Tide Rock’s Post

Damnit – we aren’t perfect!? But look at the difference in our results even when we're not…   The S&P just reported that 2024 hit a record high for PE/VC-backed bankruptcies, with 110 companies filing—this is a 15% increase from last year and is 60% greater than non-PE/VC. It’s a sobering stat, but not all that surprising given interest rates haven't gone down and the lending environment is tougher. Banks and private credit funds are definitely more aggressive these days when it comes to enforcing remedies on potential defaults or covenant breaches.   For funds operating with high leverage, it’s brutal! Debt payments pile up, restrictive covenants leave little room to maneuver, and when portcos struggle with profitability, the runway runs out fast.   That’s why I’m so grateful for Tide Rock’s model, especially right now. We recently had our first few “workouts” where a few of our historically well performing companies had some setbacks and started losing EBITDA. No bueno! In any traditional levered model, we probably would have been toast. Allocated capital entrusted to us by our investors… gone. But we don’t have debt, and we have a great team focused on nothing but operational excellence. So, we quickly made changes, rebuilt basecamp, and now, all of our companies are growing and profitable again. The underperforming companies? We expect them to be among our highest performers this year.    By avoiding amortized debt in our transactions, we have the flexibility to focus on operational improvements, even during tough times. We’re not tied down by sky-high debt servicing costs, restrictive bank terms, or the constant threat of bankruptcy. We are really good at what we do, but we are not perfect, and this unique, unlevered buyout model gives us the flexibility to withstand and recover from unexpected headwinds.    #consistency #unleveredbuyout #buyout

The Ripple Effect of Private Equity-Backed Bankruptcies The recent surge in bankruptcies among private equity (PE) and venture capital (VC)-backed companies has sent shockwaves through various sectors. In 2024 alone, a record number of 110 PE and VC-backed companies filed for bankruptcy. This trend, driven by high interest rates and reduced consumer spending, poses significant challenges and opportunities for businesses across the board. Impact on Companies Increased Financial Scrutiny: Companies backed by PE firms are under heightened financial scrutiny. The reliance on leveraged buyouts means these companies often carry substantial debt, making them vulnerable to economic fluctuations. Operational Challenges: High debt levels can limit a company's ability to invest in innovation and growth. For instance, companies like ConvergeOne, which faced bankruptcy due to overwhelming debt, highlight the operational risks associated with aggressive expansion strategies. Market Consolidation: As financially distressed firms seek to restructure or sell assets, we may see increased market consolidation. Larger, financially stable companies could acquire distressed assets at lower valuations, potentially leading to a more concentrated market. Talent Retention Issues: Financial instability can lead to talent retention challenges. Employees may seek more stable opportunities, impacting the company's ability to maintain a skilled workforce. Future Outlook: While the current landscape is challenging, it also presents opportunities for resilient companies to innovate and adapt. Companies that manage to navigate these financial pressures can emerge stronger, with leaner operations and a more strategic focus on sustainable growth. As we move forward, businesses must balance growth ambitions with prudent financial management. The lessons from recent PE-backed bankruptcies underscore the importance of maintaining a healthy balance sheet and being prepared for economic uncertainties. What are your thoughts on the impact of PE-backed bankruptcies on businesses? Share your insights in the comments below! https://lnkd.in/eF5jEGDX

S&P Global recently put out an analysis about private equity portfolio company bankruptcies (including VC-backed companies) in 2024, and here are some of the key findings: 1. US portco bankruptcies are on pace to reach an annual total near the record-high 103 bankruptcies registered in 2023. 2. Portcos accounted for 16% of all US bankruptcy filings in the first four months of 2024. They also accounted for 16% of US bankruptcy filings in 2023, which was their largest share of the annual total going back to at least 2010. 3. On average, between 2010 and 2023, private equity portfolio companies accounted for less than 9% of US bankruptcy filings. 4. Healthcare, followed by consumer discretionary, were the sectors in which the most portcos filed for bankruptcy so far this year. It’s clear that large debt loads coupled with stubbornly high interest rates are catching up with PE funds and their portcos, as evidenced by the surge in portco bankruptcies during 2023 and 2024. Generally, PE funds and their portcos try to steer clear of bankruptcy, and work out their challenges outside of court, a point made by Vincent Indelicato from Proskauer who was quoted in the piece. When a portco files for bankruptcy, it’s for a specific set of reasons. As Indelicato explains, “"The [portfolio] companies that have filed for Chapter 11 are companies that have business challenges that can only get addressed with the Chapter 11 toolbox." For example, one of the tools in the toolbox is the ability to reject above-market commercial real estate leases, which is why we tend to see lots of retail company bankruptcies. While not a retail company, a recent example of a company utilizing the lease rejection “tool” is WeWork, which emerged from bankruptcy after cutting approximately $12 billion in current and future lease obligations. With no clear end in sight for high interest rates, and the era of “extend and pretend” for debt refinancings being over, we’re almost certain to see a steady stream of portco bankruptcies moving forward. But while they may not hit the headlines, expect to see even more restructuring and winding down of portcos happening outside of court to, as Indelicato explained, avoid the cost, uncertainty and bad publicity of an in-court process.

