Higher interest rates and lower consumer expenses burden highly indebted companies that are supported by private equity groups, and forcing them to either carry out a restructuring through bankruptcy or to attract time to recover through extrajudicial comparisons with creditors.
The stress for private equity supported companies is most evident in A Current study by S&P Global Market Intelligence, which shows that in 2024 a record number of 110 private equity and risk capital-supported companies filed for bankruptcy.
This failure, which focus on the consumer and health sector, show that certain areas of the American economy suffer, although the unemployment rate in the USA remains low and the S&P 500 is increasing, since many companies are fighting under the pressure of high interest rates , lower consumer expenses and paralyzing debt mountains.
“I think the main reason why companies register bankruptcy if they are the subject of a takeover by private equity is the excessive debt,” said Lawrence Kotler, a lawyer at Duane Morris. “Everything is levered up to the stop.”
The high interest rates were demanding their toll in the entire US company landscape last year and led to bankruptcies reach their highest level Since the financial crisis. However, PE and VC-financed companies are particularly affected, according to the S&P data, their portfolio companies are increasing-and record -ant-go-part of corporate bankruptcies.
The data comes from 2010 and includes private companies with a majority private equity ownership and some listed companies with strategic minority investments from private equity companies.
A closer analysis of FTI Consulting, which focuses on larger private equity applications, does not show a similar increase, but points out the extrajudicial tactics with which the number of insolvencies in connection with private equity has been pushed back in recent years.
The overwhelming debt loads were made more difficult by the interest rate increases of the Federal Reserve, which had a variable interest on the cost of the repayment of interest-bearing loans, which were included by private equity-funded portfolio companies. These high interest rates have been increased for almost three years, and the chances of relief in the form of aggressive interest rate reductions have become lower.
The software company Convergeone, which was privatized by CVC Capital Partners in 2019, is an example of the problems with which private equity portfolio companies are faced with.
The software group, which is known for its cloud and cyber security products and is now called C1, went on a shopping tour in the years after his last takeover and took debts to buy seven companies shortly before the interest started to rise.
In the end, the debts turned out to be too high to maintain them. Last spring, Convergeone reported bankruptcy with only $ 21 million on the bench and $ 1.8 billion. CVC rejected a statement and convergone did not respond to a request for comment.
“Consumers are looking for opportunities to find value when inflation increases,” said Mike Best, portfolio manager for high interest rates at Barings. “The market is littered with bankruptcies in the consumer goods and retail sector,” he added.
While most companies funded by private equity companies fail due to a combination of excessive debt and operational difficulties, there are harsh allegations in some cases. A prime example: Instant Brands, manufacturer of the popular Instant Pot-Schnell cook pots, has proven to be one of these highly contested company losers.
In 2019, Cornell Capital bought Brands for just over $ 600 million. The kitchen appliance manufacturer had registered bankruptcy by 2023. Shortly after the company had applied for legal protection, Cornell creditor accused of skimming large amounts of money from the company’s coffers.
Cornell Capital and certain executives sued the creditor in November because they had “looted the portfolio company” by paying out a dividend of $ 345 million to its investors, which has become insolent in the lawsuit.
A process of allegations should begin this year. In a statement, a spokesman for Cornell Capital called the allegations of the lawsuit “baseless attacks” and denied that the dividend recapitalization had led to the bankruptcy of Instant Brands, and instead referred to “uncontrollable macroeconomic events”.
Meanwhile, extrajudicial maneuvers take the amount to avert bankruptcy, which are generally referred to as liability management exercises or LMES, because companies are trying to avoid chapter 11.
“Private equity sponsors have an increased interest in LMES,” said David Meyer, head of the restructuring and reorganization group of the law firm Vinson and Elkins, in an interview. “The main focus is on the question: How can we solve a situation out of court?”
Although the solution is popular, it is rarely permanent. Almost half of the respondents of one Alixpartners survey From October, the measures for liability management described the measures as successful. Only 3 percent stated that these were permanent solutions.
Despite the efforts to avert bankruptcy, some companies have earned the dubious award to initiate a “Chapter 22” or “Chapter 33” process, a nickname that indicates their second or third bankruptcy in a row.
One of the recent cases of this kind concerns Joann, a fabric and sewing needs dealer based in Ohio with hundreds of locations, thousands of employees and two separate bankruptcy applications last year.
Joann was privatized in 2011 by the private equity company Leonard Green and Partners for $ 1.6 billion. The company then brought Joann to the stock exchange in 2021 and at the same time remained his biggest shareholder.
The business was booming in 2020 thanks to the popularity of crochets and other handicrafts during the Covid 19 lockdowns. But with the subscription of the pandemic, sales slowed down, higher interest rates doubled the company’s interest payments more than and problems in the supply chain burdened the inventory – although 96 percent of its branches, according to the documents, achieved a positive cash flow.
The company registered bankruptcy in March. A month later, the company appeared after it had reduced half of its debts of $ 1 billion, but finally returned to Chapter 11 at the beginning of the month and this time the difficulty was responsible for sending products when sending products hold. Joann and Leonard Green did not respond to inquiries about comments.
“The flood has decreased and many boats are stuck,” said Jerrold Bregman, partner at BG Law. Private equity companies would rather sell their investments at profit or bring them to the stock exchange, he added. “Usually they are only about participating in a liquidity event and earning some money.”
