Higher interest rates and lower consumption expenses are tightening companies responsible for debts supported by investment capital groups, forcing them to restructure by bankruptcy or to buy time to recover via outside regulations with creditors.
Stress on companies supported by investment capital presents itself recent study By S&P Global Market Intelligence, which shows that a record number of 110 companies on the back of the investment capital and a venture capital filed for bankruptcy in 2024.
These failures, concentrated in the consumer and health care sectors, show how, even if the American unemployment rate remains low and that the S&P 500 labores are always higher, some corners of American companies hurt, many companies that find it difficult to survive under high interest rate pressure, lower consumption expenditure and paralyzing debt stacks.
“I think that the initial reason why companies go bankrupt when they have been the subject of an acquisition by investment capital, is that there are too many debts,” said Lawrence Kotler, legal partner which focuses on bankruptcy in Duane Morris. “Everything is used in the handle.”
High interest rates wreaks havoc in the landscape of American companies last year, with bankruptcies upon their highest level Since the financial crisis. But the companies supported by PE and VC have been particularly affected, with wallet companies including an increasing and recorded part – corporate bankruptcy, according to S&P data.
The data, which dates back to 2010, include private companies with the major ownership of capital investment and also include certain listed companies with minority strategic investments by investment capital stores.
A closer analysis of FTI Consulting focused on larger deposits on investment capital does not show a similar increase, but notes tactics out of the field removing the number of bankruptcies linked to investment capital in recent years.
Accablant debt charges have been made more difficult to support by the rate increases in the federal reserve, which directly assigned the cost of reimbursement of floating rate loans subscribed by portfolio companies sponsored by the investment capital. These high interest rates have now remained high for almost three years, and the chances of relief in the form of aggressive cuts have decreased.
The Convergeone software company, taken in private by CVC Capital Partners in 2019, illustrates the difficulties of the investment portfolio companies.
The software group, known for its cloud and cybersecurity products and now called C1, has made a purchasing frenzy in the years that followed its last takeover, taking debt to take seven companies just before Interest rates are not starting to increase.
In the end, the debt has proven to be too supported. Last spring, Convergeone filed for bankruptcy with only $ 21 million in banking and $ 1.8 billion in debt. CVC refused to comment and convergeone did not respond to a comment request.
“Consumers are looking for ways to find value when inflation bites,” said Mike Best, a high -performance portfolio manager at Barings. “The market is strewn with bankruptcies in the consumption and retail sectors,” he added.
While most of the companies supported by investment capital fail a combination of too many debts and operational problems, some cases arouse acute allegations. A leading case: instant brands, which make self -wisers with instant popular pressure, has become one of these highly contested business failures.
In 2019, Cornell Capital bought instant brands for just over $ 600 million. By 2023, the manufacturer of kitchen devices had filed a bankruptcy. Shortly after the company requested the protection of the courts, the creditors accused Cornell of having siphoned large sums of money from the corporations of the company.
The creditors continued Cornell Capital and certain leaders in November for having “looted the portfolio company” by removing a dividend of $ 345 million for its investors, which the complaint alleys insolvent insolvent instant brands.
A trial concerning allegations should start later this year. A spokesperson for Cornell Capital in a press release called the allegations of the “baseless attacks” trial and challenged that the recapitalization of dividends led to the bankruptcy of instant brands, citing rather “uncontrollable macroeconomic events”.
Meanwhile, maneuvers outside the court to avoid insolvency, commonly known as liability management exercises or LME, have triggered while businesses seek to avoid chapter 11.
“Investment capital sponsors have increased interest in LMEs,” said David Meyer, head of the law firm Vinson and Elkins, the restructuring and reorganization firm, in an interview. “The main objective is: how can we approach an amicable situation?”
Although popular, the solution rarely lasts. Just under half of the respondents to a Alixpartners survey From October, liability management exercises were successful. Only 3% said they turned out to be permanent corrective.
Despite efforts to avoid insolvency, some companies have obtained the questionable distinction of entering into the procedures “Chapter 22” or “Chapter 33”, a nickname indicating their second or third successive bankruptcy.
One of the most recent cases is Joann, a tissue and sewing supplies based in Ohio with hundreds of locations, thousands of employees and two separate bankruptcy deposits in the past year.
Joann was deprived for $ 1.6 billion in 2011 by the investment company Leonard Green and Partners. The company then made Joann Public in 2021 while remaining its largest shareholder.
Business exploded in 2020 thanks to the popularity of the hook and other professions during COVVI-19 locking. But sales have slowed down as the pandemic has cooled up, higher rates have more than doubled the business payments of the company and the supply chain problems have hampered its inventory – even as 96 % of its stores were positive, according to documents.
The company filed for a bankruptcy in March. He emerged a month later after having reduced half of his debt by $ 1 billion, but finally returned to Chapter 11 earlier this month, this time hung the difficulty in keeping shipping suppliers products. Joann and Leonard Green did not respond to requests for comments.
“The tide is out and many boats are swinging,” said Jerrold Bregman, partner of BG Law. Investment capital companies prefer to sell or float their assets for a profit, he added. “As a rule, everything they seek to do is go to a liquidity event and earn money.”