Private equity (PE) firms play multiple roles in the companies they invest in, which can include being a shareholder, creditor, and sometimes even a manager.  This multifaceted involvement is a conflict of interest, especially during financial distress or bankruptcy proceedings.  When a PE firm is both a creditor and an equity holder, it prioritises its interests over those of other stakeholders.  PE firms implement aggressive cost-cutting measures to improve profitability, which leads to operational challenges and financial instability.  Leveraged buyouts (LBOs) are a common strategy where PE firms use significant amounts of debt to acquire companies.  This high leverage makes companies more vulnerable to economic downturns. Studies have shown that companies owned by PE firms have a higher likelihood of filing for bankruptcy compared to non-PE-owned firms. A study by the American Bankruptcy Institute found that PE-backed companies were 10% more likely to file for bankruptcy.  PE-owned companies often carry higher debt levels.  According to a report by the Institute for Private Capital, the median debt-to-equity ratio for PE-owned firms is around 2.5, compared to 1.2 for non-PE-owned firms. The aggressive cost-cutting measures and restructuring efforts by PE firms lead to significant job losses.  A study by the National Bureau of Economic Research found that employment at PE-owned firms fell by 13% more than at comparable non-PE-owned firms over a two-year period.  In bankruptcy proceedings, the recovery rates for unsecured creditors in PE-backed bankruptcies are often lower.  According to Moody’s Investors Service, the average recovery rate for unsecured creditors in PE-backed bankruptcies is around 40%, compared to 60% for non-PE-backed bankruptcies. The high leverage used in LBOs lead to financial instability, especially during economic downturns.  The increased debt burden can strain cash flows, making it difficult for companies to meet their financial obligations.  While PE firms bring operational expertise and can improve efficiency, the aggressive cost-cutting measures can backfire, leading to operational disruptions and a decline in product or service quality.  The multifaceted roles of PE firms leads to decisions that prioritise the firm’s financial returns over the long-term health of the company and its stakeholders.  This result in negative outcomes for employees, suppliers, and other creditors. Terence Nunis Terence K. J. Nunis, Consultant Chief Executive Officer, Equinox GEMTZ

Private equity (PE) firms play multiple roles in the companies they invest in, which can include being a shareholder, creditor, and sometimes even a manager.  This multifaceted involvement is a conflict of interest, especially during financial distress or bankruptcy proceedings.  When a PE firm is both a creditor and an equity holder, it prioritises its interests over those of other stakeholders.  PE firms implement aggressive cost-cutting measures to improve profitability, which leads to operational challenges and financial instability.  Leveraged buyouts (LBOs) are a common strategy where PE firms use significant amounts of debt to acquire companies.  This high leverage makes companies more vulnerable to economic downturns. Studies have shown that companies owned by PE firms have a higher likelihood of filing for bankruptcy compared to non-PE-owned firms. A study by the American Bankruptcy Institute found that PE-backed companies were 10% more likely to file for bankruptcy.  PE-owned companies often carry higher debt levels.  According to a report by the Institute for Private Capital, the median debt-to-equity ratio for PE-owned firms is around 2.5, compared to 1.2 for non-PE-owned firms. The aggressive cost-cutting measures and restructuring efforts by PE firms lead to significant job losses.  A study by the National Bureau of Economic Research found that employment at PE-owned firms fell by 13% more than at comparable non-PE-owned firms over a two-year period.  In bankruptcy proceedings, the recovery rates for unsecured creditors in PE-backed bankruptcies are often lower.  According to Moody’s Investors Service, the average recovery rate for unsecured creditors in PE-backed bankruptcies is around 40%, compared to 60% for non-PE-backed bankruptcies. The high leverage used in LBOs lead to financial instability, especially during economic downturns.  The increased debt burden can strain cash flows, making it difficult for companies to meet their financial obligations.  While PE firms bring operational expertise and can improve efficiency, the aggressive cost-cutting measures can backfire, leading to operational disruptions and a decline in product or service quality.  The multifaceted roles of PE firms leads to decisions that prioritise the firm’s financial returns over the long-term health of the company and its stakeholders.  This result in negative outcomes for employees, suppliers, and other creditors. Terence Nunis Terence K. J. Nunis, Consultant Chief Executive Officer, Equinox GEMTZ

