Earlier this week, Toys R Us, the US’s largest toy store chain, filed for chapter 11 bankruptcy as it crawled under heavy debt loads.
KKR, Bain Capital and real estate investment firm Vornado acquired Toys R Us in a $6.6 billion take-private back in 2005. According to report, just $1.4 billion of that figure was equity, split evenly between the three firms, and the rest – more than $5 billion – was debt.
Bain Capital invested out of its Bain Capital Fund VIII, which closed on $4.1 billion in 2004, while KKR invested out of its KKR Millennium Fund, which closed on $6.1 billion in 2002. According to the latest Toys R Us 10K filing, KKR, Vornado and Bain Capital still each hold over 32 percent of the company.
A wide array of limited partners, from endowments to pension plans (see lists below) initially invested in the funds, according to PEI data, but the bankruptcy will likely not impact their investment dramatically.
According to the bankruptcy court documents, Toys R Us still has $5.27 billion in debt, and the company sought court protection because of a highly-levered capital structure – with annual cash debt servicing costing Toys R Us $400 million – as well as the costs of above-market leases and increasing competition from big-box retailers and online shopping, as reported by sister title Private Debt Investor.
For Bain and KKR’s LPs, this should come as no surprise. The Toys R Us investment had been marked down regularly based on performance, according to a person familiar with the situation, adding that the carrying value of the investment was near zero leading to the bankruptcy filing.
As such, recent performance data for the fund will likely remain unchanged and strong. For example, Bain Capital VIII posted a net internal rate of return of 16.3 percent as of 31 December with a 2.43x multiple, according to University of California Regents. Performance was boosted by successful investments in other retailers, including Burlington Stores and Dollarama.
KKR Millennium also had a 16.3 percent net IRR with a 1.8x multiple, according to 31 December data from the California Public Employees’ Retirement System.
While the Toys R Us debacle may not help private equity’s reputation of taking advantage of debt, at least LPs should remain largely unscathed.
Bain declined to comment for this story. KKR did not respond to a request for comment.