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Highlights
- Private equity-backed companies show higher default rates.
- Platinum Equity leads defaults among major private equity firms.
- Floating-rate debt plays a role in increased defaults.
Private equity-backed companies are defaulting at a higher rate compared to other speculative-grade businesses, according to a recent report from Moody's Ratings. The report, which covers the period between January 2022 and August 2023, found that private equity-backed businesses faced a default rate of 17%, significantly higher than the 8.5% rate for companies not backed by private equity.
The analysis highlights the growing financial pressure faced by companies with significant private equity involvement. These firms typically operate with higher levels of debt, which leads to increased financial stress, especially in periods of rising interest rates. Companies backed by Platinum Equity, for instance, saw the highest number of defaults among the 12 largest private equity sponsors analyzed by Moody's.
Platinum Equity and Clearlake Capital Group were also noted for having the highest leverage ratios, further emphasizing the connection between high debt levels and financial challenges. Apollo Global Management (APO) had a default rate closer to the average among these top private equity sponsors, maintaining a leverage ratio of six times, which is more in line with its peers.
The preference for floating-rate debt among private equity-backed companies has also contributed to this trend. With interest rates rising, companies carrying this type of debt have faced increasing costs, putting further strain on their balance sheets. Financial sponsors often prefer floating-rate debt due to the flexibility it offers, but the downside becomes apparent when rates increase, as they have recently.
The report underscores the significant financial hurdles faced by private equity-backed companies, particularly in an environment of rising interest rates and high leverage ratios. While private equity firms offer flexibility in financing structures, the associated risks are evident in the higher default rates seen among these companies.
