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The brick-and-mortar retail industry has been in a state of slow-motion crisis for several years now. The rise of ecommerce caused steep declines in foot traffic. A spate of private equity buyouts piled on billions of dollars in debt. One shopping-mall staple after another has limped toward layoffs, store closures and eventual bankruptcy, creating an ongoing mass-extinction event widely known as the retail apocalypse.
These trends have only accelerated during the first two months of the coronavirus crisis, resulting this week in bankruptcies from two iconic PE-backed retail chains. If this keeps up, what the industry thought was an apocalypse might end up being only a prelude to the real storm.
One of the world's biggest investors, though, is planning a new $5 billion effort to keep the wolves at bay.
Welcome to The Weekend Pitch. I'm Kevin Dowd, and you can reach me at weekend@pitchbook.com. America's retail chains are fighting for survival, which is one of 11 things you need to know from the past week: |
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| The Oculus transportation hub and mall sits empty in Manhattan. (Spencer Platt/Getty Images) |
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1. Resuscitating retail
J. Crew, a defining retailer of prep apparel, began the week by filing for Chapter 11 protection on Monday. Neiman Marcus, a chain that embodied the idea of luxury retail during the 20th century, followed suit on Thursday. Neither filing came as much of a surprise, in part because of the heavy loads of buyout-fueled debt both companies have been carrying for the past several years.
TPG Capital and Leonard Green & Partners took J. Crew private for $3 billion in 2011, while Ares Management and the Canada Pension Plan Investment Board paid $6 billion for Neiman Marcus in 2013. J. Crew reportedly maintained a $1.7 billion debt load before the coronavirus crisis began, and Neiman Marcus was weighed down by a reported $5.1 billion in debt. Servicing the obligations on that debt was a tough ask in any economy; it became impossible when stores began to close and sales began dropping because of the pandemic.
Both J. Crew and Neiman Marcus will remain in business, with hopes of emerging from bankruptcy with more sustainable balance sheets. But it stands to reason that some of the negative effects caused by the coronavirus will carry on for months, or even years, to come. On that point, it's worth noting that not only PE-backed retailers are under stress: On Friday, for instance, Reuters reported that JC Penney is preparing to file for Chapter 11 as soon as this coming week.
The ties between private equity and retail remain plentiful, though, including one planned marriage that was called off this week. L Brands, the parent of Victoria's Secret, acquiesced to Sycamore Partners' desire to walk away from its $525 million deal to acquire 55% of the lingerie chain. In a previous lawsuit defending its right to scrap the deal, Sycamore reportedly cited pandemic-driven store closures as a breach of the agreement.
Dealings with private equity haven't always ended well for retail, but in some cases, buyout firms are also one of the few available sources of funding for companies in need of a boost. Raising capital on unideal terms is often better than not raising capital at all. A loss of appetite for retail deals among the broader PE industry could cause a spiderweb of effects across the economy.
Which is where Brookfield, a Canadian investment giant with more than $500 billion in assets under management, enters the picture. In the wake of this week's bankruptcies, the firm rolled out a $5 billion program that aims to fund retailers struggling amid the coronavirus, targeting companies with $250 million or more in revenue. The effort will be led by managing partner Ron Bloom, who helped orchestrate the US auto industry bailout in 2008.
Brookfield and its many subsidiaries spread vast sums of capital across many strategies, but one of the firm's biggest bets is on real estate. It amassed a $15 billion portfolio of commercial real estate assets between 2016 and 2018, according to Institutional Investor, a collection that is said to include about 11% of all shopping malls in the US.
This is the best explanation for Brookfield's new $5 billion retail investment plan. If you own a bunch of shopping malls, you need brick-and-mortar stores to occupy those malls. You would prefer that large retail chains with dozens of locations spread across the country stay in business, so they can keep paying you rent. In essence, Brookfield's recent run of real estate acquisitions represented a long bet on physical retail.
And now, with that bet in danger of going bust, the firm is doubling down. Which is probably welcome news to struggling retailers across the nation. When you're in financial distress, it helps to have a $500 billion colossus in your corner.
2. Scooter shakeup
Uber agreed this week to lead a $170 million investment in fellow mobility company Lime at a $510 million valuation, a move that came in the immediate aftermath of reports that both companies were laying off about 14% of their workforce. Uber will merge Jump, its own bike- and scooter-sharing unit, with Lime as part of the deal, consolidating two major players in last-mile mobility. The deal represents a massive haircut for Lime: The company was valued at $2.4 billion just 10 months ago, according to PitchBook data.
