In the high stakes world of private equity (PE), not every investment pans out as planned. When a business in a PE fund’s portfolio begins to falter and heads toward insolvency or even bankruptcy, it’s a challenging and pivotal moment. Such bankruptcies are becoming more prevalent, with PE and venture capital portfolio companies accounting for 30% of all U.S. bankruptcy filings in 2024, up 15% from 2023.1 In this type of situation, careful navigation is essential to help mitigate losses, retain access to capital, protect investor interests, and potentially salvage value from the distressed asset.
Sharply higher interest rates have lingered for a few years now. That stress is showing up in a predictable way. More recently, policy shifts and economic uncertainty have added to the need for PE to pay close attention to external and internal factors impacting their portfolio companies. This article will offer crucial considerations for PE funds grappling with these portfolio businesses in distress, including the impact on fundraising efforts, the portfolio as a whole, and fund returns.
Impacts on Future Fundraising Efforts
One of the most immediate consequences of a distressed or bankrupt portfolio company is its impact on a fund’s ability to raise future capital. Limited partners (LPs) are paying closer attention than ever to downside scenarios, and a perceived lack of discipline or transparency during a workout can diminish confidence in the fund’s overall management. In today’s environment, we have observed fundraising timeline extensions and any indication that a general partner (GP) may struggle to manage adversity can cause capital to pivot elsewhere.
Equally critical is the dynamic between GPs and their capital partners during a turnaround. Managing expectations with LPs requires a proactive and transparent communication strategy. In some cases, the LP base can be a mixture of institutional investors, family offices, and funds of funds—each with its own risk tolerance and time horizon. Timely, credible updates on a distressed investment’s status, coupled with a clear plan of action, can help mitigate reputational damage and foster trust. Silence or disorganization, by contrast, only invites scrutiny and skepticism.
The Portfolio as a Whole
The same principle applies to communication with debt partners. When portfolio companies rely on leveraged capital structures, preserving lender relationships is paramount. Whether through covenant waivers, maturity extensions, or debt-for-equity restructurings, outcomes improve significantly when the lender sees the sponsor as engaged and realistic. A misaligned or slow-moving PE sponsor can complicate restructuring negotiations and impair recoveries, potentially affecting the fund’s access to credit for other investments.
For privately held companies backed by PE, the challenge is compounded by the fact that they often lack ready access to capital markets. Without public equity or broad-based financing options, liquidity must be found through internal fund reallocations, asset sales, or outside recapitalizations—each of which introduces operational and strategic trade-offs. Sponsors must make hard choices about which assets are still worth additional capital and which may need to be exited.
Fund Returns
Finally, GPs must contend with the life cycle of the fund itself. A turnaround, even if well executed, may not be feasible within the remaining term of the fund, particularly if the asset requires a multiyear recovery period. In such cases, fund extensions, secondary sales, or continuation vehicles may be necessary to align incentives and preserve value. Speed and decisiveness are essential as the window to effectuate a successful turnaround narrows considerably as the fund approaches maturity.
Some funds may have operating partners, but for those that do not, a trusted advisor can assist you in navigating a failing business toward bankruptcy within a PE portfolio. Success hinges on a combination of strategic vision, diligent execution, and effective stakeholder management. Embracing transparency, creativity, and resilience can help PE funds mitigate losses, protect investor interests, and potentially unlock value, even in the face of adversity.
How Forvis Mazars Can Help
Our restructuring and turnaround team can help clients see their challenges through different perspectives—and move with momentum through complex situations. Our cross-functional team, rooted in deep industry and subject matter knowledge, strives to understand your organization’s challenges. We work in collaboration with you to help achieve resolution. From a complete business restructuring plan to helping with critical business negotiations, we aim to deliver tailored services designed to help drive impact and change to restore stability and confidence for constituents.
If you have any questions or need assistance, please reach out to one of our restructuring and turnaround professionals.
- 1“PE-Backed company bankruptcies in US reach record high in 2024,” spglobal.com, January 9, 2025.