PE-backed consumer companies feel the crunch
Consumer businesses accounted for nearly one-third of the private equity-backed companies filing for bankruptcy last year, according to S&P Global Market Intelligence data.
Why it matters: Though 2022 was a busy year for LBOs, the economic downturn continues to pummel the consumer sector, and more lenders may be left holding the bag.
By the numbers: 15 of the 49 private equity portfolio companies filing for bankruptcy were consumer companies.
Zoom out: Overall, the number of bankruptcy filings by PE-backed companies ticked up in 2022, representing 6.6% of total U.S. filings compared with 3.5% the previous year.
Zoom in: Among the most notable distressed companies of last year was cosmetics brand Revlon, which filed for Chapter 11 bankruptcy, in June.
- Revlon sought $575 million in debtor-in-possession financing from its existing lenders, which allowed it to keep supporting its day-to-day operations. Ares Private Equity was among its investors.
- Additionally, cosmetics rival BH Cosmetics, which had backing from Trinity Capital Investment and Trinity Capital, filed for bankruptcy in January of last year.
- Others include online wine subscription service Winc, soup-and-sandwich chain Hale & Hearty Soups, and storage and home organization company Home Products International.
What they're saying: “The consumer sector likely experienced more pressure than other sectors because it is most impacted by consumer spending patterns and consumer sentiment,” BDO’s David Berliner tells Axios in an emailed statement.
Of note: S&P Global Market Intelligence also deemed the consumer discretionary sector the highest risk sector for the second consecutive quarter, citing inflation, public markets decline and recession fears.
What’s next: “Consumers are expected to curtail spending in 2023, particularly on non-essential items,” Berliner says, adding that retailers still need to clear excess inventory and expect to continue heavily discounting despite tighter budgets.
- “Unlike 2022, expect to see some large retailers file for bankruptcy in 2023 as the consumer sector continues to be under pressure,” he says.
- As he noted in July, heavily levered deals often limit a company’s flexibility to get additional financing, especially in hard times.