Private equity (PE) bankruptcy filings surged in May, according to PitchBook data, with 16 tumbling into Chapter 11, making last month the worst for PE failures in four years.
With major companies such as car rental agency Hertz Global Holdings and clothing retailer J. Crew seeking bankruptcy protection, PE filings in 2020’s first five months are ahead of the same period last year (41 versus 37). PitchBook projects that full-year PE-related filings will eclipse 2019’s count (73).
The culprit here is carrying too much debt, which left the affected companies vulnerable to the coronavirus-spurred economic shutdown. People aren’t traveling as much, so they’re not leasing autos as before. And already-suffering retail got slammed when no one could shop in physical stores.
“Private equity is a levered bet on future economic growth,” said Dylan Cox, a PitchBook PE analyst. “It performs exceptionally well during expansions, but its portfolio companies are especially vulnerable to economic contractions due to the highly levered nature of the industry.”
At its filing, Hertz listed $18.8 billion in debt. This grew out of the 2005 acquisition of the rental company from Ford Motor, using $12 billion in debt financing. Six months later, the buyout group, led by Clayton, Dubilier & Rice, took a $1 billion dividend, financed with more debt.
J. Crew had $1.7 billion in debt, left over from the 2011 purchase by TPG Capital and Leonard Green & Partners. Those PE players reportedly reaped a $760 million dividend along the way.
Certainly, companies associated with travel and retail are in the biggest binds. For retail, the problem has been mounting since before the pandemic, in large part due to the rise in online shopping. The trend of retail bankruptcies got underway in 2017 with the filing of the Toys R Us chain.
While not all the retail filings were PE-related, there is a strong PE component there. In the case of the toy chain, its 2005 buyout loaded it with $5 billion in debt. Private equity firms Bain Capital and KKR, plus the real estate firm Vornado Realty Trust, took over the company.
“The high debt loads leave relatively little margin for error,” said Wylie Fernyhough, a PitchBook PE analyst, “and do not set up these companies to succeed in an era where so many other competitors are coming to market with high-quality, direct-to-consumer products.”