The relationship between private equity ownership and the likelihood of bankruptcy for a company has been the source of intrigue for many years. In many ways, the relationship was misunderstood in the era succeeding the Global Financial Crisis, with critics pointing to pre-GFC practices (and data) as evidence for private equity companies’ ill intentions with their portcos. 

The affinity PE companies have for debt still stands, of course, but nowhere near its pre-GFC levels. This has led to a reversal in the pre-GFC trend, where private equity-owned companies were 10 times more likely than their non-private equity-owned counterparts to go bankrupt. Nowadays, even though private equity makes up between 15 to 20 percent of total corporate equity in the United States, it only accounted for 11 percent of total bankruptcies in 2024. 

On the surface, that’s good news. But on a sector-by-sector basis, this clean-cut narrative doesn’t always hold. 

Healthcare and retail in the hole

Healthcare and retail continue to be sectors plagued by bankruptcy – and in these sectors, private equity ownership seems to make companies’ odds worse.

According to research from the Private Equity Stakeholder Project, 21 percent of healthcare bankruptcies in 2024 were PE-backed companies, and the same could be said for just under 25 percent of consumer bankruptcies. This is despite private equity only owning 4 percent of the US healthcare market. A similar figure was not available for the consumer sector, but it is worth noting that private equity investment in the sector was at an all-time low in 2024.

For both sectors, the reason behind the high likelihood of bankruptcies is debt. However, each sector obtained outsized debt for different reasons.

In healthcare’s case, large, unserviceable debts were likely incurred during the investment surge the industry saw from PE firms back in 2021. During this period, multiples paid for assets were high – perhaps too high.

“Maybe those multiples were higher than they should have been. Maybe those companies weren't really worth that extra turn to two turns of leverage,” said Brian Lohan, the head of law firm Clifford Chance’s US restructuring and insolvency practice. “Now it's all coming home to roost.”

Meanwhile, on retail’s end, debt was mostly incurred during the same period to keep companies afloat amidst pandemic uncertainty.

“Retail took on leverage in 2020-22. They probably took on more leverage, not necessarily based on multiples, but based on lower interest costs. I'm guessing a lot of those leases are also resetting and the cost structure is increasing,” Lohan explained.

Playing with scale

Across all sectors, not just healthcare and retail, large PE deals were associated with a larger risk of bankruptcy. According to PESP, 56 percent of bankruptcies involving liabilities exceeding $500 million at the time of filing were private equity-backed companies. 

This could be due to the fact that companies with juiced-up valuations took on more debt, which became unserviceable due to its sheer size. It could also be due to the fact that there are structural differences in the way that large private equity firms and midmarket private equity firms manage their assets.

According to Lohan, midmarket firms are more likely to settle refinancing issues out of court given the high price tag associated with filing for bankruptcy. For larger firms, this is more difficult to pull off.

“There will be times when Chapter 11 makes a whole lot of sense, especially if there are operational burdens or burdensome contracts or other things to deal with. In larger companies, it's harder to just hand the keys to lenders outside of bankruptcy,” he explained.

Cutting out

Another time when bankruptcy just makes more sense for a private equity company (of any size) is when the asset is highly regulated – such as with healthcare assets.

“For healthcare systems, you almost need bankruptcy to help solve the problem. Out of court, it'd be nearly impossible to be able to sequence and manage the various regulatory approvals and other types of things that would go along with dispositions of those healthcare systems absent having a bankruptcy court overseeing everything, pushing along deals, and bringing people to the table, including regulators,” said Lohan.

But why is retail experiencing more bankruptcies? According to Lohan, it may just be because investors want to cash out.

“From a sponsor perspective, it's not like we're in 2021 or 2020, when it was like, ‘Let's put a little more money in and see what happens when the world comes back and stabilizes.’ They've realized the landscape has changed and that regressing to 2019 is not coming and, if anything, it's getting worse with cost. So I think at that point it's just like if we cut our losses on retail and if we can turn it over, great,” he said.

In other words, instead of settling refinancing out of court through liquidation, PE sponsors are just happy to pass on bad assets to lenders, clearing them from their balance sheet. 

For all of these reasons, Lohan argues that bankruptcy cannot be the sole measure of how poorly a private equity company runs companies – or indeed, how entire sectors are potentially negatively impacted by private equity ownership.

“The more realistic metric is how many refinancings occur. How many companies are basically being run for option value for the private equity firm that could hand the keys over to lenders at any given time,” Lohan explained.

Information such as this, however, is hard to find – as such, it's hard to know just how “bad” or “good” private equity might be for sectors outside of retail and healthcare.