Oops, I Leveraged It Again: Private Equity's Bankruptcy Album

Let's talk about what's happening with private equity-backed companies. It's quite a story!

In 2024, we saw a record number of bankruptcies among these companies - 110 to be exact, according to S&P Global Market Intelligence. This is happening despite a strong stock market and low unemployment, which shows how different parts of the economy can tell very different stories.

So, why is this happening? It's a perfect storm of high interest rates, lower consumer spending and tons of debt. You see, when private equity firms buy companies, they often use a lot of borrowed money. It's like buying a house with a huge mortgage - if your income drops or interest rates go up, those monthly payments become really tough to manage.

The Federal Reserve's interest rate hikes have made things even tougher. Many of these companies

have loans with floating interest rates, so their debt payments have skyrocketed. This has been going on for almost three years now! What a circus!

Let's look at a real example: ConvergeOne, a software company. They went on a buying spree after being acquired by a private equity firm, but then interest rates climbed. They ended up filing for bankruptcy with $1.8 billion in debt and only $21 million in the bank. Crazy!

Some companies are trying to avoid bankruptcy through "liability management exercises" - basically, renegotiating their debt. But these often only provide temporary relief. In fact, we're seeing some companies file for bankruptcy multiple times. They even have a nickname for this - "Chapter 22" for the second time, "Chapter 33" for the third!

Joann, the craft store, is one such case. They were bought by a private equity firm, went public, filed for bankruptcy, emerged, and then had to file again. Talk about hit me baby, one more time!

The consumer and healthcare sectors seem to be hit hardest. As one expert put it, "Consumers search for ways to find value when inflation bites." When people tighten their belts, these debt-heavy companies often feel it first. Definitely not lucky!

In the end, it's a complex dance between private equity strategies, economic conditions and corporate financial health. As we move through 2025, it'll be interesting to see how this all plays out! Could get toxic!

#distressed