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There’s been at least 35 liability management exercises this year with sponsor-backed companies accounting for three fourths of said transactions launched in the US. 9fin will be compiling data on specific sponsors and the frequency and type of LMEs they have engaged in, and reporting that in a series of profiles.
9fin will start with a deeper look at Clearlake. According to a new report by Moody’s, in which they analyzed rated portfolio companies of the 12 largest private equity firms held over the past two years, Platinum Equity had 58% of its rated and owned deals in distressed territory, followed closely by Clearlake with 55%.
A 9fin review of Clearlake’s portfolio companies shows that at least 11 of the 50 “current investments” listed on the company’s website carry debt that trades below 85 cents on the dollar — the metric we’re using to define distress here (as opposed to ratings as used by Moody’s). Distress is concentrated in the private equity firm’s sixth buyout fund, which contains at least six distressed companies.
While no longer listed as a current investment, Hoonigan (fka WheelPros) only recently left that list following its bankruptcy filing in September. A year before it filed, the aftermarket tire seller engaged in a double dip LME transaction (more on that here).
The Hoonigan LME fits a pattern. Clearlake has demonstrated a willingness to engage in LMEs in order to preserve its equity investments. Clearlake had no comment for this story.
Source: Clearlake, 9fin, Bloomberg
Clearlake was founded in 2006 by José Feliciano, Behdad Eghbali and Steve Chang. Chang has since departed the firm, but billionaires Feliciano and Eghbali remain at the helm. The private equity firm they built — which focuses on the technology, consumer and industrial sector — is known for its successful 2022 bid for Chelsea Football Club alongside Todd Boehly, which catapulted the investment shop to heightened prominence.
Clearlake’s strategy was designed to mix traditional buyouts with distressed debt investing, according to a report by the Financial Times. The strategy has historically succeeded in delivering outsized returns for Clearlake and its investors. This performance is disclosed by state pension fund LPs: For one, Connecticut had committed $575m to Clearlake private investment funds as of April 2024, and a report by Connecticut Retirement Plans and Trust Funds chief investment officer Ted Wright recommended a further commitment of up to $200m to Clearlake’s Fund VIII.
“The Clearlake Capital Partners Funds have consistently generated attractive absolute and relative returns,” the recommendation reads.
According to Wright’s report, Clearlake funds II through VII generated a gross total value multiple of 1.9x and internal rate of return of 34% on more than $25bn of invested capital as of 31 December 2023. Those results compared favorably to fund performance metrics followed by the state.
Whether that will continue is uncertain: The Moody’s report focused on defaults by private equity-backed companies between 2022 and August 2024 found Clearlake’s portfolio companies had an average portfolio leverage ratio of 8.6x, the highest among the 12 private equity firms examined by the credit rating agency.
Additionally, Clearlake portfolio companies sported the greatest share of credit downgrades out of that cohort. Moody’s observed an above average default rate among Clearlake portfolio companies, with five defaults among 30 companies examined.
Source: 9fin sources. Note: The proportion is calculated as realized value over total value
Fund VI exemplifies some of the challenges within Clearlake’s broader portfolio. Clearlake announced it had closed the fund in April 2020. In a statement, it touted that the fund was oversubscribed, seeking to raise $5bn and instead hitting the hard cap with more than $7bn. That brought assets under management at the firm to $18bn. (Since then, AUM has ballooned past $80bn, according to its website.)
As of 31 December 2023, Fund VI’s net internal rate of return clocked in at 24% while its total value to paid-in multiple — an important performance metric early in a PE fund’s lifecycle — came in at 1.7x. That’s according to a report on Clearlake and its performance prepared by private market investment firm Hamilton Lane on behalf of the state of Connecticut.
Clearlake’s sixth buyout fund faces a unique challenge compared to its other investment vehicles. It was raised during the period of low interest rates and economic growth that preceded the Covid-19 pandemic. The Federal Reserve brought rates even lower in response to widespread economic shutdowns, allowing private company multiples to flourish.
But since then, inflation has forced the Fed to change course and hike interest rates, putting pressure on private equity portfolio companies levered up with variable rate debt.
The Fund VI investments exhibiting signs of distress so far are Valcour Packaging (dba MRP Solutions), Newfold Digital, Quest Software, RSA, Springs Window Fashions, and Wellness Pet Company. Of those investments, four were made in 2021 — the year before the Fed started its hiking cycle.
9fin has reported on creditors organizing in the case of Springs Window and Wellness Pet. Valcour engaged in a debt swap earlier this year that included $113m of new money after lenders to the plastic packaging maker organized.
Companies tied to Clearlake’s prior buyout fund have also experienced pressure. In addition to the Hoonigan bankruptcy, specialty chemical manufacturer Alkegen (aka Unifrax) entered into a distressed exchange announced in late September.
To be sure, none of the Fund VI investments are struggling in the same way as Hoonigan. But the portfolio’s current signs of distress point to the potential for further liability management exercises that could result in worse outcomes for creditors excluded from those transactions.
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