Saks Fifth Avenue, the iconic luxury retailer, went into bankruptcy last Thursday. To read most of the press coverage, you’d think that it was just the latest casualty in a long line of failed department stores that have gone out of fashion, squeezed by online sales on one side and direct marketing by luxury brands on the other.
But think again. The real killer was private equity.
In fact, private equity’s prints are all over that long line of failed department stores. Its extraction model helped kill Sears, Toys ‘R’ Us, Kmart, Sports Authority, Red Lobster, RadioShack, RJR Nabisco, Barneys, and numerous others.
To hear The New York Times tell it, Saks’s owner, a real estate operator named Richard Baker, tried to stave off the inevitable bankruptcy by going big, combining Saks with Neiman Marcus after already swallowing Bergdorf Goodman and the Barneys brand name. “By combining Saks and Neiman, Mr. Baker aimed to realize his grand vision of creating the ultimate luxury department store group, one that would be unrivaled in reach and power,” the Times credulously writes.
But that wasn’t Baker’s real game.
As The Wall Street Journal explained, Baker created a private equity company in 2005, NRDC Equity Partners, “to snap up retailers with valuable real estate. A memo he wrote that year listed his targets: Lord & Taylor, Canadian chain Hudson’s Bay, Saks, Germany’s Galeria Kaufhof, and Neiman Marcus. He would go on to buy them all. Each eventually filed for bankruptcy—though not all on his watch. Even though the companies failed, Baker often made money on the real estate.”
Retailers are a particularly attractive target for private equity because their stores are often valuable real estate.
The last deal, which combined Saks with Neiman Marcus in 2024, was financed by $2.2 billion in high-interest junk bonds. This mountain of debt became completely unsustainable, preventing the retailer from continuing as a going concern. (The deal also spun out Hudson’s Bay, which would eventually liquidate.)
Retailers are a particularly attractive target for private equity because their stores are often valuable real estate. Part of the extraction strategy is to sell off the real estate, pocket the money, and then burden the retailer with rent.
In a typical display of the Journal being at war with itself, the editorial page blames “competition” as the reason for upscale department store failures. But that editorial fails to even mention Baker’s name, or his strategy to capture stores with valuable real estate that he could profit from by eventually selling off. The villain wasn’t “competition.” It was extraction.
One amusing part of this mess is that Baker suckered Amazon into making an equity investment of $475 million in the Saks/Neiman Marcus deal. The plan was that Saks would sell branded products on Amazon’s marketplace and give Amazon a referral fee for each sale. But in an incensed filing to the bankruptcy court, Amazon said its investment is “presumptively worthless” and objected to Saks’s bankruptcy plan, which would put it way down the list of creditors. You have to give Baker this: He may have screwed over suppliers and workers, but at least he screwed over Amazon in the exchange.
BAKER’S STRATEGY WAS TO ACQUIRE retail properties by extensive debt financing, using very little of his own money. He’s obviously not suffering. Baker commutes from his castle-style estate in Greenwich to Manhattan by his private boat.
Baker claims that he put about a billion dollars over the years into refurbishing the department stores that he owned. But we don’t know how much he took out—because we can’t know. That is the genius of the private equity model. It allows all transactions to be kept secret.
The financial reforms bequeathed us from FDR’s New Deal rely heavily on disclosures. In the 1930s, virtually every large company that mattered was publicly traded. Under the Securities Act of 1933, publicly traded companies were required to make extensive disclosures. If any insider tried to extract wealth at the expense of shareholders, it would have to be disclosed and was thus short-circuited. There was no such thing as private equity.
The rise of the private equity and junk bond model is the result of several loopholes added to the securities laws beginning in the 1980s. PE companies can use debt financing to take over companies and extract wealth, not subject to rules or disclosures. By the time the acquired company is driven into bankruptcy, it’s no skin off their noses because they have already made far more than they put in.
Elizabeth Warren’s Stop Wall Street Looting Act reverse engineers the private equity model. The bill would basically put private equity out of business by drastically limiting payouts to PE owners, requiring them to bear much of the risk and be personally liable for damages to the acquired company; ending the tax deduction for debt to acquire companies; and requiring disclosures comparable to those required of publicly traded companies.
“A bunch of Wall Street billionaires bought Toys ‘R’ Us, Red Lobster, Joann Fabrics, Steward Health Care, and countless other businesses, gutted them, sold off the parts, fired their workers, then filed for bankruptcy—all while lining their own pockets,” Warren told me. And they do it all in the shadows: Billionaires’ money in a black box with no oversight and no accountability, destroying classic American businesses, veterinarian practices, and hospital systems just to buy new luxury yachts. Saks may be the latest victim of this legalized looting model, but it won’t be the last if Congress stays silent.
President Trump has been courting Warren as part of his bogus effort to signal concern for consumer worries about the high cost of living. If he were serious, he’d push Congress to pass her anti–Wall Street looting bill.
Brick-and-mortar retail was bound to struggle because of online competition. But the bigger culprit is extractive private equity, which accelerated the slide and made it impossible for physical stores to even try to offer a better experience.
The loss of retail is not just loss of luxury brands. Retail is a key part of the fabric of America’s downtowns. It adds tax revenues and contributes to the vibrancy of a city.
PE operators have moved on to everything from buying up nursing homes to trailer parks to pest control companies to veterinary practices. The result is to raise prices to consumers, debase services, and squeeze wages. It’s time to end this parasitic mutation of American capitalism.