These are the plunderers… In the mid-1980’s, Leveraged Buyouts or LBOs were all the rage in the business world. Drexel Burnham Lambert was a key player in financing these types of deals. They specialized in funding corporate takeovers using high-cost debt. Known as “junk” bonds, they had to pay higher rates of interest to attract investors. A man named Michael Milken was the head of Drexel’s junk bond division. Many of the client companies wound up borrowing more than they could repay from their ongoing operations. This, along with a general economic slowdown in the late 1980’s caused these bonds to crater, and ultimately many large national companies that invested in these bonds found themselves in distress. Executive Life Insurance Company, California’s largest insurer at the time, was one of them (a whopping 60% of their portfolio was invested in junk bonds, about 6 billion dollars). So was the Southland Company, parent of 7-11 stores, who used these types of bonds to finance a LBO, attempting to bring the company from publicly traded back to private. LBOs meant deep cuts in R&D, along with just about every other internal budget, all sacrificed to pay off the debt. Southland was not immune to this and began to renege on support for franchisees (ex: marketing and advertising for the 7-11 brand) as they headed toward bankruptcy, ultimately filing Chapter 11. Other companies followed, generally the more leveraged, the greater the risk…the greater the risk today, the more bankruptcies tomorrow. One of those bankruptcies was Drexel itself in 1990. With Drexel gone and the entire junk bond market in a tizzy, Executive Life soon followed, crushed under $800 million in losses. Another prominent LBO firm at that time was KKR, who became famous for their 1988 LBO of RJR Nabisco, which was financed by Milken/Drexel.  Firms like KKR, now became investors in companies, picking them up for pennies on the dollar, given their distressed conditions. The theory was that many could be saved by restructuring the financial burdens, which were burdens created by Drexel. They would receive a percent return on the assets each year, and a big share of the profits when re-sold. And, if it doesn’t work out, just sell the company, cut your losses, and move on. It’s classic Hegelian dialectic, the objective of which is to replace something old with something new, and in this case profit from a problem you created. Now you may ask yourself: “What was the something new that replaced the old?” PRIVATE EQUITY #healthcare #digitalmedicine #technology #privateequity #venturecapital

Private equity (PE) firms play multiple roles in the companies they invest in, which can include being a shareholder, creditor, and sometimes even a manager.  This multifaceted involvement is a conflict of interest, especially during financial distress or bankruptcy proceedings.  When a PE firm is both a creditor and an equity holder, it prioritises its interests over those of other stakeholders.  PE firms implement aggressive cost-cutting measures to improve profitability, which leads to operational challenges and financial instability.  Leveraged buyouts (LBOs) are a common strategy where PE firms use significant amounts of debt to acquire companies.  This high leverage makes companies more vulnerable to economic downturns. Studies have shown that companies owned by PE firms have a higher likelihood of filing for bankruptcy compared to non-PE-owned firms. A study by the American Bankruptcy Institute found that PE-backed companies were 10% more likely to file for bankruptcy.  PE-owned companies often carry higher debt levels.  According to a report by the Institute for Private Capital, the median debt-to-equity ratio for PE-owned firms is around 2.5, compared to 1.2 for non-PE-owned firms. The aggressive cost-cutting measures and restructuring efforts by PE firms lead to significant job losses.  A study by the National Bureau of Economic Research found that employment at PE-owned firms fell by 13% more than at comparable non-PE-owned firms over a two-year period.  In bankruptcy proceedings, the recovery rates for unsecured creditors in PE-backed bankruptcies are often lower.  According to Moody’s Investors Service, the average recovery rate for unsecured creditors in PE-backed bankruptcies is around 40%, compared to 60% for non-PE-backed bankruptcies. The high leverage used in LBOs lead to financial instability, especially during economic downturns.  The increased debt burden can strain cash flows, making it difficult for companies to meet their financial obligations.  While PE firms bring operational expertise and can improve efficiency, the aggressive cost-cutting measures can backfire, leading to operational disruptions and a decline in product or service quality.  The multifaceted roles of PE firms leads to decisions that prioritise the firm’s financial returns over the long-term health of the company and its stakeholders.  This result in negative outcomes for employees, suppliers, and other creditors. Terence Nunis Terence K. J. Nunis, Consultant Chief Executive Officer, Equinox GEMTZ

