of financial restructuring and strategic overhauls, their critics rebut that the short-term profit motives of private equity typically accelerate brand deterioration, loss of jobs, and even eventual bankruptcies. The controversy over the part private equity plays in the decline of major brands has only intensified over recent years, leading legislators to review the issue with renewed scrutiny.
An LBO is an oft-employed financial strategy in which a private equity firm acquires a company primarily using borrowed capital, frequently securing loans against the assets of the target firm itself. The goal of an LBO is to improve the company’s profitability—usually by cutting costs, selling off assets, or restructuring internal operations—before selling it at a higher value to turn a profit. [2] Unfortunately, since the acquired company is typically saddled with significant debt post-acquisition, it is left more vulnerable to a number of problems, including but not limited to higher susceptibility to downturns within the business cycle and larger global economy, declining sales, and operational mismanagement.
Research directs many to believe that although certain private equity acquisitions produce successful turnarounds, others eventually weaken a company’s long-term financial prospects. Harvard Business School professor Josh Lerner notes that “aggressive debt financing can leave firms with little margin for error, meaning even slight missteps can drive them toward bankruptcy.” [3] Critics put forth that the LBO model incentivizes cost-cutting measures like layoffs, reduced product quality, and closure of retail locations at the expense of brand value.
Perhaps one of the most notorious examples of private equity mismanagement—which many young readers may remember in their own lifetimes—is the collapse of the beloved toy retailer Toys “R” Us, which filed for Chapter 11 bankruptcy in 2011 to restructure its debt. [4] They incurred such debt in 2005, when a consortium of private equity firms, including KKR, Bain Capital, and Vornado Realty Trust, acquired the company in a $6.6 billion LBO. [5] Post-acquisition, however, Toys “R” Us was left to wrangle nearly $5 billion in debt, leaving it wholly unable to invest in modernizing its stores or competing with e-commerce giants such as Amazon. With debt service costs draining over $400 million annually, the retailer lacked the flexibility to adapt to rapidly shifting consumer preferences and eventually shuttered its US operations.
Similarly, Sears—once a titan of American retail—suffered the same fate after its 2005 acquisition by hedge fund manager Eddie Lampert’s ESL Investments. [6] While Sears struggled with external retail pressures, critics maintain that Lampert’s strategy of asset liquidation and cost-cutting dramatically hastened its decline by eroding both customer trust and brand loyalty. Consequently, some claim that private equity-backed firms often prioritize short-term financial gains over long-term brand sustainability.
From a legal perspective, private equity firms have faced scrutiny over their fiduciary duties in LBO transactions, especially concerning their obligations to stakeholders beyond direct shareholders. The doctrine of fiduciary duty traditionally requires corporate directors and executives to act in the best interest of the company, but private equity acquisitions often prioritize the financial interests of investors over those of employees, creditors, and customers. [7]
Bankruptcy law has also recently emerged as a battleground in private equity disputes. Critics say that firms frequently exploit bankruptcy proceedings to offload pension obligations, renegotiate labor contracts, and shift liabilities to creditors while shielding investor profits. [8] In the Toys “R” Us case, private equity owners paid themselves millions in fees prior to the company’s collapse, raising concerns across the industry about the ethical treatment of stakeholders in insolvency cases.
Amid growing concerns over private equity’s role in corporate failures, lawmakers and regulatory agencies have proposed reforms to curb predatory practices. The Stop Wall Street Looting Act, first introduced in 2019 and reintroduced in Congress in 2023, aims to impose stricter regulations on private equity firms, including increased transparency requirements, limits on dividend payouts before bankruptcy, and enhanced protections for workers affected by leveraged buyouts. [9]
Additionally, the Federal Trade Commission and the Department of Justice have begun applying stricter antitrust scrutiny to private equity acquisitions, particularly when firms engage in “roll-up” strategies—where multiple small companies in the same industry are acquired to consolidate market power. [10] These regulatory efforts signal a broader shift toward increasing oversight of financialized business models that prioritize investor returns over corporate sustainability.
The decline of iconic brands at the hands of private equity introduces far-reaching effects into all sorts of areas like corporate governance, financial regulation, and economic justice. While private equity firms argue that their interventions inject much-needed capital and efficiency into struggling businesses, the broader economic impact—particularly in cases of excessive debt and asset-stripping—has led to heightened legal and political scrutiny. As legislators, investors, companies, and ordinary customers alike attempt to balance financial innovation with consumer and worker protections, the future of private equity regulation will remain a contentious and evolving issue.
Sources
[1] LBO – Leveraged Buyout – Using Debt to Boost Equity Returns
[2] Leveraged Buyouts and Private Equity – American Economic Association
[3] Do Private Equity Buyouts Get a Bad Rap? | Working Knowledge
[4] One year later: Toys R Us’ fatal journey through Chapter 11 | Retail Dive
[5] Toys ‘R’ Us Case Is Test of Private Equity in Age of Amazon – The New York Times
[6] Eddie Lampert Shattered Sears, Sullied His Reputation, and Lost Billions of Dollars. Or Did He?
[7] “Fiduciary Deadlock” by Roberto Tallarita
[8] A Primer on Private Equity at Work Management, Employment, and Sustainability | RSF
[9] H.R.5648 – 117th Congress (2021-2022): Stop Wall Street Looting Act