PE-Related Bankruptcy Filings Soared in May

Too much debt and the virus economic slide harmed companies such as Hertz and J. Crew.

Private equity (PE) bankruptcy filings surged in May, according to PitchBook data, with 16 tumbling into Chapter 11, making last month the worst for PE failures in four years.

With major companies such as car rental agency Hertz Global Holdings and clothing retailer J. Crew seeking bankruptcy protection, PE filings in 2020’s first five months are ahead of the same period last year (41 versus 37). PitchBook projects that full-year PE-related filings will eclipse 2019’s count (73).

The culprit here is carrying too much debt, which left the affected companies vulnerable to the coronavirus-spurred economic shutdown. People aren’t traveling as much, so they’re not leasing autos as before. And already-suffering retail got slammed when no one could shop in physical stores.

“Private equity is a levered bet on future economic growth,” said Dylan Cox, a PitchBook PE analyst. “It performs exceptionally well during expansions, but its portfolio companies are especially vulnerable to economic contractions due to the highly levered nature of the industry.”

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At its filing, Hertz listed $18.8 billion in debt. This grew out of the 2005 acquisition of the rental company from Ford Motor, using $12 billion in debt financing. Six months later, the buyout group, led by Clayton, Dubilier & Rice, took a $1 billion dividend, financed with more debt.

J. Crew had $1.7 billion in debt, left over from the 2011 purchase by TPG Capital and Leonard Green & Partners. Those PE players reportedly reaped a $760 million dividend along the way.

Certainly, companies associated with travel and retail are in the biggest binds. For retail, the problem has been mounting since before the pandemic, in large part due to the rise in online shopping. The trend of retail bankruptcies got underway in 2017 with the filing of the Toys R Us chain.

While not all the retail filings were PE-related, there is a strong PE component there. In the case of the toy chain, its 2005 buyout loaded it with $5 billion in debt. Private equity firms Bain Capital and KKR, plus the real estate firm Vornado Realty Trust, took over the company.

“The high debt loads leave relatively little margin for error,” said Wylie Fernyhough, a PitchBook PE analyst, “and do not set up these companies to succeed in an era where so many other competitors are coming to market with high-quality, direct-to-consumer products.”

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San Francisco Pension Plan Reports Data Breach

 SFERS is the latest to suffer the loss of personal information that puts some at higher risk of identity theft.

The San Francisco Employees’ Retirement System (SFERS) has reported that a data breach to one of its partners’ systems occurred in late February, potentially, exposing the information of 74,000 current and prior members of the fund.  

The fund said that information from 10up Inc.’s servers was not removed, but it is not clear whether the information was viewed or copied by the outside source. The retirement system was alerted to the hack by 10up one month after its occurrence and it was told that 10up shut down the server and began an investigation once the breach was identified.

The information exposed includes users’ personal information such as their address, full name, date of birth, bank routing numbers, IRS form 1099R information (excluding Social Security number), and information about their designated beneficiaries.

CIO recently published a report detailing insider tips for funds and businesses that are keen on ramping up their data security.

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“Your personal financial information may be misused,” the fund said in a statement. It offered solutions for members who are interested in protecting their identity and offered a complementary year to identity protection program Experian’s IdentityWorks for those plan participants who may face an increased risk of identity theft.

In explaining how the breach happened, SFERS said, “the retirement system contracts with vendors to provide SFERS members with online access to their account information. One of the vendors, 10up Inc., set up a test environment on a separate computer server, which included a database containing data from approximately 74,000 SFERS member accounts as of August 29, 2018. On March 21, 2020, 10up Inc. learned that this server had been accessed by an outside party on February 24, 2020.”

The news makes SFERS the latest pension fund to be assailed by hackers. Last year, the Oklahoma Police Pension reported that hackers had stolen $4.2 million from its coffers, however no pension benefits to members were affected. Cyber insurance companies reported that they’ve seen a growth in customers as many businesses prepare for potential breaches.

In 2018, Rhode Island’s pension fund sued Google for covering up data breaches, compromising the personal information of 52.5 million users.

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