There’s so much cliche response to this filing as “typical PE playbook” as if PE intended to go bankrupt the whole time. As if the PE firm principals somehow get rich by bankrupting companies. So much misunderstanding and ignorant echo chamber repeating of this “well known fact.”
If the intention was to simply pocket management fees from investors, and then avoid the debt obligation that funded the whole enterprise, this was a tedious and expensive way to do that, and they didn’t have a lot of time, given the quick collapse, to pocket a lot of fees.
Unless your thesis is to buy distressed companies and sell them for parts, a PE fund gets rich by buying low and selling high. To another investor. The fees made along the way is just gravy, it’s not the meat of the potential payoff. So people need to stop buying into the dumb trope that “this is what PE does.”
A lot of bank debt was taken by Wheel Pros to fund the purchase of lots of brands, when bank loans were cheap. When interest rates started climbing, the Fed’s attempt to quell pandemic-caused inflation, their debt service suddenly started to get very expensive. Business bank lending is variable rate (except for mortgages). No one saw the pandemic coming. And no one saw the massively compromised supply chain issues during the pandemic, which hurt companies’ abilities to service demand (and get paid and service their debt) or the sudden drop in demand as the pandemic subsided (and interest rates did not).
This was the perfect storm.
And they’re not the only high profile bankruptcy caused by this sequence of events.
Yeah I think there's a lot of truth here, thank you for the insight. Wheel Pros obviously assumed a lot of risk absorbing all of these brands, and you're right that they couldn't have foreseen everything that happened in recent years. In particular the sudden drop in demand post-pandemic caused a lot more stress than people realize. It hasn't been well publicized.
I think the issue PE firms run into is that the leverage they put on companies requires high cash generation to repay debt. This works well with stable non-cyclical companies but gets tough when the business requires a lot of cash, for example to turn around the company. The high debt constrains what the company can invest in.
There’s so much cliche response to this filing as “typical PE playbook” as if PE intended to go bankrupt the whole time. As if the PE firm principals somehow get rich by bankrupting companies. So much misunderstanding and ignorant echo chamber repeating of this “well known fact.”
If the intention was to simply pocket management fees from investors, and then avoid the debt obligation that funded the whole enterprise, this was a tedious and expensive way to do that, and they didn’t have a lot of time, given the quick collapse, to pocket a lot of fees.
Unless your thesis is to buy distressed companies and sell them for parts, a PE fund gets rich by buying low and selling high. To another investor. The fees made along the way is just gravy, it’s not the meat of the potential payoff. So people need to stop buying into the dumb trope that “this is what PE does.”
A lot of bank debt was taken by Wheel Pros to fund the purchase of lots of brands, when bank loans were cheap. When interest rates started climbing, the Fed’s attempt to quell pandemic-caused inflation, their debt service suddenly started to get very expensive. Business bank lending is variable rate (except for mortgages). No one saw the pandemic coming. And no one saw the massively compromised supply chain issues during the pandemic, which hurt companies’ abilities to service demand (and get paid and service their debt) or the sudden drop in demand as the pandemic subsided (and interest rates did not).
This was the perfect storm.
And they’re not the only high profile bankruptcy caused by this sequence of events.
Yeah I think there's a lot of truth here, thank you for the insight. Wheel Pros obviously assumed a lot of risk absorbing all of these brands, and you're right that they couldn't have foreseen everything that happened in recent years. In particular the sudden drop in demand post-pandemic caused a lot more stress than people realize. It hasn't been well publicized.
I think the issue PE firms run into is that the leverage they put on companies requires high cash generation to repay debt. This works well with stable non-cyclical companies but gets tough when the business requires a lot of cash, for example to turn around the company. The high debt constrains what the company can invest in.
Thanks for laying out the facts, we need more reporting like this 👏
Happy to do it!