Trends in private equity-backed bankruptcies
For several years now, the number of private equity-backed bankruptcy filings has been on the rise. A few months ago in November, The Deal reported that, for private equity-backed companies with liabilities of $25 million or more, the number of bankruptcy filings in 2015 was 14. In 2019, through October, the number climbed and was already up to 44.
My sense is that this trend will continue. There are substantial assets invested across the economy in private equity, and there still is a significant backlog of assets seeking to be placed in private equity investments. If you want to see deep details on this dynamic, you can look at the Bain & Company “Global Private Equity Report 2019.”
With the high volume of private equity investments in today’s economy, it shouldn’t be a surprise that we are seeing more private equity-backed insolvencies. This will lead to new issues that have to be resolved by courts.
With the high volume of private equity investments in today’s economy, it shouldn’t be a surprise that we are seeing more private equity-backed insolvencies. This will lead to new issues that have to be resolved by courts
One issue that I am seeing in my practice already is that it is becoming standard operating procedure in large private-equity backed bankruptcy cases for the unsecured creditors to sue the private equity backers, and/or their principals or management team, for allegedly improperly causing the insolvency. The action in these disputes is often around who exactly was directing operations as the company slid deeper into insolvency – was it the full-time management, or the private equity backers?
Another issue getting attention is whether a private equity backer should have liability for a failed pension plan. These disputes are heavily dependent on the facts. A recent federal appellate decision, Sun Capital Partners III, LP v. New England Teamsters & Trucking Industry Pension Fund, No. 16-1376 (1st Cir. 2019), reversed a lower court decision and found that two private equity firms were not liable for a $4.5 million pension fund withdrawal liability. Most commentators believe that this decision was meant to be narrow and that different facts might cause a different result.
We’ll keep watching this area and provide updates on new developments.