Private Equity is transforming the face of American business. From sprawling retail chains to regional healthcare systems, the quiet but aggressive advance of private equity has reshaped how companies are acquired, managed, and, all too often, driven into financial distress. At the heart of this transformation are two financial tools: the leveraged buyout (LBO) and the increasingly controversial back floating rate loan (BFLR).

These tools, while legal and often lucrative for investors, have had severe consequences for employees, customers, and communities. The recent collapse of Joann Fabrics, once a profitable and loved American craft retail store, illustrates how private equity can extract maximum value for owners while leaving the underlying business burdened with unsustainable debt.

The Joann Fabrics Case: A Cautionary Tale

In 2011, private equity firm Leonard Green & Partners (LGP) acquired Joann Fabrics in a $1.6 billion leveraged buyout, using debt placed directly on Joann’s balance sheet to fund the acquisition. Joann, not LGP, bore the responsibility of repaying this debt. By the time Joann went public again in 2021, it was still carrying approximately $800 million in debt (Fortune, 2025).

Joann filed for Chapter 11 bankruptcy in 2024 and again in 2025. Despite store-level profitability, the company’s financial structure, rooted in its LBO, left it with insufficient cash flow to manage its liabilities. This included not only bondholder repayments but obligations on back floating rate loans, which calculate interest based on retrospective performance, compounding financial uncertainty (GlobeNewswire, 2024).

The firm attempted restructuring by reducing $505 million in funded debt and selling off its headquarters and distribution centers through sale-leaseback agreements (Retail Dive, 2024). But these efforts weren’t enough to overcome a structurally flawed capital stack. Joann entered 2025 with $615 million in remaining debt and over $130 million in unpaid vendor obligations (Fox13, 2025).

Why Private Equity Uses LBOs and BFLRs

A leveraged buyout allows private equity firms to purchase companies primarily using borrowed money, minimizing their own capital at risk. This strategy can amplify returns if the company performs well but leaves the company, not the private equity owner, on the hook for repayment.

Back floating rate loans further complicate the situation. Unlike traditional loans with predictable interest costs, BFLRs calculate interest at the end of the term based on average performance of a benchmark like SOFR (Secured Overnight Financing Rate). In periods of rate volatility or financial stress, this can sharply increase interest obligations at the worst possible moment.

Together, LBOs and BFLRs create a situation where companies face high fixed costs and unpredictable debt servicing requirements, while the private equity owners often extract value through management fees, dividends, or partial exits via IPOs.

Are PE-Owned Companies More Likely to Default?

A 2020 study by Ayash and Mahoney in the Review of Finance found that companies acquired through LBOs are twice as likely to file for bankruptcy within 10 years than comparable public firms. Similarly, a 2023 analysis by Americans for Financial Reform showed that over 10 major retail chains driven into bankruptcy over the last two decades were owned by private equity, including J.Crew, Toys “R” Us, and 99 Cents Only.

A recent CFA Institute article titled “Private Equity: In Essence, Plunder” (2024) points out that the probability of default among PE-backed companies is not only higher but is growing. This is due in part to increased use of BFLRs, which transfer more risk to the acquired company while protecting the return profile of the private equity sponsor.

Growth of PE Activity and Risk Amplification

According to PitchBook’s 2023 PE Report, private equity deal activity in the U.S. reached $1.2 trillion in transaction volume, a record-setting figure. Much of this growth is happening in traditionally stable sectors like healthcare, education, and infrastructure, where the failure of a provider has outsized public impact.

The rise of non-bank direct lending, particularly from private credit funds, has accelerated the use of back floating rate loans in deal structures. This trend enables private equity firms to bypass traditional regulatory oversight, since these private lenders are not subject to the same capital reserve or disclosure requirements as traditional banks. According to the European Systemic Risk Board (2024), the rapid growth of non-bank credit intermediation has led to higher leverage profiles and reduced transparency, amplifying systemic risk in key sectors. A 2024 report by the Oliver Wyman Forum similarly concludes that private credit has “rewired the corporate financing machine” in ways that often prioritize returns over resilience.

The Success Stories

To be fair, not all private equity-backed LBOs are failures. For example:

• Hilton Hotels: Acquired by Blackstone in 2007 for $26 billion via an LBO, Hilton initially struggled during the 2008 financial crisis but rebounded. Blackstone took Hilton public in 2013, realizing a $14 billion profit (Bloomberg, 2014).
• PetSmart/Chewy: BC Partners acquired PetSmart in a 2015 LBO, then spun off its e-commerce arm, Chewy, in a highly successful IPO in 2019, creating enormous shareholder value (WSJ, 2019).

These cases illustrate that when PE firms invest in operational improvements and take a longer view, outcomes can be positive. However, they remain exceptions rather than the rule.

What This Means for the U.S. Economy

With nearly 11,000 PE-backed companies in the U.S. employing over 11 million workers (Private Equity Stakeholder Project, 2023), systemic exposure is significant. If even a fraction of these firms default due to unsustainable debt, the ripple effects could resemble a slow-moving financial crisis:

• Job Losses: Closures of PE-owned retailers like Toys “R” Us and 99 Cents Only led to over 100,000 job losses combined.
• Supply Chain Shocks: Defaults often leave unpaid vendors, many of whom are small businesses.
• Community Impact: Store closures and facility shutdowns reduce local tax bases and erode civic infrastructure.

Private equity firms are often insulated from these consequences due to limited liability structures, allowing them to walk away while communities bear the cost.

Is There a Solution?

Legislators are beginning to pay attention. The proposed Stop Wall Street Looting Act, reintroduced in 2023, aims to hold PE firms more accountable by limiting dividend recapitalizations and enforcing shared liability for portfolio company debts.

Financial scholars such as Ludovic Phalippou of Oxford have also argued for increased disclosure requirements and stress-testing of PE portfolios, especially in systemically important sectors.

A Tipping Point for Private Equity?

Private equity, when deployed responsibly, can unlock value and drive innovation. But when used as a tool for financial engineering through leveraged buyouts and back floating rate loans, it can hollow out companies, destabilize communities, and jeopardize long-term economic resilience.

The Joann Fabrics case is emblematic. A profitable brand with deep customer loyalty, undone not by operational missteps but by an unsustainable capital structure imposed by private equity. As debt-fueled acquisitions increase, and as rate volatility persists, the need for oversight grows more urgent.

For now, the model continues because it delivers positive returns to PE investors, even as it imposes negative externalities on the broader economy. Unless there’s structural reform, Joann won’t be the last cautionary tale, just the latest.