Forbes - The bankruptcy threat to PE

In a bid to curb inflation, the Federal Reserve signaled plans earlier this month to raise rates several times throughout the rest of 2022, potentially reaching 2% or more. It will be the first rate increase in more than three years. Which means it will be the first time many current private equity portfolio companies are asked to operate in an environment where debt is not so cheap as to be basically free.  

What will it mean for private equity? I published a story this week digging into some of the potential implications, including one possibility firms find particularly scary: a rise in PE-backed bankruptcies. One expert told me he expects the rate of bankruptcy filings to begin ticking up by the middle of the year. 

Markus Lahrkamp leads the private equity performance improvement group at advisory firm Alvarez & Marsal. With wages and other labor costs rising, he expects many manufacturing and industrial companies to focus on automation and shift at least some of their operations from China to Mexico. Such moves could have two motivations: reducing costs and supply-chain delays, and avoiding the geopolitical tensions across Europe and Asia that the war in Ukraine has intensified. 

“Mexico is going to have a huge influx of business,” Lahrkamp says. “Not only because of the need to produce cheaper for the U.S., but also because China is becoming what I would call a very risky proposition.”  

Glenn Mincey, who leads the private equity tax practice at KPMG, said rising rates will shine a spotlight on the need for portfolio companies to manage costs. The fight to find new efficiencies could lead to a greater reliance on data analytics, with companies relying on specialized software to trim the fat from corporate budgets. 

“They have to be really, really specific and surgical,” Mincey says. But the bid to reduce costs will be complicated by inflation and other factors. Like Lahrkamp, he thinks the supply-chain snarls of the pandemic will have lasting strategic effects for companies that make, ship or sell physical products. “They’re going to change from the just-in-time supply chain to a much more resilient one,” he says. “And that’s going to, in and of itself, increase costs.”

Mincey also spoke about how inflation and rate hikes could cause private equity firms to get creative in a bid to win over workers. He pointed to KKR’s novel employee stock strategy, which gives workers at industrial companies like Ingersoll Rand an equity stake in the business. In a tight labor market, the initiative’s early successes might spark imitators. 

“That gives you much more productive employees, right, ones who act like an owner rather than just a line employee,” Mincey says. “I think you’re going to see innovations like that, that we maybe didn’t expect before.” —K.D.

That’s a pretty big haircut for a startup that has raised $2.9 billion in venture funding from notable names including Sequoia, Khosla Ventures and Andreesson Horowitz. The startups said the cut will make existing employee stock options more valuable and could help attract talent, as stock options are part of the startup’s compensation package. 

Instacart isn’t the first company to do this in recent months, either. Last month, Philadelphia-based Dbt Labs, which creates an open-source data analytics tool, raised $222 million at a $4.2 billion valuation. Our colleague Kenrick Cai scooped that the startup had originally set out to raise at a $6.2 billion valuation at the end of last year. (The company’s response for the lower valuation, too, was that it also wanted employee stock options to keep their value.)

If the froth in the public and late-stage venture markets continues, I’m sure these two examples will be the first of many. —B.S.

The Carlyle Group and PAI Partners agreed to buy Theramex from CVC Capital Partners, with Bloomberg reporting a $1.4 billion price tag. Theramex specializes in reproductive health, offering care related to fertility, contraception, menopause and more. Separately, multiple outlets are reporting that KKR is closing in on a deal to buy reproductive medicine group Ivirma Global at a valuation of between €2.5 billion and €3 billion ($3.3 billion). Based in Spain, Ivirma operates a chain of fertility clinics and laboratories that spans nine countries. —K.D. 

— Black News Channel abruptly shut down last week and laid off all of its 230 employees. The Tallahassee-based startup cable news channel had secured $50 million in funding in 2019 from Jacksonville Jaguars owner Shahid Khan. The Los Angeles Times reported that the billionaire declined to fund the startup further. 

— HP agreed to pay $1.7 billion to acquire Poly, a maker of headsets, desk phones and other communications products for both in-person and remote workplaces. The price of $40 per share is 50% higher than the closing price of Poly shares Friday; including debt, the deal values Poly at $3.3 billion.

— London-based Casual raised a $20 million Series A round for the development of a spreadsheet that it says offers more data integration and fewer formulas than competitor Microsoft Excel. The round was co-led by Accel and Coatue with participation from FTX founder Sam Bankman-Fried, among other angel investors. 

— Pamplona Capital Management said last week that it will liquidate three private equity funds that had raised capital from sanctioned Russian billionaires, an “irrevocable” process that could include both secondary sales and exits from direct investments. Pamplona had reportedly raised nearly $3 billion from LetterOne Holdings, a vehicle cofounded by Mikhail Fridman and Petr Aven.

— Kyle Lui is the latest venture investor to ditch a storied firm for a younger shop. The former partner at DCM announced that after almost eight years, he’s leaving to become the second general partner at Bling Capital. In his time at DCM, Lui invested in companies including DocSend, SoFi and Lime.

— British fashion retailer Ted Baker said it has rejected two recent takeover proposals from Sycamore Partners, one worth 130 pence per share and one worth 137.5 per share. The company believes it is worth far more, but for now, at least, shareholders disagree: Ted Baker shares were down some 2.5% today, dropping its market cap to £227 million ($298 million).

— SteelSky Ventures raised $72 million for its debut fund to focus on digital health companies targeting women. The Atlanta-based firm is one of the few and largest venture funds with a Black woman at the helm, Maria Velissaris. The fund was backed by strategic investors including the American Hospital Association, Eli Lilly and Blue Shield of California, among others.

— Intermediate Capital Group raised €1.5 billion ($1.65 billion) for its debut infrastructure fund, topping a €1 billion target. ICG is a publicly traded manager that claims $71 billion in assets across a range of strategies, including private equity and private debt. It has already deployed €1 billion from the new infrastructure vehicle.

Apparently the Amazon aggregator industry has gotten so hot that investors are willing to threaten startups and fabricate documents in an attempt to get into an oversubscribed deal. (Sifted) 

The inside story of how the Blue Man Group was born—and how it morphed into a unique cultural phenomenon. (Vulture)

Investors aren’t taking board seats at crypto startups like they would at companies in other sectors. This move protects investors from some liability on risky projects but also means these companies largely operate with very little oversight. (Financial Times)

The pandemic-era loosening of prescription drug rules was a boon to some telehealth startups following a familiar Silicon Valley playbook. (Wall Street Journal)

Startups are looking to create wearable tech so that people can feel pain while in the metaverse. (Financial Times) 

A detailed profile of Rohit Chopra, the 40-year-old financial watchdog who’s at the forefront of a new generation of regulators in Washington, D.C. (American Prospect)

Physicist Sankar Das Sarma is pro quantum computing. He’s written more than 100 technical papers on the subject. He also thinks it’s the most overhyped sector in tech right now. (MIT Technology Review)