Private equity firms and the companies they own employ over 13 million, from startups to rural hospitals and large retailers, but experts’ concerns of collapse are growing
Retail stalwarts Saks and Eddie Bauer filed for bankruptcy. Kmart and JoAnn Fabrics are gone for good, a trail of layoffs and disappointed customers in their wake. Hospital giant Steward Health Care collapsed, costing thousands of jobs and leaving several communities without a local hospital.
These once-trusted US companies have one thing in common: they were owned by private equity investors, who load companies with debt when they buy them and squeeze out profits as they restructure.
The business model is now facing an existential crisis that may have profound ramifications across the US.
Once fringe financial players, private equity investors have bought up vast swathes of US, UK, European and Australian industry, from local dentists to shopping mall anchors and fast-food chains and even video games company EA.
In the US, these firms and the companies they own, employ over 13 million people in everything from quirky startups like Dave’s Hot Chicken, Two Men and a Truck and School of Rock (all owned by Roark Capital) to the US’s largest pet retailer PetSmart (BC Partners) and classics Birkenstock (purchased by L Catterton in 2021) and Pyrex (owned by Centre Lane Partners).
Private equity investors also bought thousands of healthcare facilities in the US in recent years, including nonprofit hospice care, rural hospitals and small-town dentists’ offices.
But this wave of buyouts is running smack into a wall of persistently high interest rates, rising buyout prices and pressure over moribund returns.
Private equity funds are sitting on a “record number of unsold companies, many of which they’ve been unable to sell … or at least unable to sell at the prices that they’re looking for”, said Jim Baker, the executive director of the Private Equity Stakeholder Project, an industry watchdog.
The US’s over 13,500 unsold companies in private equity portfolios include 2,563 consumer products and services companies, PitchBook data shows, and 1,536 healthcare companies. Hundreds of these have been sitting in PE portfolios for years longer than funds historically like to keep their investments.
A growing concern is that “eventually, the companies that have accumulated this much debt are going to collapse”, said Audrey Stienon, Industrial Policy Program Manager at Open Markets, an anti-monopoly thinktank that is examining private equity’s role in the greater economy.
And often, what private equity buys up “are really, really important businesses”, Stiennon said, providing jobs or vital services to local communities. “When they go down, either you need to bail them out, or you need to find some to save them, or else you’re just stuck with fewer options for consumers down the line.”
Executives in the industry argue their deep pockets will help businesses weather any upcoming crisis. “Private equity-backed businesses face the same higher interest rates and economic pressures as other companies, but they also have committed investment partners that can provide additional capital and keep investing through difficult periods,” Will Dunham, the president and CEO of American Investment Council, an industry trade group, said in a statement.
“Ultimately, private equity only succeeds when the businesses it invests in succeed over the long term,” he said.
Think of private equity deals like buying a home, explains Brad Lipton, director of corporate power and financial regulation at the Roosevelt Institute. Investors buy the company with a hefty loan, like a mortgage, but plan to sell in a matter of years.
