Ascent of Private Capital Hampers Monitoring of Corporate Distress

By Daniel Kokini and John Yozzo

As restructuring professionals gear up for what could be a period of heightened engagement activity following the April announcement of a severe tariff regime by the Trump Administration and subsequent broad retreat across global financial markets, advisors are busy trying to identify the most impacted industry sectors and most likely corporate casualties of new U.S. tariff policies and the global response to their mutability and probable impacts. The likelihood of slowing growth or a U.S. or global recession has ratcheted higher within a month of the tariff announcements, according to the latest IMF forecast1 and a consensus of economists tracked by Bloomberg.

When combing through news story coverage in various business media and restructuring-oriented publications or otherwise screening for useful data and intelligence on potential restructuring candidates, something concerning has become obvious: Financial statement information and other quantitative data on many prospective names has been scant or absent from public sources and subscription services, with the problem worsening in recent years. This is not conjecture; it is verifiably accurate, with relevant data supporting the premise that comprehensive financial statement information and related disclosures for large U.S. corporations — the basis for evaluating business performance — is diminishing by the year as corporate privatization marches on.

The topic of fewer public companies got some attention about a year ago when JPMorgan Chief Executive Officer Jamie Dimon lamented in his annual letter to shareholders that public companies are experiencing a diminishing role in the U.S. financial system. He stated that the number of U.S. publicly owned companies peaked at 7,300 in 1996 but had shrunk to 4,300 by 2024, while private-equity-owned U.S. companies had increased more than fivefold in the last two decades to more than 11,000.2 These are attention-grabbing figures. Dimon used the topic to critique the causes that are discouraging companies from going public or staying public, including increasing filing and regulatory requirements; environmental, social and governance pressures and other shareholder activism; the outsize influence of proxy advisors; and unrelenting pressure from investors on quarterly performance and their obsessive focus on near-term results. Doubtless, these factors and others have contributed to an environment that might discourage public ownership.

Let’s state the obvious: The primary cause of this phenomenon is the unprecedented amounts of private capital — both equity and credit — that have accumulated in the 15 years since the end of the global financial crisis, as well as sought-out investment opportunities and returns that have resulted in many thousands of companies (both public and private) being purchased by private-equity sponsors and other investment funds, typically in leveraged buyout (LBO) transactions. This is hardly headline-making business news, but the inexorable ascent of private equity has reached a point where it has fundamentally changed the corporate landscape and the public’s visibility into it. Bain & Co. recently reported that global assets under management dedicated to buyouts has grown at 11 percent annually for two decades and is now $4.7 trillion compared to $600 billion in 2005.3

Notably, the buyout industry has grown so large that sponsors have been challenged since 2021 to monetize investments that have surpassed targeted holding periods. Traditional exit routes for mature sponsor-owned companies are not accommodating the potentially huge deal volume of investments that selling sponsors want to harvest at elevated exit multiples. The exit slowdown and growing challenge for private-equity sponsors to monetize mature investments and return capital to limited partners has been a prominent discussion topic in private-equity circles for the last few years.

An analysis of the privatization trend supports the impact of this phenomenon on the availability of corporate financial statement data, with the total number of large U.S. companies (annual sales exceeding $100 million) having publicly available financial statements dropping by 28 percent in the last decade, from 4,850 companies in 2015 to 3,480 companies last year, as shown in the exhibit below. This decrease coincided with a strong uptick in LBO activity from 2014-19, during which time nearly 1,400 large U.S. companies were taken private in LBO transactions financed by large broadly syndicated loans — a total that excludes most smaller and middle-market buyout deals.

One contributing reason that average market valuation multiples of major stock indexes have climbed above historic norms in the last decade arguably is the diminishing supply of public companies combined with the vast amounts of investment liquidity created by the Fed’s easy money policies, which prevailed until 2022. More investment capital is chasing fewer public companies.

