May 8, 2023 - Economy

Private equity's looming bankruptcy boom

Illustration of Benjamin Franklin exiting the frame of the one hundred dollar bill.

Illustration: Maura Losch/Axios

Private equity is facing a wave of portfolio company bankruptcies, due to rising interest rates and slowing economic growth.

What to know: The situation looks worse than it really is, at least in the short term.

  • There are echoes to the Great Financial Crisis era, when covenant-lite loan terms enabled private equity owners to "amend and extend." Despite all the hand-wringing, cov-lite persisted through the subsequent boom times and can again be leveraged.
  • Yes, there were several large buyout bankruptcies back then, including Linens 'n Things, but the vast majority of PE-backed problem children restructured and lived to fight another day.

Zoom out: An obvious difference between 2008 and 2023 is the direction of interest rates.

  • The upward arrow, perhaps further sharpened by Friday's hot jobs report, could lead to more difficult restructuring negotiations with lenders.
  • But, on the other hand, today's economic slowdown is much more modest than the 2008 version, and PE portfolio companies tend to have less existing leverage. Moreover, lots of PE-backed companies took advantage of loose credit conditions in late 2020 and 2021 to push back their debt maturities.

What they're saying: "I think today people are relatively complacent," said KKR global private equity co-head Pete Stavros during a Milken Global Conference panel last week. "The question about, 'Are we going to have a bunch of bankruptcies?' kind of depends on how long rates stay high."

By the numbers: S&P Global Market Intelligence reported that 16 PE-backed U.S. companies filed for bankruptcy protection during the first 75 days of 2023.

  • If that pace were maintained, 2023 would be the top year for PE-backed bankruptcies since 2010.
  • At the same time, however, it's worth noting that those 16 companies represented just 11% of total U.S. bankruptcy filings, and that the raw number of PE portfolio companies is much higher today than in 2010.

The bottom line: Private equity believes it can jump the bankruptcy wave, and keep its fingers crossed that there are calmer waters ahead.

Go deeper