3. Startup litigation
The once-inescapable WeWork saga continued to unfold this week, as co-founder Adam Neumann filed a lawsuit against SoftBank alleging the investor breached its contract with WeWork by walking away from a planned $3 billion secondary sale. Activist investor Elliott Management inserted itself into a separate startup lawsuit this week, reportedly agreeing to financially back interactive video specialist Eko in a suit accusing Quibi of stealing a key piece of technology for its recently launched mobile streaming service.
4. PE aggression
Silver Lake and Vista Equity Partners, two of the highest-profile tech investors in PE, lined up separate investments this week in Jio Platforms, a budding internet services giant in India. Silver Lake agreed to stake the company with $750 million and Vista offered up $1.5 billion, moves that come just two weeks after Facebook furnished Jio with a $5.7 billion investment. Bloomberg reported Friday that General Atlantic may also invest in the company. PE deal flow has slowed in recent weeks, but the Jio investments are a sign that opportunities remain, as KKR's executives highlighted this week during the firm's quarterly report.
5. Having a ball
CVC Capital Partners and Blackstone are in separate talks to invest in Serie A, the top flight of Italian soccer, the Financial Times reported this week. CVC is said to be mulling a deal to put €2 billion (about $2.2 billion) into the league for a 20% stake. On the other side of the Atlantic, the XFL is seeking a new owner, Axios reported. Launched by pro wrestling mogul Vince McMahon, the league had recently filed for Chapter 11 protection. It was five weeks into its inaugural season when the coronavirus brought action to a standstill. |
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The XFL was here for a good time, not a long time.
(Bob Levey/Getty Images) |
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6. Phone a friend
Just one month after Sprint and T-Mobile completed their combination, two of the biggest wireless carriers in the UK are planning a mega-merger of their own. Virgin Media (owned by Liberty Global) and O2 (owned by Telefónica) agreed to merge this week in a deal valued at a reported £31.4 billion (about $39 billion), one that will be structured as a joint venture between Liberty and Telefónica. The combined business expects to claim 46 million subscribers and £11 billion in annual revenue.
7. Zoo-ology
Zoom Video Communications inked a pact this week to purchase Keybase, an encryption startup backed by Andreessen Horowitz, with the aim of deploying Keybase's services to address some of the security concerns that have arisen around Zoom in recent weeks. Similarly named startup Zoox was also in the news this week, with The Information reporting that the self-driving car startup is speaking to potential investors about either an outright sale or a new round of funding. Zoox was valued at $3.2 billion in 2018, according to PitchBook data.
8. Sidewalk talk
Sidewalk Labs, a subsidiary of Alphabet focused on smart cities, this week abandoned a long-running project to reimagine a portion of the Toronto waterfront, chalking up the death of the 12-acre dream to the coronavirus and related turmoil in the Toronto real estate market. Also this week, a spinoff from Sidewalk Labs called Sidewalk Infrastructure Partners raised $400 million to invest in tech-related infrastructure projects, according to Fortune.
9. Fintech unicorns
Stock-trading startup Robinhood confirmed earlier fundraising reports this week when it announced a new $280 million round led by Sequoia, valuing the company at $8.3 billion. In Europe, online banking startup N26 also brought in new funds, raising a $100 million-plus addition to its existing Series D that takes the round's total to $570 million.
10. Chowing down
Less than two months after raising $500 million, Impossible Foods is in talks with investors about bringing in even more cash, Bloomberg reported this week. The pandemic seems to be providing a boost to Impossible's business: The company also announced this week that its products will now be available in more than 1,700 supermarkets owned by Kroger, marking an 18-fold increase in its grocery-store footprint so far in 2020.
11. Grail's quest
While dealmaking has dried up in some sectors during the pandemic, healthcare companies working on potential life-saving technologies have continued to bring in VC. This week's biggest example was Grail, which banked $390 million in Series D funding. The capital will go toward the company's efforts to build a new test that could detect cancer earlier than current methods, which would in turn increase patients' chances for survival. The business has now reportedly raised nearly $2 billion in total backing.