The privatization trend among larger U.S. corporations typically means that target companies “go dark” shortly after their acquisition with respect to financial statement disclosures and other disclosures of material corporate events and developments. A termination of registration with the Securities and Exchange Commission (SEC) via a Form 15 filing is one of the first orders of business following a public-to-private deal closing. Reduced numbers of reporting public companies not only entails the loss of quarterly and annual financial statement filings with the SEC but also other key source documents provided in Form 8-K filings, such as credit agreements, bond indentures, earnings call transcripts and investor roadshow presentation decks. Moreover, the loss of institutional equity coverage by sell-side investment firms when a company goes private represents a critical loss of intelligence and analysis by a knowledgeable community of analysts.

Adding to the dearth of publicly available corporate intelligence, the vast majority of bond offerings by speculative grade issuers are unregistered Rule 144A issues (commonly referred to as “private placements”) sold to qualified institutional buyers, while a growing share of them in recent years are “Rule 144A for-Life” issues, meaning that they are issued without any registration rights and will never become registered issues with the SEC nor be subject to its disclosure requirements and other required filings.

Rule 144A issuances have fewer disclosure requirements than public bond offerings, while their underlying source documents (e.g., prospectus and indenture) and continuing disclosures to credit investors remain out of the public domain. Investor calls and presentations are confidential and restricted to securityholders. Reports produced by paid subscription services (e.g., Octus and CreditSights) that analyze performance or evaluate and score loan documents and bond indentures of private issuers are housed in secure datarooms and are inaccessible to subscribers, unless they can provide evidence of security ownership or are permissioned by the issuer or lender.

Lastly, coverage of speculative-grade debt issues by credit-rating agencies also has slipped this past decade, as leveraged credit-supporting buyout deals have leaned more heavily on secured loans — more often unrated — while many credit investors (notably CLOs) increasingly are comfortable with private credit estimates in lieu of a formal credit rating. It is estimated that 39 percent of U.S. broadly syndicated non-investment-grade term loans (as determined by loan-pricing spreads at issuance) made in 2015-16 had a Moody’s credit rating at issuance, compared to 33 percent of comparable loans made in 2023-24 — not an alarming decline, but certainly noteworthy.

Rating agencies have access to financial statement data, debt documents and management teams of issuers whose securities they rate, typically on a confidential basis, and the insights and analyses provided in their credit-rating reports and subsequent rating reviews of private companies often are the only source of comprehensive third-party intelligence for subscribers. Consequently, any diminished rating coverage of the corporate sector by the credit-rating agencies represents a loss of key intelligence for the business and investing communities. Cumulatively, these developments represent an increasing challenge for financial advisors and analysts to monitor and evaluate the performance of sponsor-owned companies and other large privately owned businesses, whose increasing numbers and penchant for opacity render more of the corporate landscape indiscernible to public scrutiny.

More concerningly, none of these trends show any signs of abating. PitchBook reported an astounding $1 trillion of “dry powder” (i.e., uninvested capital that needs to be deployed) held by U.S. private-equity sponsors at year’s end — nearly unchanged since 2022 — compared to $350 billion a decade earlier,4 while global private debt dry powder is approaching $600 billion. The increasing privatization of large U.S. corporations with respect to ownership and financing has been a gradual but steady buildup for many years whose cumulative effect has become impossible to ignore, and it will continue in the years ahead as private capital dry powder gets deployed. With the economic landscape becoming increasingly volatile at a time when corporate leverage is uncomfortably high while many earnings forecasts are coming under pressure, the need for restructuring professionals and others who are close to distressed corporate circles to survey the scene and peer through the corporate curtain is pivotal to effective lead-generation and the timely identification of business targets.

Market-Based Data Can Provide Actionable Intelligence

With the availability of public financial statement data and disclosures diminishing for large corporations as the privatization trend continues, restructuring professionals are challenged to find other ways to methodically identify and monitor business opportunities well in advance of a restructuring event. Being attuned to reporting coverage in relevant publications is insufficient and often untimely with respect to actionable business prospecting. A systematic screening approach using market-trading data is more likely to be productive in this effort. Most high-yield bonds and leveraged term loans trade regularly, and the signaling content of this market data can be utilized to formulate prospecting efforts under the presumption that markets for distressed-debt securities are efficient and reflect the collective judgment of institutional investors to events and business performance that might not be known publicly.

