Private Equity Roll Ups Keep Ending in Bankruptcy
A private equity roll up means buying one company in a fragmented industry, then acquiring 10, 20, or 50
A private equity roll up means buying one company in a fragmented industry, then acquiring 10, 20, or 50 competitors to create a dominant player. Buy a platform veterinary clinic, roll up 30 more. Acquire a restaurant chain, consolidate 15 others. Take a home services company, absorb the competition.
The strategy promises massive returns through economies of scale, centralized operations, and market dominance. In practice, it produces spectacular bankruptcies.
During Q1 2025, seven out of ten bankruptcies at companies with over a billion dollars in liabilities happened at private equity owned firms. In 2024, private equity roll up strategies drove 56 percent of large corporate bankruptcies despite PE firms controlling just 6.5 percent of the U.S. economy. Research shows 60 percent of private equity roll up strategies fail to meet projected synergies within two years.
Private equity backed companies are ten times more likely to go bankrupt than companies without PE ownership.
How Roll Ups Are Supposed to Work
The pitch makes sense on paper. Most industries have hundreds of small, independently owned businesses. Car washes, dental practices, HVAC companies, restaurants. Each one operates with its own systems, suppliers, and overhead.
A private equity firm buys one strong performer as the platform, then starts acquiring competitors. Consolidate back offices. Negotiate better supplier contracts. Standardize operations. Fire duplicate staff. The combined company should be worth far more than the individual businesses because of these efficiencies.
Between 2014 and 2024, PE firms invested 94.5 billion dollars into restaurants and bars using this strategy. In the lower middle market, roll ups accounted for over 80 percent of all PE deals. Healthcare, retail, and professional services saw similar consolidation.
The model assumes that buying ten businesses and combining them creates value. The data shows it usually destroys it.
The Debt Problem
Private equity firms finance roll ups with massive leverage. A typical deal uses 80 percent borrowed money. The PE firm contributes 20 percent, borrows the rest, and makes the acquired company responsible for paying it back.
Toys R Us shows how this kills businesses. In 2005, KKR, Bain Capital, and Vornado bought the toy retailer for 6.6 billion dollars. They contributed 1.3 billion. The rest was debt that Toys R Us had to repay.
Overnight, the company owed 450 to 500 million dollars annually just in interest. Before the buyout, Toys R Us had 2.2 billion in cash reserves. By 2017, that dropped to 301 million. The company spent more on debt payments than on its stores and website combined.
When Toys R Us filed for bankruptcy in 2017, it still controlled 20 percent of U.S. toy sales. The business worked. The debt load did not. The company liquidated in 2018, laying off 33,000 employees.
Red Lobster followed the same path. Golden Gate Capital acquired the chain in 2014 and immediately executed a sale-leaseback. They sold 500 restaurant properties for 1.5 billion dollars, then forced Red Lobster to lease them back at above-market rates. Red Lobster went from owning its real estate to paying escalating rent while servicing acquisition debt. Bankruptcy came in 2024.
The Bankruptcy Numbers
In 2024, private equity backed companies made up 11 percent of all U.S. bankruptcies but 56 percent of large bankruptcies over 500 million dollars in liabilities. These failures resulted in at least 65,850 layoffs.
Healthcare tells the story clearly. PE firms caused seven of the eight largest healthcare bankruptcies in 2024, and 21 percent of all healthcare bankruptcies. In retail, 40 percent of bankruptcies between January 2015 and April 2017 involved PE-owned chains.
Restaurants saw 21 bankruptcy filings in 2024. Ten were PE-backed. TGI Fridays filed after Sentinel Capital Partners acquired it in 2019. Party City, 99 Cents Only, Claire’s, Payless ShoeSource, Gymboree, and Wet Seal all went bankrupt under PE ownership.
Credit agency Moody’s rates companies by default risk. As of October 2024, PE portfolio companies represented 73 percent of the most speculative companies rated B3 negative or lower. These companies face the highest probability of defaulting on obligations.
The Synergy Lie
Roll up presentations promise synergies. Combine five companies, cut duplicate overhead, save 30 percent on costs. Centralize purchasing for better supplier terms. Standardize systems across locations. Simple.
