Companies in the portfolios of private equity or venture capital portfolios are on pace for the type of record investors don't want to see: the highest rate of bankruptcy filings since the fallout from the global financial crisis.
"In the first half of 2023, 338 US companies filed for bankruptcy protection, including 54 companies with private equity or venture capital backing, according to an analysis of S&P Global Market Intelligence data," the firm wrote. "At the current pace, bankruptcies by private equity portfolio companies are on track to total 108 by the end of 2023."
In 2020, the number of PE- or VC-backed company bankruptcies in the wake of the Covid-19 pandemic, supply chain disasters, and their economic impact hit 95 for the year. A count of 108 would beat that figure.
Out of the 54 to date, 15 were in healthcare, 12 in consumer discretionary, 7 in industrial, 6 in information technology, 6 in consumer staples, 4 in finance, and 1 each in energy, communication services, and utilities.
Something to remember is that out of all the companies backed by PE or VC money, 54, or even 108, is likely a small percentage.
As S&P Global noted private equity companies usually use substantial credit from banks to acquire businesses through highly-leveraged transactions. But this is a bad time for bank lending as institutions tighten their policies and interest rates have risen.
One of the concerns among many watching the banking industry and general corporate credit markets has been the existence of so-called zombie companies that don't make enough profit to service their debts and that depend on cheap credit to continue survival. In September 2022, Goldman Sachs estimated that 13% of companies based in the U.S. "could be considered examples of the living dead." Many of these have been young, high-growth businesses.
The largest bankruptcy of this group is Certa Simmons Bedding, with $1.93 billion in liabilities at the data of its bankruptcy filing.
Cyxtera Technologies, which provides data center products and services, reportedly had more than $1 billion in liabilities. Also at the billion plus level were PGX Holdings, which offers credit repair services; Monitronics International; and Bed Bath & Beyond.
While none on this list are specifically in real CRE, all will have leased space that may present creditor losses through the bankruptcy process. And S&P Global wrote, "The commercial real estate sector is on top of the list with companies potentially hitting some debt maturity walls in the coming year, forcing landlords to restructure their debts."
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