What happens when a private-equity shop fails? Boston Consulting Group thinks that will happen a lot in coming years:
The consultants expect 50% of all companies backed by private-equity funds to default on their debt; as many as 40% of buyout firms to shutter their own operations and only around 30% of partnerships to survive intact through the next few years.
A private-equity shop which loads up its portfolio companies with too much debt naturally stands to lose control of those companies if and when it fails to service the debt. That’s not a major problem, especially if the companies in question have good businesses: if done well, bankruptcy doesn’t mean closing down, it just means a change of ownership.
But what happens when the PE shop itself closes down? Who manages the portfolio companies which haven’t gone bust? Do they just get liquidated or sold off in fire sales, with the proceeds then given to the limited partners? That could be very bad indeed. But with their portfolios underwater and little prospect of performance fees in the future, it’s easy to see why the general partners might want to give up the hard work of running their portfolio companies and retire to an island somewhere instead on all the money they’ve trousered thus far.