Capital Markets Corporate

March 25, 2021

Can Toys R Us save private equity?


By the time Toys R Us filed for bankruptcy protection in 2017, it seemed an inevitable fate for a retailer that had been struggling for years against fierce competition from online giants and the ‘big box’ stores. However, the business’ demise was clearly accelerated by the mountain of debt piled on over a decade earlier by its private equity owners Bain Capital, KKR and Vornado Realty Trust.

Following a leveraged buyout in 2005, the business had built up more than £5bn of long-term debt which, after a series of restructurings, proved too much for the retailer to support.

When the business collapsed, more than 30,000 jobs were lost, while top executives received handsome bonuses. In the face of public and government scrutiny, the private equity industry’s reputation was once again tarnished, and Toys R Us was written off as another casualty of digitalisation and pre-financial crisis recklessness.

A clean start

Last week, WHP Global, a brand acquisition and management firm backed by private equity investor Oaktree Capital Management announced that it has acquired a majority stake in Tru Kids, the parent company of Toys R Us, Babies R Us and the Geoffrey the Giraffe brands.

This presents an exciting opportunity both for a new generation of children – the company has suggested it will reopen physical stores, albeit smaller than the originals – and for the private equity sector to redeem itself.

The industry has come a long way from the heady days of 2005. At the time, money could be made simply by buying and selling companies riding a wave of economic growth, with the returns on investment for the owners magnified by very high – sometimes excessive – use of leverage.

Nowadays, the industry has largely shifted away from such financial engineering towards a model that is more focused on delivering operational improvements. Furthermore, responsible investing and ESG considerations are now a critical part of firms’ strategies in raising capital, driving value creation in their portfolios and protecting their long-term reputation.

For this reason, we have every reason to be hopeful that Toys R Us’ latest backers will take a more responsible approach and one that balances the fiduciary needs of LPs with wider societal stakeholders.

All bets are off

Whether Toys R Us will succeed or not is far from certain. The same online competitors that challenged the company five years ago have only increased their dominance. However, with a Covid-induced surge in demand for toys, the time could be right for a familiar brand with nostalgic capital. In these uncertain times, what could be more comforting than a trip to the toy box of our collective childhood?

As for private equity, while it is true that the industry has changed, that does not put it above criticism. Just last month Oaktree Capital Management came under fire at a public pension meeting for reportedly disregarding a Centers for Disease Control and Prevention order barring evictions for failure to pay rent because of the pandemic.

Personally, I hope that it does succeed, to introduce a new generation to Geoffrey the Giraffe, and show them that their parents have learned a lesson or two about responsible investing.