PE-backed firms hit by recession wave

High interest rates and low consumer spending are putting pressure on debt-laden private equity-backed companies, forcing them to restructure through bankruptcy or buy back time through out-of-court deals and creditors.

The pressure on private equity-funded companies is largely reflected in the recent study by S&P Global Market Intelligence, which shows that a record number of 110 private and venture capital-backed companies have filed for bankruptcy by 2024.

These losses, focused on the consumer and health care sectors, show that while the US economy remains low and the S&P 500 is climbing higher, other sectors of the economy America’s economy is still suffering, and many companies are struggling to survive under the pressure of high interest rates. , reducing consumer spending and debt piles.

“I think the number one reason companies file for bankruptcy when it comes to going private is because there’s too much debt,” said Lawrence Kotler, Duane Morris bankruptcy attorney. “Everything depends on the circumstances.”

High interest rates caused problems across the US economy last year, with a recession to hit their highest level since the financial crisis. But PE and VC-backed companies have struggled, with portfolio companies comprising an increasing — and record — share of corporate failures, according to S&P data.

The data, which began in 2010, includes private companies with majority private equity ownership and includes some publicly traded companies with limited strategic private equity investments.

A small analysis by FTI Consulting that focuses on large private financial papers does not show the same increase, but it recognizes the out-of-court tactics that suppress the number of private bankruptcies in recent years.

Many loans were shouldered by the Federal Reserve’s rate hikes, which directly affected the cost of repaying high-quality loans taken by privately-backed portfolio companies. Those high interest rates are already at nearly three-year highs, and the chances of relief in the form of drastic cuts are slim.

Software company ConvergeOne, taken private by CVC Capital Partners in 2019, exemplifies the challenges facing private equity firms.

The software group, known for its cloud and network security products and now called C1, went on a buying spree in the years following its last acquisition. , took out debt to buy seven companies before interest rates started to rise.

In the end, the debt proved too much for us to sustain. Last year, ConvergeOne filed for bankruptcy with just $21mn in the bank, and $1.8bn in debt. CVC declined to comment, and ConvergeOne did not respond to a request for comment.

“Consumers are looking for ways to get value when inflation bites,” said Mike Best, senior portfolio manager at Barings. He added: “The market is full of recession in the consumer goods and retail sectors.”

While many privately funded companies fail to emerge from massive debt and operational problems, some cases spark acerbic accusations. One key issue: Instant Brands, which makes the popular Instant Pot cookers, emerged as one of the most controversial business failures.

In 2019, Cornell Capital bought Instant Brands for just $600mn. By 2023, the kitchen appliance maker had already filed for bankruptcy. Shortly after the company sought court protection, creditors accused Cornell of siphoning large sums of money from the company’s coffers.

Creditors accused Cornell Capital and other executives in November of “robbing a portfolio company” by handing out $345mn in dividends to its investors, which the complaint says left Instant Brands bankrupt.

A trial on these charges is scheduled to begin later this year. A spokesman for Cornell Capital in a statement called the lawsuit’s allegations “baseless attacks” and argued that the transfer of the division led to the collapse of Instant Brands, instead referring to “uncontrollable economic events” .

Meanwhile, out-of-court insolvency prevention strategies, often called liability management exercises or LMEs, have continued as companies seek to avoid Chapter 11.

“Private equity investors are very interested in LMEs,” David Meyer, head of the Vinson law firm and Elkins’ planning group, said in an interview. “The bottom line is: how can we deal with the situation outside of court?”

Although popular, the solution is rarely permanent. Less than half of respondents to AlixPartners review since October described the debt management training as a success. Only 3 percent said they were permanent fixes.

Despite efforts to prevent bankruptcy, some companies have received the dubious distinction of entering a “Chapter 22” or “Chapter 33” case, an indication of their second or third bankruptcy. three in a row.

One of the most recent such cases is Joann’s, a clothing and sewing supplies retailer in Ohio with hundreds of locations, thousands of employees and two separate bank filings last year.

Joann was taken private for $1.6bn in 2011 by private equity firm Leonard Green and Partners. The firm took Joann public in 2021 while still its largest shareholder.

Business increased in 2020 due to the popularity of sewing and other crafts during the Covid-19 Lockdowns. But sales slowed as the pandemic hit, higher prices more than doubled the company’s dividend payouts and supply issues dented its inventory – even though 96 percent of its stores were open. he is fine, according to reports.

The company filed for bankruptcy in March. It emerged a month later after halving $1bn in debt, but eventually returned to Chapter 11 earlier this month, this time blaming problems keeping suppliers from shipping products. Joann and Leonard Green did not respond to requests for comment.

“The tide is out, and a lot of boats are rocking,” said Jerrold Bregman, a partner at BG Law. Privately held companies prefer to sell or sell their assets at a profit, he added. “Often, all they want to do is get to the event of having money and making money.”