Private equity firm distributes $2 million emergency fund to ex-Art Van employees
In the world of retail, the influence of private equity (PE) firms has been a subject of growing concern. A recent example of this is the bankruptcy and liquidation of Art Van, a furniture retailer, which has shed light on the potential risks and consequences of PE ownership.
Art Van, once a thriving business, took on significant debt after its acquisition by Thomas H. Lee Partners. This rapid expansion left the company with a larger lease footprint, making it more vulnerable when it hit troubled waters. Despite the addition of $2 million to a hardship fund for former Art Van employees by Thomas H. Lee Partners, the retailer failed to find a buyer in Chapter 11 to keep it afloat, leading to job losses and financial hardship for its employees.
The hardship fund for former Art Van employees was a result of a year-long pressure campaign by workers, who have been pushing for legislation sponsored by Democratic Sen. Elizabeth Warren to increase liabilities for private equity firms, curb fees and dividends, and prioritize worker pay in bankruptcies, among other changes.
This is not an isolated incident. Since 2016, dozens of private equity-owned retailers have gone bankrupt, with approximately a third of retailers owned or previously owned by PE firms since 2002 filing for bankruptcy as of July 2020. This trend is particularly concerning given that PE firms account for only 6.5% of the economy.
A study from December traced 542,000 lost jobs and 18,000 closed stores to private equity-owned retailers. The high debt loads that PE firms often use to fund acquisitions make retailers more vulnerable to economic shocks and interest rate rises, leading to bankruptcy.
When highly leveraged companies under PE stewardship collapse, employees face layoffs or reduced benefits without sufficient hardship fund protections. The focus on short-term investor returns means less prioritization of long-term employee welfare in turnaround or restructuring plans.
PE’s model often involves acquiring retail companies with borrowed money, increasing vulnerability to economic shocks and interest rate rises, leading to bankruptcy. This triggers closures and job cuts, as seen in numerous high-profile cases, such as Forever 21 and J.C. Penney stores sold to PE.
Regulatory and policy pressures are growing to improve transparency and ESG (Environmental, Social, Governance) accountability in PE practices, partially to mitigate social harms including employee hardship. As the case of Art Van illustrates, the impact of PE ownership on retail bankruptcies and employee hardship is a critical issue that demands attention and action.
[1] Americans for Financial Reform, Center for Popular Democracy, United for Respect. (2020). Private Equity’s Retail Racketeering: How Wall Street’s Predatory Model Harms Workers and Communities. [5] Retail Dive. (2020). Retail bankruptcies: A comprehensive guide to store closures and liquidations.
- The influence of private equity (PE) firms, especially in high technology and finance sectors, has become a matter of growing concern, as evident in the retail sector, where PE-owned companies are more vulnerable to economic shocks and interest rate rises, leading to bankruptcy and job losses.
- During the pandemic, PE firms have come under scrutiny for their business models, with critics arguing that PE-owned companies, such as those in the health sector, prioritize short-term investor returns, which may compromise long-term business stability and employee welfare.
- Art Van's bankruptcy and liquidation highlighted the risks of PE-owned companies, particularly in the context of war and geopolitical instability, as lower interest rates and government stimulus packages during the pandemic can lead to increased debt and overexpansion.
- advocacy groups argue that PE firms, particularly those in the artificial intelligence (AI) and business sectors, must be held accountable for their impact on jobs and the economy, as Private equity has been linked to job losses and closures in numerous industries.
- In the ongoing editorial debate on the role of PE firms, Democratic Senator Elizabeth Warren's proposed legislation aims to increase liabilities for PE firms, curb fees and dividends, and prioritize worker pay in bankruptcies, signaling a shift towards greater financial and social responsibility in the PE industry.
