Private equity firms cause major bankruptcies in the restaurant industry

In 2024, the American restaurant and bar industry experienced significant turmoil, with 21 chains filing for bankruptcy. This wave of financial distress disproportionately affected establishments backed by private equity, as ten of the bankruptcies were linked to these firms. Notably, casual dining giants Red Lobster and TGI Fridays were among those that failed to navigate their financial challenges successfully. Private equity has significantly increased its presence in the restaurant sector, investing approximately $94.5 billion between 2014 and 2024. However, reports indicate that companies under private equity ownership are statistically more prone to bankruptcy. Brendan Ballou, author of 'Plunder: Private Equity's Plan to Pillage America,' highlighted a pattern where private equity firms often employ short-term, extractive strategies that can adversely affect the long-term viability of restaurant businesses. Two common tactics utilized by these firms, leveraged buyouts, and sale-leasebacks have been particularly criticized. Leveraged buyouts involve purchasing a company chiefly through borrowed funds, which leaves the acquired company responsible for paying back this debt. Moreover, sale-leasebacks entail selling a company's property while the business is forced to lease it back, creating additional financial pressure. These strategies have raised significant concerns regarding their impact on the operational viability of companies like Red Lobster. The consequences of these strategies were evidently detrimental when examining Red Lobster's situation. The company found itself burdened by repayment obligations and elevated rents imposed by its new property owner, compounding its financial difficulties. Industry experts noted that this dual pressure created a precarious scenario for many chains. Although private equity can sometimes infuse much-needed capital into struggling concepts, the overarching trend suggests that the financial health of many restaurant businesses may suffer under private equity ownership, ultimately jeopardizing their long-term sustainability.