Market-trading data for distressed bonds and term loans is available via paid subscription services (e.g., Bloomberg and 9Fin). Users can create screens that search through thousands of corporate debt securities to identify ones that qualify as “distressed” and track them periodically. A commonly used definition of a distressed security is one that trades at a market yield (yield-to-maturity or YTM) greater than 1,000 basis points (bps) above comparable maturity Treasury securities,5 which currently would equate to a YTM of nearly 15 percent. However, there is no universal definition of “distress,” and users can define a threshold for a distressed security in any way they decide. Waiting until a security is trading deeply distressed, regardless of how one defines it, makes it less likely to be an actionable situation for prospecting advisors, since advisor roles often are filled by then. Identifying prospective targets when they are trading “stressed” rather than “distressed” provides more lead time to make inquiries and find inroads into these situations.

A market yield parameter, typically YTM, is a preferred metric for identifying stressed or distressed securities than a trading price, which can be misleading due to the mathematics of duration, a topic discussed at length in a previous article.6 During the COVID-19 era, interest rates were near record lows, as extreme monetary easing by the Fed drove down rates across the board. High-yield bonds issued during this period had very low coupon rates. As interest rates soared during the Fed’s monetary tightening cycle (QT), corporate bond prices in secondary trading markets had to fall in order to provide buyers with a prevailing market yield.

Duration math7 dictates that price declines will be more severe for low-coupon, long-dated securities (i.e., long duration bonds) than for bonds with higher coupons and/or shorter maturities. Consequently, many corporate bond market prices for long-duration bonds during the QT cycle were trading at very deep discounts to par value, yet these prices were not necessarily indicative of stress or distress. With market interest rates still high relative to 2019-21, duration considerations prevail for low coupon debt issued during the pre-QT period. For example, Kohl’s Corp., an erstwhile investment-grade credit struggling to implement a turnaround, has a 5.55 percent senior unsecured bond maturing in 2045 trading at 45 cents on the dollar that arguably is not distressed on a yield basis, with an imputed YTM of 13.8 percent.

In short, duration tells us not to be quick to judge a bond by its market price alone. For term loans, which typically are floating-rate obligations whose periodic interest rate payments adjust as the base reference rate (e.g., SOFR) changes, duration-related impacts on market prices are much more constrained because interest payments adjust periodically to provide a buyer with a market-yielding investment.

It should be noted that once an issuer enters the realm of deep financial distress and a restructuring event becomes a probable outcome, market-trading yields for bonds and loans, especially those lower in the capital structure, can lose intuitive meaning as security prices adjust to reflect their expected recovery value in a restructuring scenario rather than a yield return to investors. There is no bright line that makes this distinction evident, but a calculated YTM exceeding, say, 30-35 percent could be indicative of a security trading at expected recovery value rather than a risk-adjusted rate of return.

Screens used to identify lists of stressed and distressed securities should also sort output results by industry sector to ascertain what industry groups are experiencing disproportionate shares of distress relative to the entirety of relevant securities. Stressed and distressed yields for individual securities and industry groups should be tracked and compared over time to detect meaningful changes in YTM and trending results. The user should be able to quantify what industry sectors have securities trading with more stress or distress over a defined time period, such as the automotive-related sector since the tariff announcements. This might be common knowledge from story-reporting coverage, but tracking these developments indirectly via market-driven screens allows users to do this is in a more regimented and timely manner.

Public reporting by the large corporate sector has diminished steadily over the past decade or so, and restructuring professionals often must contend with a paucity of financial intelligence available to them, despite the surge of reporting services dedicated to covering restructuring activity. Market-trading data can be a useful proxy for fundamental financial data, but it is an imperfect substitute. Many high-yield bonds and leveraged loans do not necessarily trade regularly or robustly. Security market data can be spotty or stale and is sometimes misleading, but much more often it is a dependable signaling tool that analysts can use to make sense of corporate events and developments that are not readily transparent or knowable to outsiders.

Daniel Kokini is a senior managing director in FTI Consulting, Inc.’s Corporate Finance and Restructuring Practice in New York and a 2024 ABI “40 Under 40” honoree. John Yozzo is a managing director in the same office.