Crestwood Capital: A Case Study in Liquidity Crisis and the Hidden Risks of Private Equity
Case Study: The Silent Strain — Collapse of Crestwood Capital Partners
Background
Crestwood Capital Partners was a mid-sized private equity firm managing $18 billion in assets, largely invested in industrial manufacturing and healthcare services companies across the U.S. Its LPs (limited partners) included state pension funds, university endowments, and one Middle Eastern sovereign wealth fund.
From 2012 to 2021, Crestwood thrived. Cheap debt and a booming M&A environment enabled it to deliver double-digit IRRs. Its portfolio companies benefited from low borrowing costs, steady consumer demand, and an endless appetite for private equity from institutional investors chasing returns in a low-rate world.
But by early 2024, the tide had turned.
The Downturn
The first warning sign was a failed refinancing in Q3 2023. One of Crestwood’s larger holdings, MedLine Group (a chain of rural diagnostic labs), was due to roll over $350 million in term loans. Lenders balked. Interest rates had climbed sharply, and private credit markets were tightening.
When Crestwood tried to sell minority stakes in several of its portfolio companies to generate liquidity, buyers either lowballed them or walked away. Meanwhile, three state pension funds requested partial redemptions—requests Crestwood couldn’t meet without selling at steep losses.
At the same time, budget cuts in Washington D.C. caused several Crestwood-linked government contractors to lose long-standing federal contracts. One aerospace components manufacturer went from a $120 million revenue run rate to $45 million almost overnight.
The firm’s internal valuation models still showed healthy returns—but the external market had moved on. Exit multiples were compressing. IPOs had dried up. And most distressingly, Crestwood’s second-largest LP, a top Ivy League endowment, began quietly liquidating its position in private markets, compounding the liquidity crisis.
The Fallout
By Q1 2025, Crestwood was forced to mark down its portfolio by 35%, triggering covenant breaches with several lenders. The firm's flagship fund, Crestwood Capital Fund IV, was officially gated, freezing redemptions for all LPs.
Talks with potential rescuers began. A larger PE firm considered a distressed acquisition of Crestwood's management company—but at a valuation 70% below its 2021 peak. The firm ultimately required a capital injection from its sovereign wealth backer to avoid complete collapse. In return, the fund gave up board control and management fees for three years.
Key Takeaways
- Liquidity Illusion: Private equity firms often appear healthy until they must mark to market or provide liquidity to LPs.
- Systemic Risks: The unwinding of one firm can signal a broader issue across thousands of similarly structured entities.
- Endowment Exit Signals: Institutions like Harvard and Yale selling private holdings can indicate major shifts in market sentiment, often before broader media coverage.
- Policy Sensitivity: Budget tightening, especially in regions like Washington D.C., has ripple effects that can disproportionately impact private firms tied to government contracts.
Conclusion
Crestwood’s near-collapse was not driven by traditional market factors like tariffs or consumer weakness—it stemmed from liquidity drying up in the private capital markets, rising rates, and a failure to adapt to a structurally shifting economy. It serves as a textbook warning: in times of transition, what looks solid on paper can evaporate in practice.
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