BusinessWeek Logo
A Painful Year for Private Equity

Getty Images

By David Bogoslaw

A Painful Year for Private Equity

Add private equity investments to the growing list of supposedly diversified asset classes that have been caught in the downward valuation spiral brought on by the financial crisis. Leveraged buyouts were the tool of choice among private equity funds that purchased 863 companies for a total of $559.5 billion between 2000 and the third quarter of 2008. With the deterioration of economic conditions over the past year and the collapse of credit markets, most of the companies taken over in these deals have seen their sources of cash flow drop sharply—and many have already defaulted on their outstanding debt, with more expected as the recession worsens in the coming months.

That will translate into big losses for private equity sponsors and delayed or substantially lower returns to their investors. It also means a much longer commitment by the funds to their portfolio companies than they bargained for, with little hope of exiting their investments any time soon through initial public offerings, sales to other companies in the same industries, or secondary private equity deals.

Here is a look at some of the deals that have gone sour for private equity this year—namely, the nine companies with the biggest outstanding amounts of long-term debt—and have resulted in debt defaults or bankruptcies for the companies they've invested in, based on data provided by Standard & Poor's Ratings Services and CapitalIQ (both of which, like BusinessWeek, are units of The McGraw-Hill Companies (MHP)). Note that current private equity sponsors aren’t responsible for this debt and stand to lose only their equity contribution to the original buyout, less any cash dividends they have taken through refinancing debt since the buyout. Prior private equity holders are more fortunate: They exited while the markets and economy were in much better shape.