View the full list online |
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A message from Silicon Valley Bank
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Introducing the COVID-19 Global Impact & Innovation Fund
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As we navigate unprecedented times, Silicon Valley Bank believes that collective action is the best way to overcome the challenges we're up against. This is why Silicon Valley Bank, in partnership with Founders Pledge, has formed the COVID-19 Global Impact & Innovation Fund. This fund will deliver resources directly to organizations around the world that can help make the most immediate impact in the fight against COVID-19.
To learn more about the Silicon Valley Bank COVID-19 Global Impact & Innovation Fund, visit SVB.com/impact. |
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| Life moves pretty fast. (Andreas Zitlau/Getty Images) |
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In the face of a deadly pandemic, billions of people around the world have embraced a more sedentary lifestyle. Startups in several different sectors, though, are doing their best to keep things moving.
The latest publication from PitchBook's Emerging Tech Research team is a quarterly update from Asad Hussain on all things mobility tech, including at look at Q1 dealmaking and how social distancing is impacting scooters, ridesharing and more.
The coronavirus is placing respiratory health in a global spotlight. But concerns about other kinds of physical and mental wellbeing also abound. PitchBook analyst Kaia Colban published a new note this week on how COVID-19 is reshaping fitness and mental health. |
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Combination consternation
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| PitchBook analysts expect a coming decline in European M&A activity. (Chris Rogers/Getty Images) |
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Dealmakers in Europe are setting into a new reality, the defining quality of which is the omnipresence of the coronavirus. The global crisis will likely impact every nook and cranny of the financial world.
PitchBook's Q1 2020 European M&A Breakdown, released this week, dives into some of the implications of the virus for the merger market, including the prediction that cybersecurity companies could be more resilient than most to an expected decline in valuations. |
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Endowments and foundations are some of the biggest and most influential LPs in the private markets. Sometimes, student groups and other activists don't like it. But many of the investors running these multibillion-dollar outfits believe the private markets offer an unmatched potential for returns.
A new PitchBook analyst note from this week delves into what makes these endowments and foundations unique, as well as some of the strategies they deploy in their quest for ROI. |
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Only one thing is missing: ninjas.
(Jorg Greuel/Getty Images) |
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Pandemic-inspired lockdowns have led to a boom in business for many ecommerce and logistics companies. That surely helps explain some of the investor optimism around Ninja Van, a Singapore-based delivery upstart that in recent days raised a reported $279 million from an investor list that includes Southeast Asian ridehailing giant Grab and B Capital, the firm led by Facebook co-founder Eduardo Saverin.
I would imagine a delivery business run by ninjas would be very competent and quick-moving, but also secretive; you can't expect a ninja to send you an email with an anticipated delivery time. Wikipedia reminds me that "[t]he functions of a ninja included espionage, deception, and surprise attacks," so I guess such an enterprise would also involve a not-insignificant degree of subterfuge. Are the delivery ninjas spying on their rivals, or on their customers? Are ninjas the future of predictive shopping algorithms? I think I've taken this too far already. |
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Recommended reads
A magical look at the magical life of Val Kilmer, the matinee idol turned cancer survivor who believes nothing is quite as it seems. [The New York Times]
Behind the scenes of the biggest oil meltdown in history. [Institutional Investor]
In Southern California, a secretive startup led by a fintech veteran is trying to transform brain science from an esoteric art into big business. [Bloomberg]
The US accounts for 4% of the world's population and 21% of its prisoners. That mass incarceration presents unique risks during a pandemic. [The Intercept]
Across the US, job losses continue to mount. But home prices continue to rise. [The Wall Street Journal]
Nearly 15 years ago, Ali Khan was tasked with imagining what the next pandemic might look like. Now, he's seeing the real thing. [The New Yorker]
Most of Airbnb's business has ground to a halt. But the company's Experiences arm is still offering the chance to meditate with sleepy sheep in Scotland—over Zoom, of course. [Outside]
Despite the hosting site's best efforts, conspiracy theories about the coronavirus are spreading like wildfire on YouTube. [MIT Technology Review]
An ode to live music at a strange time when nobody is quite sure how soon they'll attend a concert again. [Rolling Stone] |
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Quote of the week
"Egon Durban is going to be the legendary private-equity investor of our generation."
—Nikesh Arora, the current CEO of Palo Alto Networks and a former Silver Lake adviser, speaking to The Wall Street Journal about Silver Lake's co-CEO |
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The Weekend Pitch is produced by editor Kevin Dowd.
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