🏛️ From LBO to Bankruptcy: What Red Lobster’s Collapse Teaches Us About Debt & Private Equity Red Lobster’s recent Chapter 11 bankruptcy and restructuring is a textbook example of how financial engineering can make or break a business. 🔹 A $2.1bn LBO structured with minimal equity 🔹 A $1.5bn sale-leaseback deal that front-loaded liquidity but crippled future cash flows 🔹 A credit bid takeover by lenders who saw value in the business despite its financial struggles   This isn’t just about a struggling restaurant chain—it’s a case study in leveraged buyouts, creditor strategies, and distressed investing.   1️⃣ Private Equity’s Short-Term Gains vs. Long-Term Consequences When Golden Gate Capital acquired Red Lobster in 2014, they didn’t just buy the business—they monetized its real estate through a $1.5bn sale-leaseback transaction. 💰 Why? This allowed them to recover capital upfront, significantly reducing the amount of equity at risk. 💣 The Problem? Red Lobster was now locked into high-rent obligations ($177M annually by 2023), making it nearly impossible to generate sustainable free cash flow. This is a classic "asset-light" private equity strategy—extracting liquidity while shifting long-term risk to the operating business.   2️⃣ The Role of Creditors: How Fortress Took Control By 2024, Red Lobster had burned through cash, and the high lease costs made restructuring inevitable. Fortress Investment Group, a key lender, provided DIP financing and later acquired the company via a credit bid. 🏦 What’s a credit bid? Instead of putting up new cash, Fortress used its existing debt holdings to take ownership at a discount. 📊 Why does this matter? It’s a powerful restructuring tool—lenders can take control without injecting significant new capital. For anyone in private equity, distressed debt, or restructuring, this deal is a masterclass in how control shifts from equity holders to creditors in a downturn.   3️⃣ Key Lessons for Investors & Operators 🔹 Financial engineering isn’t free: A sale-leaseback boosts liquidity in the short term but can be fatal when business conditions deteriorate. 🔹 Creditors will always play the long game: Lenders structure deals to protect downside risk and position for ownership when equity holders fail. 🔹 Turnaround strategies must go beyond financial fixes: Fortress now owns Red Lobster, but can they operate it successfully? That remains to be seen.   📩 Final thought: Distressed situations like this are playing out across multiple industries. Whether you’re in PE, credit, or special situations investing, understanding these dynamics is key to spotting both risks and opportunities.   Would love to hear thoughts from others in the industry—what’s your take on Red Lobster’s restructuring?   #DCM #PrivateEquity #Restructuring #Debt #DistressedDebt #InvestmentBanking #LeveragedBuyouts #Finance #CreditInvesting

Over the past months, I’ve been reflecting on two key aspects of leveraged buyouts (LBOs): financing the acquisition with equity vs. participating loans, and the different exit strategies. While equity means less financial risk and more flexibility, it also comes with potentially lower returns. Since there are no fixed interest payments or debt obligations, the company has more room to reinvest profits into growth, but the cost of capital is higher. Participating loans, on the other hand, allow investors to borrow money while sharing in the company’s upside. This structure can amplify returns but also introduces more risk. The company has to meet its debt obligations, and if it doesn’t perform well, servicing that debt can become challenging. Honestly, I haven't found yet my own preference. It depends in the end on your own risk appetite and whether you’re aiming for long-term growth or short-term returns, but it depends even more on your ability to find the investors and their own preferences. Once the company is acquired, the next big question is how to exit. Over the months, I’ve thought about three potential paths: an IPO, selling to an industrial player, or selling to a private equity firm. IPO: The upside here is significant—if the company performs well, the public market could provide a lucrative exit, with much higher multiples and liquidity (especially for small companies this is often a concern for investors). However, the process might be lengthy, expensive, and subject to market volatility. You also need to be prepared for the scrutiny and regulatory challenges that come with being a publicly traded company. Industrial sale: Selling to a strategic buyer, like an industry player, often results in a quicker and more straightforward process. They might offer a premium for the synergies they can extract from the acquisition. But you need to find the investor. Private equity: Selling to a private equity firm is an appealing option for many owners because of the speed and confidentiality of the transaction. PE firms can also bring operational expertise and capital to help the business grow further before a future exit, whether via IPO or another sale. However, the firm may push for changes that align with their own exit strategy, which could involve short-term decision-making. As I’ve reflected on these options, I’ve realized there’s no one-size-fits-all answer. Each choice—whether it’s structuring the buyout with equity or participating loans, or selecting the right exit strategy—depends on a variety of factors: the company’s market position, its growth potential, and the preferences of the investors involved. When you try something small... the last one is the most important. Ultimately, what I’ve learned is that flexibility and clarity of vision are crucial. You need to remain adaptable and resilient at the same time... #lbo #learning #reflecting #equity #participatingloan

"Early Stage Capital Raising Trends in Chapter 11 Reorganisations," by #Robert #Drain, Shana Elberg, Evan Hill and Jaclyn Kleban (Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates). Check out this new article published on the Singapore Global Restructuring Initiative (SGRI) Blog! #restructuring #DIP #loans #capital #reorganization #Chapter11 #US https://lnkd.in/ddyfD6QU