Moody’s warns that private equity assets are struggling to pay off heavy debts.

Moody’s reported on Thursday that private equity groups such as Platinum Equity, Clearlake Capital, and Apollo Global struggle with their heavy debt loads.

In a recent analysis, the agency noted that the recent rise in interest rates has put some of the fastest-growing PE firms in the US under pressure.

The report said that more than half the companies in Platinum and Clearlake’s portfolios, both based in Los Angeles, were at high risk of default with a B3 rating or lower.

Moody’s reported that Clearlake, which is a co-owner in Chelsea Football Club and Platinum, had the highest leverage of all the companies it surveyed. Other firms had started to reduce their debt load.

In recent years, the two groups have received tens or hundreds of millions of dollars from North American institutional investors. They are now no longer niche middle market firms but dealmaking powerhouses.

Clearlake’s assets have grown from $1bn to $90bn since 2008. Platinum’s assets have nearly quadrupled to reach almost $50bn.

The report revealed that portfolio companies from the top 12 buyout groups defaulted on loans at a rate twice that of companies that were not backed by private capital.

Apollo Global, Ares Management and other private capital giants have seen their buyouts suffer. Moody’s said that nearly a quarter (24%) of Apollo-owned firms it rates since 2022 have defaulted, and 47% of Ares-backed businesses they follow are in distress.

Platinum did not respond immediately to requests for comments. Moody’s has a broad definition of default, which representatives of Apollo and Clearlake have disputed.

Ares Management’s representative declined to comment.

The industry was hit by one of the fastest interest rate increases of the last generation. This brought down valuations which had been soaring during the pandemic, and pounded the balance sheets for thousands of private equity-backed highly leveraged companies.

More than a third (35%) of Platinum-rated companies were restructured or defaulted on their debt between January 2022 to August this year. 17 per cent of Clearlake’s portfolio experienced the same result.

Clearlake has also become an active user in the so-called continuation fund, wherein the group sells its company to themselves and other investors. This is a novel deal that will be put to the test by higher interest rates.

In early this year, Clearlake’s biggest fund-to-fund deal, Wheel Pros for car parts, filed for bankruptcy. Moody’s said that it regarded similar deals made by the group for software companies such as Symplr as distressed.

Private credit is growing rapidly, and this has made it difficult for rating agencies to keep track of these loans. They are harder to track than traditional borrowing methods.

The agency stated that due to the difficulty in analyzing the data, many buyout groups, including Vista Equity Carlyle, and Thoma Bravo, which were historically among Moody’s most frequently rated companies within the US, have “almost disappeared”.

Julia Chursin said that private credit could “mask certain issues” within a firm’s portfolio. Private credit firms may absorb some opaque credit risks, even though they claim to only select the best ones.