The Private Equity Playbook Part 1: How It Works How KKR, Bain Capital, and Vornado Bought Toys R Us for $6.6 Billion, Loaded It With Debt, Extracted $470 Million in Fees, and Left 33,000 Workers With Nothing

🔥 THE PRIVATE EQUITY PLAYBOOK:
Part 1: How It Works (You Are Here) | Part 2: The Healthcare Empire (Coming Soon) | Part 3: The Housing Empire (Coming Soon) | Part 4: The Cost (Coming Soon) | Part 5: The Loophole (Coming Soon) | Part 6: The Connection (Coming Soon)

The Private Equity Playbook Part 1: How It Works

How KKR, Bain Capital, and Vornado Bought Toys R Us for $6.6 Billion, Loaded It With Debt, Extracted $470 Million in Fees, and Left 33,000 Workers With Nothing

In 2005, Toys R Us was profitable. It had $11.2 billion in annual sales, 1,600 stores worldwide, and was America's leading toy retailer with 20% market share. It had $2.2 billion in cash reserves and $2.3 billion in debt. Then three private equity firms—KKR, Bain Capital, and Vornado Realty Trust—bought it for $6.6 billion. They put down $1.3 billion of their own money and borrowed $5.3 billion, loading Toys R Us with $7.6 billion in total debt. Over the next 12 years, Toys R Us paid $400 million per year in interest—nearly $5 billion total. The PE firms extracted $470 million in management fees, transaction fees, and advisory fees. In September 2017, Toys R Us filed for bankruptcy owing $5 billion. In March 2018, it liquidated. 33,000 workers lost their jobs. They received zero severance. The CEO told them to consider their final weeks working the going-out-of-business sales as their severance. The PE firms? They lost their $1.3 billion equity investment—but they'd already extracted $470 million in fees. This isn't a story about bad luck or Amazon disruption. This is the playbook. And it's been used on thousands of American companies.

What Is a Leveraged Buyout?

The Basic Mechanism

A leveraged buyout (LBO) is when private equity firms buy a company using mostly borrowed money. The word "leveraged" means using debt to increase potential returns. Here's how it works:

Imagine you want to buy a house worth $1 million. You could pay $1 million in cash. Or you could put down $200,000 and take out an $800,000 mortgage. If the house value goes up to $1.2 million and you sell, you made $200,000 profit on your $200,000 investment—a 100% return. If you'd paid all cash, you'd have made $200,000 on $1 million—only a 20% return.

That's leverage. The less of your own money you use, the higher your potential return.

But here's the critical difference between buying a house and a leveraged buyout: When you buy a house with a mortgage, you pay the mortgage. When private equity firms buy a company with debt, the company pays the debt.

HOW AN LBO WORKS:

Step 1: PE firm identifies target company (usually profitable, stable cash flow)
Step 2: PE firm puts down 20-40% equity (their own money)
Step 3: PE firm borrows 60-80% (debt loaded onto the company)
Step 4: Company now owes massive debt + annual interest payments
Step 5: PE firm extracts fees (management, transaction, advisory)
Step 6: PE firm exits in 3-7 years (IPO, sale, dividend recap, or bankruptcy)
Result: PE firm makes money from fees even if company fails

The Toys R Us Numbers

In 2005, KKR, Bain Capital, and Vornado bought Toys R Us for $6.6 billion. They structured the deal like this:

TOYS R US LBO STRUCTURE (2005):

Purchase Price: $6.6 billion
PE Firm Equity: $1.3 billion (20%)
New Debt Borrowed: $5.3 billion (80%)
Existing Debt: $2.3 billion
TOTAL DEBT AFTER BUYOUT: $7.6 billion
Debt-to-Equity Ratio: 5.8:1
Annual Interest Payment: $400 million/year

Before the buyout, Toys R Us had $2.3 billion in debt and $2.2 billion in cash. After the buyout, it had $7.6 billion in debt and its cash reserves were being drained to service that debt. By 2017, its cash reserves had fallen to $301 million—a loss of $1.9 billion over 12 years.

The company wasn't paying off the debt. It was barely covering the interest.

The Fee Structure: How PE Firms Make Money

The "2 and 20" Model

Private equity firms make money in two ways: management fees and carried interest. This is often called the "2 and 20" model, though the actual percentages vary.

Management Fees (the "2"): Annual fee of 1.5-2% of assets under management, paid regardless of performance. If a PE firm manages $10 billion, that's $150-200 million per year in guaranteed income.

Carried Interest (the "20"): 20% of profits when the investment is sold. If a PE firm buys a company for $1 billion and sells it for $2 billion, they keep 20% of that $1 billion profit ($200 million), and their investors get the remaining 80%.

But there's a third category that doesn't get discussed as much: fees charged directly to the companies they own.

