• The Wall Street Journal, Tuesday, August 18, 2009 9:55 PM

The bankruptcy of Reader's Digest Association is another black eye for private-equity firms, which bet big during the boom years earlier this decade that they could turn around media concerns and create outsize profits. The investment group led by private-equity firm Ripplewood Holdings, which bought Reader's Digest in 2007 for $1.6 billion, will see its investment wiped out.

It's a familiar story. In headier days, media-company revenue was predictable, allowing investment firms to pile on debt and repay it with steady -- albeit slightly ebbing -- profits. Instead, revenue is dropping more quickly than almost anyone imagined.

Here's the twist: While senior lenders will exchange a substantial portion of their $1.6 billion in debt for a 92.5% equity stake, the company is also looking for $100 million in new investment from existing bondholders or outside firms. Those investors can receive up to 20% of the reorganized company. It all goes to show that optimism perseveres.

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