Private equity portfolio companies in the US are on course in 2023 to post the highest number of annual bankruptcy filings since 2010, as credit tightening and interest rate hikes push highly leveraged companies toward nonperforming status.

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.

At the current pace, bankruptcies by private equity portfolio companies are on track to total 108 by the end of 2023, a number that would exceed the 2020 total of 95 such bankruptcies and would be the highest since at least 2010.

Private equity portfolio companies are typically acquired through highly leveraged transactions drawing on substantial amounts of credit from banks. The current environment of tightening credit and interest rate increases create significant problems for rate-sensitive companies, said Todd Feinsmith, a partner in the corporate reorganization practice of law firm Troutman Pepper.

"Because of all of these highly leveraged companies struggling against a rising interest rate environment, we are seeing quite a few more bankruptcies among private equity firm portfolio companies than we have historically," Feinsmith added.

Troubled sectors

The situation offers an opportunity for buy-side firms that can move to acquire distressed targets. 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.

"Private equity firms that are sharp are already starting to hunt for opportunities that are going to arise in that sector," Feinsmith said.

– Download a spreadsheet with data featured in this story. – Check out the $1 billion-plus private equity deals in 2023. – Explore more private equity coverage.

Since Jan. 1, private equity portfolio company bankruptcies have been largely concentrated in healthcare and consumer discretionary, two of the highest-risk sectors identified in quarterly Market Intelligence reports since the start of the year.

Feinsmith noted that there was a preponderance of distressed opportunities and bankruptcies in consumer retail, and the sector will likely continue in a downward spiral.

Largest liabilities

In June, Cyxtera Technologies Inc., which provides datacenter products and services, along with certain of its units, filed for Chapter 11 bankruptcy. Private equity firms BC Partners and Medina Capital hold substantial stakes in the company. Cyxtera Technologies is continuing to explore a possible sale of the business or a sizable investment from a new investor as it moves through the court-supervised process.

Also in June, credit report repair services company PGX Holdings Inc., which is backed by HIG Capital LLC, filed for voluntary bankruptcy.H.I.G. Capital Partners LP