Bankruptcy filings by US-based private equity portfolio companies are on track to nearly equal the record set in 2023, as inflation and higher-for-longer interest rates continue to take their toll.

Thirty-four US companies with private equity or venture capital backing filed for bankruptcy between Jan. 1 and April 30, a 36% increase over the same four-month period in 2023, according to S&P Global Market Intelligence data.

Based on that sample, US portfolio company bankruptcies are on pace to reach an annual total near the record-high 103 bankruptcies registered in 2023.

The combination of sticky inflation and higher-for-longer interest rates was enough to put some portfolio companies on the ropes, especially those already reeling from COVID-era business disruptions, said Vincent Indelicato, co-head of the restructuring group at Proskauer Rose LLP.

"It not only has affected borrowing costs, which has created a barrier to refinancing [existing debt], it's also presented headwinds for revenue generation for businesses that have exposure to consumers," Indelicato said.

Elevated share of bankruptcies

Private equity portfolio companies 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.

On average, between 2010 and 2023, private equity portfolio companies accounted for less than 9% of US bankruptcy filings.

The healthcare sector racked up the most bankruptcies of private equity portfolio companies between Jan. 1 and April 30 with 12 filings, followed by consumer discretionary with six filings. The same sectors also led in bankruptcy filings by portfolio companies in 2023.

Portfolio companies with hefty debt loads from high-leverage acquisitions have "less margin for error for business performance," said Michael Handler, a partner in King & Spalding LLP's financial restructuring practice. Now, they are being pushed to the edge by higher costs and a deceleration in consumer spending.

"The consumer is starting to feel pinched by higher prices, and that affects all aspects of the economy, from going out to eat [less] to maybe not seeing the doctor," Handler said.

Debt and fading consumer demand

Among the portfolio companies to file for bankruptcy protection so far in 2024 was CVC Capital Partners Ltd.-backed IT business ConvergeOne Holdings Inc. ConvergeOne management sought to erase $1.6 billion in debt, a burden that the company's CFO said was "unsustainable in the current interest-rate environment."

In another bankruptcy filing, Leonard Green & Partners LP-backed retailer Joann Inc. cited a pullback in consumer demand for fabric and sewing supplies, which rose during the pandemic.

Opening the 'toolbox'

Indelicato said private equity sponsors prefer to negotiate debt restructurings outside of the courtroom, avoiding the cost, uncertainty and bad publicity of an in-court process.

"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," Indelicato said.

Examples of tough-to-tackle issues include retail locations stuck with above-market leases that hamper store profitability or legacy labor agreements that can only be modified through the Chapter 11 process, he said.

– Download a file of raw data from this story. – Catch up on private equity headlines. – Read about a decline in terminated private equity deals.

Handler of King & Spalding predicted US portfolio company bankruptcies would remain elevated through 2024.

"There's just so much debt in the system, and there are a lot of companies that have a lot of challenges," Handler said.