The Hidden Fees: What Toys R Us Paid

According to the Private Equity Stakeholder Project's detailed analysis, KKR, Bain Capital, and Vornado extracted at least $470 million in fees from Toys R Us between 2005 and 2017. Here's the breakdown:

FEES EXTRACTED FROM TOYS R US (2005-2017):

TRANSACTION FEES: $143 million
• 2005 LBO: $81 million
• 2009 Propco II financing: $7 million
• 2010 refinancing: $29 million
• 2011 term loan: $4 million
• 2012 Spain facility: $7 million
• 2013 Propco I loan: $15 million

ANNUAL "ADVISORY" FEES: ~$200+ million (estimated)
• Started at $15 million/year
• Increased 5% annually
• Paid for "advisory services" (while Toys R Us also paid McKinsey/AlixPartners for actual consulting)

BOARD DIRECTOR FEES (2014-2017): $18 million
• Paid to Bain/KKR/Vornado executives for serving on the board
• They were owners collecting fees to oversee their own company

TOTAL FEES: $470 million minimum

Here's what makes this extraordinary: Every time Toys R Us borrowed more money, the PE firms charged transaction fees. The company was drowning in debt, and the owners were charging it fees to borrow more.

And those "advisory fees"? According to The Week, Toys R Us was simultaneously paying McKinsey and AlixPartners for actual consulting work. The $15 million annual fee to KKR, Bain, and Vornado wasn't for services rendered—it was for owning the company.

The Debt Trap: $400 Million Per Year in Interest

The Math That Killed Toys R Us

After the 2005 buyout, Toys R Us owed $7.6 billion in debt at roughly 7.25% interest. That meant annual interest payments of approximately $400 million.

To put that in context:

TOYS R US FINANCIAL SNAPSHOT (2017):

Annual Sales: $11.5 billion
Operating Loss: $36 million
Annual Debt Service: $400 million
Net Loss (including debt service): $436 million

THE COUNTERFACTUAL:
Without the $400M debt burden, Toys R Us would have been profitable by $364 million in 2017.

As The Week reported, "The debt burden wasn't a symptom of Toys R Us's problems. It was the problem." The company's operating losses were shrinking ($164 million in 2016 to $36 million in 2017), and the toy industry was experiencing a boom from 2015-2017. Toys R Us still held 20% of the US toy market.

But none of that mattered when you're paying $400 million per year in interest.

The Death Spiral

By 2017, suppliers were demanding cash upfront for inventory. They'd watched Toys R Us struggle for years and didn't trust it to survive another holiday season. When the holiday 2017 sales missed targets, creditors lost faith entirely.

Toys R Us filed for bankruptcy in September 2017 owing $5 billion. It attempted to reorganize, but by March 2018, it began liquidation. All 735 US stores closed. 33,000 workers lost their jobs.

The Human Cost: What Workers Got

Zero Severance

In March 2018, as Toys R Us began liquidation, CEO Dave Brandon sent a message to employees. According to CBS News, he told them to "consider your final weeks manning the going-out-of-business sales as your severance."

Under company policy, workers were entitled to two weeks severance for their first year of employment, plus one week for every two years after that. For 33,000 workers, the total owed was approximately $75 million.

They received nothing.

The Worker Campaign

Toys R Us workers organized. They protested in Washington DC and New York. They lobbied state pension funds that had invested in KKR and Bain Capital. They got 19 Democratic Congress members to write letters demanding severance.

The campaign lasted eight months.

In November 2018, KKR and Bain Capital finally contributed to a severance fund—but not nearly enough.

THE SEVERANCE FUND (November 2018):

KKR Contribution: $10 million
Bain Capital Contribution: $10 million
Vornado Contribution: $0
Total Fund: $20 million
Amount Owed (per company policy): $75 million
Shortfall: $55 million
Average Payment Per Worker: ~$660 (range: $200 to $12,800)
Fund Administrator: Kenneth Feinberg (who administered the 9/11 Victim Compensation Fund)

Workers who'd been with the company for decades received a few hundred dollars. The PE firms had extracted $470 million in fees over 12 years. They contributed $20 million to severance only after eight months of public pressure.

Vornado, the third partner in the deal, contributed nothing.

What the PE Firms Actually Made

The Equity Loss

When Toys R Us filed for bankruptcy, KKR, Bain Capital, and Vornado's $1.3 billion equity investment was wiped out. In traditional business terms, they "lost" money on the deal.

But that's not the whole story.

PE FIRM PROFIT/LOSS CALCULATION:

Initial Equity Investment: -$1.3 billion
Fees Extracted (2005-2017): +$470 million
Net Loss: -$830 million

BUT THIS DOESN'T ACCOUNT FOR:
• Tax benefits from interest deductions
• Returns on other investments made using Toys R Us fees
• The fact that fees were extracted BEFORE bankruptcy
• Interest payments they received as senior lenders

The critical point: They made $470 million in fees even though the company failed. Those fees came from Toys R Us borrowing more money—which accelerated its death. And every time the company borrowed more, they charged transaction fees.

