Job seekers: Beware Private Equity (2024)

This is a warning to all the job seekers in the Never Search Alone community and beyond: be careful in taking a job at private-equity owned companies.

Why?

Many (though not all!) have too much debt on their balance sheets creating increased risk for bankruptcy.

This is what happened to medical scrubs manufacturer Careismatics, which filed for bankruptcy this week.

I'll go over their numbers in more detail in a moment. Before I do, let me give you the big picture.

When interest rates were low, many PE-owned companies could handle the interest payments from their large debt burden.

But now with the Fed raising interest rates from 0% to 5.25%, many PE-owned companies are paying 3-4x what they were paying before (because most of the debt on PE-owned balance sheets is floating rate! - ouch) and for a growing number they can't handle those payments... and thus they can go bankrupt.

So, of course, I don't want you to take a job with a company that goes bankrupt six months later, putting you back out into the job search. That can really be emotionally hard - harder than continuing to look for something better (unless you need to put on the food on the table now – then by all means take whatever you can).

Bankruptcy risk is especially true for any PE-owned companies that received an upside shock to demand during the pandemic – many layered on more debt believing they had reached a new normal, only to see demand fall way back...just as the Fed was raising interest rates.

Be smart. If you are interviewing with a PE-owned company learn how to ask questions about the balance sheet, debt repayments, and especially the experience of the management team in riding through difficult moments.

That last point is important: depending on your role, you may not get access to the financials. But you can ask about the experience of the management team in hard times...and whether they have a plan to make it through this era of relatively high interest rates.

And don't just ask the company. Ask around. Try to find people who worked there or at a competitive firm. Gauge how the industry is doing in this post-pandemic high interest rate world.

Remember, this is one of the three key lessons in Never Search Alone: 'boss the process.' Don't be passive. You are in charge of your career including evaluating the financial strength of any company you join (if you don't know how to do that -- ask your Job Search Council or network for help).

Ok. Let's now dive into Careismatics.

Here are their revenues from 2019 to last year: (omitting 2022 because that number has not been made public)

• 2019 – $498M
• 2020 - $635M (big jump in first year of pandemic)
• 2021 - $687M (and another jump in year 2)
• 2023 - $559M (below 2020 and 2021...but normalized growth from 2019)

This kind of curve would not normally be a problem. They are still generating more revenues in 2023 than they were pre-pandemic.

The problem is, however, they took on more debt in 2021 to 'meet the demand' and total debt ended up being around $1.2 billion.

What interest rate did they pay on that? I don't have access to the exact numbers but a typical interest rate for PE debt in 2021 during the low interest rate era would have been 3%.

Today, that same debt (because again it's floating rate) would be 9% or 10% (in some cases even higher).

So, what happened to Careismatics?

Three things:

1. Fed started raising interest rates so Careismatics 'coupon' (or interest rate on their debt) went from around 3% to around 9% (again, again...key thing to know: most PE-backed companies have floating rate debt on their balance sheet - I know...insane)
2. Just as Fed was raising interest rates, revenues started to drop – meaning that the total amount of free cash flow decreased.
3. This was made worse by inflation, which drove up the costs of their raw materials...meaning their margins also decreased – giving them even less free cash flow.

So, if they had debt of around $1.2 billion and sales dropped to $559M in 2023 and their margins dropped to 10% (or possibly less), and their interest rate went up to 9%, then here's what their cash flow would have looked like:

$559 million * 10% margin = $59.9 million

$1.2 billion in debt * 9% interest rate = $108 million

So they generated $59 million to pay interest payments of $108 million. That obviously doesn't work. Therefore, bankruptcy.

Again, you may not have access to all this data (or find these numbers a little head-spinning).

Further, some PE-owned companies have little debt on their balance sheet and the little they have is fixed rate so their interest payments have not gone up.

I know one CEO who has run her company this way -- and has been through hard times before, so would have a great answer to your question: what's your experience managing through tough times.

Bottomline... the key lesson is: ask around. Get some sense of the financial strength of any company you plan to work for.

And, if you need a job and must take one with a firm you have questions about, then take it. But don't be passive. Keep looking out for yourself.

There will be more PE-company bankruptcies coming.

No one knows how many (this is a big debate in certain circles of Wall Street).

So, job seeker beware.

Good luck out there....and never, never, never search alone.

- Phyl

P.S. Links in comments to all of our free job seeker services run by our volunteer-driven community.