Private Equity Investments Collapse into Insolvency and Bankruptcy
Private equity, due to its high use of debt, has placed numerous companies in distressed positions. Also note that there is a bit of a crossover, where private equity buyout business and venture capital are playing in each other’s sandbox. For brevity, companies in distressed situations from 2024-2026 are mentioned here; other history is available upon request.
Glossary
Bankrupt: A legal process that allows a person, business, organization that cannot pay its debts. Most common bankruptcies are Chapter 11 (Reorganization), Chapter 13 (reorganization) and Chapter 7 (liquidation).
Debt-for-equity swap: A debt-for-equity swap is a transaction in which a lender (creditor) agrees to exchange debt that is owed to them for ownership (equity) in the borrower. Instead of being repaid in cash, the creditor becomes an owner.
Default: A default occurs when a borrower fails to meet the terms of a debt obligation. Most commonly, defaults occur when a borrower fails to meet the terms of the obligation.
House of debt: A house of debt is when private equity firms borrowed heavily to finance a leveraged buyout or other private equity transaction. A house of debt is a distressed debt situation when the portfolio company controlled by the private equity firm has so much debt that it cannot comfortably service or refinance it. In this situation the success of the company could either become a success or failure, but has not reached bankruptcy or an out-of-court debt exchange. Generally for our purposes a house of debt portfolio company has too much debt from the leveraged buyout, falling revenues or profits, rising interest rates or debt maturing soon with no easy refinancing available.
Liquidation: A liquidation is the process of selling a company's assets and using the proceeds to pay creditors, usually because the business can no longer continue operating. In a liquidation , a company typically ceases operations. In a liquidation generally secured creditors (banks with collateral) can paid first, while administrative expenses (lawyers, bankruptcy courts) get paid second, employees get paid third, unsecured creditors are paid fourth, while preferred and common shareholders are paid last.
Receivership: When an insurance company becomes financially impaired or insolvent, and a state insurance regulator steps in to take control anA receivership for an insurance company is a special legal process used by the insurer when it is either financially troubled or insolvent. Unlike most companies, insurance companies cannot file Chapter 11 bankruptcy. A receiver's job is to protect policyholders, preserve assets, evaluate the company's finances, rehabilitate or liquidate the insurer.
Reverse stock split: A reverse stock split is when a company reduces the number of shares outstanding while proportionately increasing the share price per share. A reverse stock split does not create any new value, it simply changes the arithematic of the share count and price. A form of stock manipulation, a reverse stock split is frequently performed to remain listed on either the Nasdaq or NYSE to remain listed and still have access to investor money.
Chapter 22, 33, etc.: A Chapter 22 is when a portfolio company files bankruptcy more than once, for instance a Chapter 22 bankruptcy would be a company that filed bankruptcy while a Chapter 33 would be a company that filed bankruptcy three times.