It’s okay to ask for help sometimes—like when you’re short on lunch money and a friend covers you. Eventually, though, they’ll expect to be paid back. Business credit works the same way: it’s a relationship built on give and take.
When risk is high and traditional lending dries up, many companies turn to private sources for support. That’s where private equity (PE) comes in—firms that invest in private companies, take an active role in managing them, and aim to sell them at a profit down the line.
Why it matters: While private equity can provide capital and strategic support, extending credit to private equity-owned companies introduces additional risk—both for the business and its investors.
How does private equity work?
Private equity refers to ownership of companies or assets not publicly traded, with the goal of increasing value and eventually exiting at a profit. Private equity funds are typically structured as limited partnerships, in which the private equity firm acts as the general partner (GP), managing investments, while institutions and accredited investors serve as limited partners (LPs) providing capital.
Risks of private equity-owned companies
Although private equity firms can offer flexible financing, they don’t guarantee a healthy business. Many private equity-owned companies are debt-laden, particularly through leveraged buyouts (LBOs), where acquisitions are largely debt-funded using company assets as collateral.
“Often that debt isn’t used to improve operations or the business in general,” said Ryan Steiner, corporate credit manager at Olympic Steel, Inc. (Bedford Heights, OH). “With the price of interest rates, that debt can be quite a burden for many companies.”
A private equity-owned company may have to make dividend recapitalization, paying a dividend that includes a return of capital to shareholders, which further increases debt for the company. In addition, they may be required to sign a sale-leaseback, a financial arrangement where a company sells an asset and then immediately leases it back from the buyer. Leasing transfers some risks associated with ownership, like maintenance and depreciation, to the lessor. In this case, credit managers must perform thorough diligence on the tenant’s financial outlook to ensure the lease payments will be met.
Private equity-owned companies may face excessive management fees imposed by their private equity firm, increasing their financial burden and credit risk. “Sometimes the fees are manageable but other times, they can be massive and a major disruption to cash flow,” Steiner said during the Credit Congress session, Private Equity: Risk and Reward.
Because of these risks, private equity-owned companies are 10 times more likely to go bankrupt than other companies, according to The Atlantic. In 2024, PE-backed companies—despite representing just 6.5% of the U.S. economy—accounted for 11% of all corporate bankruptcies and 56% of large ones, according to PESP.
Safeguard against risk
To safeguard against risk associated with private equity-owned customers, credit professionals must do their research and ask the right questions. During the credit investigation, they must analyze the customer’s financial statements, as they can reveal any liabilities or dividends made to a private equity firm. It helps to check the company website to see if it says anything about being partnered or acquired by a private equity firm.
Researching the private equity firm can help you evaluate the risk of doing business with a private equity-owned company. For example, a private equity firm’s website and portfolio may provide insight into its track record with companies. With larger firms, you can see which of their acquisitions have gone bankrupt and which ones have had more success. “The portfolio won’t always tell you the whole story, but it will give you enough information to gauge whether or not this acquired company is one you want to invest heavily with a line of trade credit,” Steiner said.
Preparing both the sales and credit teams is also key to minimizing losses. “Make sure that everyone who is involved in the sales process knows the risks of dealing with private equity so that they’re not caught off guard if you are recommending much more restrictive credit access than you might typically do with a similar customer type,” said Steiner.
The bottom line: Private equity can be a valuable source of capital and growth, but it often comes with increased financial complexity and risk. For credit professionals, success depends on thorough due diligence—understanding the ownership structure, scrutinizing financial health and preparing internal teams to manage heightened risk. With careful research and clear communication, you can navigate the challenges of working with private equity-owned companies.
