Private equity and hedge funds have a rough history in the retail sector, despite a growing presence across all industries.

Companies owned by private equity firms accounted for 8.8 million jobs in the U.S. in 2018, according to a Feb. 1 New York Times story on the demise of Payless ShoeSource under Alden Capital Partners.

However, 10 of the 14 largest retail bankruptcies since 2012 have been owned by private equity, including Toys R Us and RadioShack.

Thomas H. Lee entered the business with no previous experience in the furniture retail market. But it's not a retail virgin, as the private equity firm manages a $22 billion portfolio that includes 1-800 Contacts, Bargain Hunt Superstores, Dunkin' Brands, Fogo de Chao and Party City.

Diana Sikes, senior vice president of marketing at Art Van from 2010 until August 2018, said Thomas H. Lee wasn't brought in to rescue a struggling retailer, but to modernize its IT infrastructure and build its online presence. However, all it brought was a misunderstanding of retail and inept executives.

"(Thomas H. Lee) had blind spots," Sikes said. "They had a complete disregard for Warren, Michigan, and its ability to attract top talent. They were of the belief that if you weren't Ivy League talent and vetted by Boston Consulting Group or KPMG, you couldn't possibly be capable of growing a company."

The company was profitable when Thomas H. Lee entered, but its cost-cutting strategy quickly dismantled its balance sheet, said a former executive who spoke to Crain's on the condition of anonymity due to a nondisclosure agreement.

"The first thing (Thomas H. Lee) did was start cutting costs and cutting people," the executive said. "When everyone starts looking back and analyzing this, how it happened, they are going to see they took a successful brand with a successful executive team and destroyed a great company in three years by bringing in the same team that ran the demise of Kmart and Sears."

Longtime CEO Kim Yost retired from the company in February 2018, less than a year after Thomas H. Lee acquired the company and only days after Van Elslander died.

Yost was replaced in April 2018 by Ronald Boire, a former Barnes & Noble Inc. CEO and executive at Toys R Us, Brookstone, Kmart and Sears. Yahoo! Finance ranked Boire as the worst executive of 2016 after Barnes & Noble reported a $24.6 million loss that year.

The executive said Thomas H. Lee terminated or accepted the resignation of upward of 22 Art Van executives in the first two years of its ownership.

"(Thomas H. Lee) did not put passionate leaders in seats," Sikes said. "They replaced people working crazy hours and with passion with a team of numbers crunchers who would fly in on Monday and fly out on Thursday night. That might work in manufacturing, but not in retail."

Boire left the company 14 months later in July. Gary Fazio took over the top executive role in September. Fazio had retired in 2015 as the CEO of the Serta-Simmons Bedding Co., the world largest bedding manufacturer and supplier to Art Van. Gail Galea, Art Van's executive vice president and chief merchandising officer, also departed last year.

To fund the transaction, Thomas H. Lee loaded up Art Van with debt — a common private equity tactic to reduce the firm's financial exposure. Art Van carries $178 million in debt with FS KKR Capital Corp., the publicly traded business development and lending arm of New York private equity firm KKR & Co. Inc.

KKR declined to comment.

Crain's was unable to independently verify the rest of Art Van's debt, but sources said the company owed $60 million to Wells Fargo & Co. with an additional roughly $180 million in unsecured debt. Wells Fargo did not respond to inquiries.

The bent of private equity often is to extract as much cash as possible, as quickly as possible from a company, said Pat O'Keefe, CEO of Bloomfield Hills-based advisory form O'Keefe & Associates Consulting.

At closing in 2017, Thomas H. Lee entered into a series of sale-leaseback deals on Art Van's real estate, including its 1.06 million-square-foot headquarters in Warren and 20 locations in Michigan, with a variety of buyers after closing the deal to buy Art Van.

"Private equity saw value outside the business in the real estate owned by Art Van, who owned a number of their stores," O'Keefe said. "They entered into a massive sale-leaseback to liquidate the value of the real estate and recover a big part of their initial investment."

The executive said the move constrained cash flow as the retailer became bogged down by high rents.

Thomas H. Lee then made the bolt-on acquisitions of Levin Furniture in Pittsburgh and Wolf Furniture Co. in Altoona, Pa., in separate deals Crain's estimated at a total of $260 million.

The acquisitions boosted Art Van's workforce by 1,900 to 5,500 employees and added 53 stores. Art Van reported to Crain's revenue of $850 million in 2018, up from $650 million in 2015.

O'Keefe said the bolt-on formula that was popularized in manufacturing routinely fails under finance-driven private equity ownership.

"This is almost always a disaster, as the PE firm rarely executes on the plan post closing as they don't devote resources to the synergies they are hoping to get from centralized purchasing, human resources and other administrative duties," O'Keefe said.

"They often don't plow money into the business and the companies now under a sea of debt often don't make it, especially if there is a small hiccup in the numbers."

Thomas H. Lee told Crain's in an emailed statement that "investors in the March 2017 acquisition, including THL, will lose 100 percent of their principal investment in the company and never received any dividends or returns of capital from their investments."