A few recent deals show how leveraged-buyout barons can fund innovation and growth, create jobs and sometimes rebuild companies in challenging industries. Other times, private-equity deals result in onerous debt loads, losses and deep layoffs.
In early 2010, Gloucester Engineering Co., which manufactures machines that make thin plastics like those used in trash bags, was saddled with debt and hurtling toward bankruptcy. The Massachusetts company's management informed union officials it planned layoffs and needed concessions from remaining workers. Word of the company's distress reached customers, who began canceling orders.
A union representative, Mike Vartabedian, knew a lawyer who put him in touch with Blue Wolf Capital Partners, a New York private-equity firm with a reputation for teaming up with labor in its investments. He asked Blue Wolf to step in.
Blue Wolf, which manages a $118 million fund, invested in Gloucester just as it went into Chapter 11 bankruptcy protection, and bought the entire company when it re-emerged from bankruptcy in late 2010. "If we could fix the operational issues, there was no reason we couldn't see this grow," said Blue Wolf managing partner Adam Blumenthal.
Blue Wolf brought in a new management team, installed a computer system that helped better manage inventory and estimate job costs, and built up a business to service Gloucester equipment around the world. It also struck a deal with union workers that Mr. Vartabedian says kept pay and pensions unchanged but mandated employees perform a wider range of tasks than their previous job descriptions allowed.
"The one goal we had was to make the company successful," said Joe Orlando, who took on multiple roles, including maintenance and truck driving under the new union agreement. "There were a lot of people that live in Gloucester and wanted to keep the jobs here."
A mechanic at Gloucester Engineering, which benefitted from turnaround efforts by private-equity firm Blue Wolf Capital Partners.
Gloucester now employs about 100 workers, up from 30 at the time of the bankruptcy. Mr. Blumenthal said he expects substantial job growth over the next several years.
Other deals aren't as satisfying to all parties.
When KKR & Co. and TPG Holdings purchased TXU Corp., Texas' largest power generator, in a $45 billion leveraged buyout in 2007then the largest ever such dealthe private-equity firms left the utility with $35 billion in debt, up from $11 billion before the takeover.
All that debt has put pressure on the utility, since renamed Energy Future Holdings. At the same time, a plunge in natural-gas prices has eaten into revenues by reducing prices the utility charges for its power. Today, Energy Future's debt trades at less than 50 cents on the dollar, suggesting that investors anticipate a default.
Despite the difficulties, Energy Future has added jobs by adding three new coal units since the buyout, expanding its employee base by 25% to about 9,400, the company says.
One problem with assessing buyouts is that it is hard to tell what a company's fate would have been had a buyout not taken place. It is especially tough because buyout specialists often target troubled industries.
Customers at a going-out-of-business sale at a Miami Linens 'N Things in 2008. Apollo Global Management and other leveraged-buyout specialists failed to improve operations quickly enough to turn the company around.
In 2006, Apollo Global Management and other leveraged-buyout specialists purchased Linens 'N Things for $1.3 billion. They used $260 million of cash and added more than $1 billion of debt to the already-struggling company.
Apollo and the other buyers failed to improve operations quickly enough to turn the company around. The economic downturn compounded the problems, as did all the debt the firms piled onto the retailer.
In 2008, New Jersey-based Linens 'N Things filed for bankruptcy protection. Apollo, the other buyout firms and the firms' investors, together lost the $260 million they had invested.
