Three years ago, cash-rich private-equity firms were on a retail spending spree, buying companies such as Clifton-based housewares purveyor Linens 'n Things as if they were going out of style. Now, the only place some of those sought-after chains are going is going out of business.

Private-equity firms purchased retailers and saddled them with debt just before the consumers began closing their wallets. That caused cash-flow problems at a time when the credit freeze made it impossible for retailers to refinance their debt.

There have been dozens of retail bankruptcies over the past year, and some of the biggest failures in recent months -- KB Toys, Mervyn's, Steve and Barry's, among others -- have involved private- equity-owned chains.

"There was a bubble in private equity just as there was a bubble in hedge funds," said Howard Davidowitz, chairman of Davidowitz & Associates, a national retail consulting and investment banking firm in New York. "And it's all built on leverage. Leverage doesn't work when things are collapsing. Leverage magnifies your winnings when things are going up, but it also exaggerates your losses when things are going down."

In leveraged buyouts, usually only a small percentage of the purchase price is paid with equity capital.

The acquired company then borrows the remainder of the multibillion-dollar cost of the takeover.

Claire's Stores, a mall-based, teen-focused accessories chain that Apollo Management LP purchased in 2007 for $3.1 billion had $245 million in cash on hand when the deal was announced. As of Nov. 1, it had long-term debt of $2.3 billion, a heavy load to bear, when it also reported third-quarter sales had fallen by 6.8 percent.

'Throwing money'

"They were throwing money at retail without a clear understanding of how to make money at retail," said Scott McKain, vice chairman of Obsidian Enterprises, an Indianapolis holding company that buys small businesses.

McKain is also founder of the Value Added Institute, an organization that advises companies on customer retention, and author of "Collapse of Distinction: Stand Out and Move Up While Your Competition Fails."

"It's one thing to be a good deal maker; it's another to be a good operator, and those aren't necessarily transferable skills," he continued.