This is the business model.

The Counterfactual: What If They'd Never Bought It?

Could Toys R Us Have Survived?

Multiple analyses—The Week, The American Prospect, and others—argue that if the PE firms had never bought Toys R Us, it probably would have survived.

Not thrived. Not dominated. But survived.

Here's why:

TOYS R US WITHOUT THE DEBT:

2017 Operating Loss: $36 million
2017 Debt Service: $400 million
Hypothetical Profit (no debt): $364 million

MARKET POSITION (2017):
• 20% of US toy market share
• $11.5 billion in annual sales
• Operating losses shrinking ($164M in 2016 → $36M in 2017)
• Toy industry experiencing boom (2015-2017)

Yes, Toys R Us faced competition from Amazon, Walmart, and Target. Yes, it had real operational challenges. But its operating losses were small and shrinking. The debt service was 11 times larger than the operating loss.

As one analysis put it: "The company was slowly bleeding out from retail competition, but the PE firms drained all the blood immediately."

The Aftermath: The 2020 Lawsuit

What Creditors Alleged

In 2020, the TRU Creditor Litigation Trust sued former CEO Dave Brandon and board members from KKR, Bain Capital, and Vornado. The lawsuit alleged:

• Breach of fiduciary duty
• Fraudulent concealment
• Misrepresentation
• Self-dealing

Specific claims included:

• $16 million in executive bonuses paid days before the bankruptcy filing
• $18 million in board fees paid to PE firm executives (2014-2017) for overseeing their own company
• $600 million in inventory orders placed on credit while telling creditors the company would survive
• Asset shuffling — moving real estate into separate entities to shield assets from creditors
• "Paying a mortgage with a credit card indefinitely" — borrowing to make debt payments

The lawsuit claimed that executives knew Toys R Us was headed for collapse but concealed this from creditors while enriching themselves.

The case's outcome is unclear—it was likely settled or is still ongoing. But the allegations provide a window into how the final years played out.

The Playbook

This Wasn't Unique

Toys R Us isn't an outlier. It's a case study in how private equity works when things go wrong—but also how PE firms can profit even when things go wrong.

The playbook:

THE PRIVATE EQUITY PLAYBOOK:

1. Identify Target: Profitable company with steady cash flow
2. Load With Debt: Borrow 60-80% of purchase price
3. Extract Fees: Management, transaction, advisory fees
4. Cut Costs: Reduce staff, quality, investment in growth
5. Dividend Recap: Borrow more, pay yourself dividends
6. Exit: Sell to another PE firm, IPO, or bankruptcy
Result: PE firm profits from fees regardless of company outcome

Toys R Us generated $470 million in fees. KKR, Bain, and Vornado lost $830 million net—but that's because they lost their equity when the company collapsed. The fees were extracted along the way, year after year, as the company slowly died under the weight of its debt.

And here's the thing: thousands of other companies have gone through this exact same process.

Since 2000, private equity firms have bought more than 30,000 American companies. They manage over $5 trillion in assets. They employ 12 million workers. And most people have no idea. In Part 2, we'll show you what they actually own. Your hospital. Your apartment building. Your vet clinic. Your nursing home. Your emergency room. You interact with private equity 5-10 times per week and don't even know it. The machine is bigger than you think. And Toys R Us was just one company that went through the crusher.

NEXT IN THE SERIES: Part 2 examines what private equity actually owns. We'll document the healthcare empire (hospitals, nursing homes, ER staffing companies), the scale of PE ownership (by sector and by firm), and how much of your daily life is controlled by companies you've never heard of. The data will show that PE doesn't just own distressed retailers—it owns the infrastructure of American life.

Sources & Further Reading

1. Bloomberg: Bain, KKR, Vornado Suffer Wipeout in Toys R Us Bankruptcy
2. In These Times: How Private Equity Killed Toys R Us
3. The Week: How Vulture Capitalists Ate Toys R Us
4. PE Stakeholder Project: Detailed Fee Breakdown
5. Wikipedia: Toys R Us
6. CBS News: $20 Million Severance Fund for Toys R Us Workers
7. CNBC: Bain and KKR Establish Severance Fund
8. PitchBook: Toys R Us Creditors Sue PE Executives
9. American Prospect: Private Equity - Looting R Us
10. Headcount Coffee: Complete Case Study of Toys R Us Bankruptcy
11. NBER: Determinants of Leverage in Buyouts
12. IPC/PERC: White Paper on Private Equity Debt and Leverage

Disclaimer: This article presents research and analysis based on publicly available sources including bankruptcy court documents, academic research, and investigative journalism. All factual claims are cited and linked to their sources. Interpretations and conclusions represent the author's analysis. This is educational content, not financial or legal advice.