PE Firms Shun Investments In Older Firms Hard Hit By Pandemic

Companies owned by private equity firms are not seeing the money for protection that those firms ostensibly have saved up, The Wall Street Journal (WSJ) reported, and many are tumbling into bankruptcy.

The companies, ranging from restaurants to rental companies and retailers, have not seen any of the “dry powder,” or the money that the private equity owners have committed to funds that haven’t yet been spent. The worldwide pile was at around $1.45 trillion, a record number, as of June, WSJ reported.

But the money isn’t being used to help out companies struggling because of the pandemic, with PitchBook reporting that 34 private equity-backed companies have filed for bankruptcy in the past few months, according to WSJ. The ranks include names like Neiman Marcus, Hertz and J.Crew.

The problem didn’t seem to be one of a cash shortage. Ares Management Corp., which bought Neiman Marcus, recently had around $33 billion of dry powder right as the luxury department store retailer was filing for bankruptcy. Ares didn’t respond to a WSJ request for comment.

More than 70 percent of retailers with the lowest-rated debts are owned by private equity firms.

But many of the firms have a good amount of funds reserved for new investments, while companies bought even over three or four years ago seem to be left in the cold, WSJ reported. One potential strategy was cross-fund investments, where a firm invested in a company it already owns from a different, newer fund.

But this has not been practiced much since the pandemic started, with experts tending to find it too risky in terms of possible conflicts of interest with a company buying itself, Jennifer Choi, managing director of industry affairs for the Institutional Limited Partners Association, a trade group for private equity professionals, told WSJ.

Instead, some prefer “recycling,” a process where the earnings from a successful investment are then used to support other companies in the same fund rather than being returned to investors, WSJ reported. This is still not always looked at favorably by investors, but requests for the recycling practice have risen as the pandemic has taken hold.