8 months ago • 2 mins
What’s going on here?
Private equity (PE) firms are racking up debt to return cash to investors – but that could create problems of its own.
What does this mean?
PE firms typically use a cocktail of investor cash and debt to buy out their target companies, spruce them up, and sell them for a profit down the line. But lately, that final step has been more like a tightrope walk, with exit activity taking a nosedive due to rising debt costs and economic jitters. In fact, both global listings of portfolio companies and sales to corporate buyers are set to hit a ten-year low this year. So, PE firms are getting creative, finding other ways to return cash to investors instead. Case in point: the likes of Texas-based Vista Equity Partners and Sweden’s Nordic Capital have been borrowing against their portfolios to return cash to their investors.
Why should I care?
Zooming in: Out of their debt.
This strategy is adding another layer of debt to PE funds – a risky move when interest rates are high. It’s effectively like kicking the can down the road: after all, they still need to sell their holdings at some point, and with the economy so bumpy, there’s no guarantee that’ll get easier anytime soon. Plus, debt increases the firms’ financial risk, which might spook investors. Add it all together, and some firms might end up finding it hard to raise cash for new investments too, leaving them in a seriously tight spot.
The bigger picture: Deal or no deal.
PE firms are big players in the dealmaking world, so their struggles have contributed to its overall slump this year. But there’s a silver lining: experts think the stock market recovery could boost CEOs’ confidence when it comes to striking deals. And there are signs that’s already happening, with last quarter’s deal values outstripping the first quarter – suggesting dealmaking could already have bottomed out.
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