Parkway Capital found that 60 percent of PE-backed roll ups fail to meet projected synergies within two years. The CEO gets pulled from running the business to hunt acquisitions and manage integrations. With 78 percent of PE-backed CEOs reporting burnout from this juggling act, core operations suffer.
Integration takes longer and costs more than projected. Different locations use incompatible systems. Cultures clash. Key employees leave. The promised 30 percent cost savings becomes a 10 percent cost increase while revenue drops from operational chaos.
Time works against PE firms. Most funds underwrite 25 to 40 percent internal rates of return. They need to triple their money in five years. Delays that seem reasonable in normal business kill the financial model when you’re racing the clock.
PE Firms Win Even When Companies Fail
The incentive structure explains the bankruptcy rate. PE firms extract value through management fees, transaction fees, and debt-funded dividends before any exit. When portfolio companies fail, the firms often still profit.
KKR and Bain collected millions in fees from Toys R Us throughout ownership. When bankruptcy hit, they lost their equity but had already recovered their initial investment through fees. The 33,000 laid-off employees got no severance initially. After public outcry, the PE firms created a 20 million dollar fund, a fraction of what they extracted.
Leonard Green and Partners demonstrates the pattern. The firm owned Joann fabric stores when it filed for bankruptcy in March 2024. The company stabilized briefly, then filed again in January 2025 and liquidated, laying off 19,000 workers. Leonard Green also backed Prospect Medical Holdings, which filed for bankruptcy in January 2025 with over 400 million in debts, and The Container Store, which went bankrupt in December 2024.
Leonard Green extracted debt-funded dividends during ownership of all three. The companies carried unsustainable debt loads. The PE firm took its returns from financial engineering, not operational improvements, and walked away before the bankruptcies.
What Actually Kills Roll Ups
First, most roll ups target mature, low-growth industries. Restaurants, retail, healthcare services. These industries face structural pressures from changing consumer behavior, technology disruption, or market saturation. Adding debt doesn’t solve these problems. It removes the company’s ability to adapt.
Second, PE fund timelines don’t match business reality. Building an integrated multi-location business takes five to ten years. PE firms need exits in three to seven. This forces premature sales, more debt to fund dividends, or fire sales that destroy value.
Third, the leverage eliminates margin for error. A company with modest debt can weather a bad year or invest in changes. A company spending 40 percent of revenue on debt service cannot. One mistake becomes a death spiral.
Fourth, incentives reward extraction over building. PE firms make money from fees and leverage-driven returns. When a portfolio company struggles, the response is more debt, more fees, and eventually bankruptcy that wipes out creditors while the PE firm’s earlier extractions stay protected.
The Pattern Continues
In Q1 2025 alone, bankruptcies included Forever 21, Prospect Medical, and Joann Craft Stores. Joann filed for bankruptcy twice within a year before liquidating. All three were PE-owned. More are coming.
Private equity has 2.5 trillion dollars in dry powder waiting to deploy. Roll up strategies remain popular because they work for PE firms, not because they work for businesses. The model delivers returns to fund managers through fees and financial engineering while loading portfolio companies with debt they cannot service.
For every successful roll up that creates a sustainable business, five or six collapse under leverage and fail to achieve projected synergies. The PE firms move on to the next deal. The employees, suppliers, and customers absorb the losses.
The data is clear. Private equity roll up strategies fail at a rate that would be unacceptable in any other business model. But when the people making decisions profit regardless of outcomes, the bankruptcies will continue.
Sources
- PE Stakeholder – Private Equity Bankruptcy Tracker 2024
- PE Stakeholder – Q1 2025 Bankruptcy Data
- Opus Connect – Roll-Up Strategy Insights and Pitfalls
- Cherry Bekaert – Private Equity Report 2024 Trends
- In These Times – How Private Equity Killed Toys R Us
- The American Prospect – Private Equity Looting
- CNBC – Red Lobster and TGI Fridays Bankruptcies
- Harvard Business School – Breaking Down Toys R Us
