Commentary on Political Economy

Wednesday 15 May 2024

 Private equity’s day of reckoning still beckons despite refinancings

15 May 2024

Private equity employs a lot of clever people. In recent times, they have applied their brainpower to avoid having to sell assets at cut-price valuations. Bloated portfolios and high debt costs have been ratcheting up the pressure on sellers. But a fortuitous opportunity to refinance and extend leveraged loans has given the industry a chance to kick the can further down the road — and hope markets recover in the meantime.

The industry’s latest reprieve comes courtesy of the booming debt market. Investors are keen on high yields. Banks are slugging it out with private credit funds to provide financing. The result is that spreads on US term loans have tightened by almost 100 basis points in the 12 months to March, according to PitchBook LCD data. Activity in the US leveraged loan market has exceeded $300bn in the first quarter of 2024 — the vast majority are opportunistic swoops to refinance, reprice and extend the maturities of existing debt.

This wave of refinancings buys the industry some breathing room. It follows on from a whole series of wheezes aimed at delaying their day of reckoning. Continuation funds have given firms the opportunity to shuffle assets to a new group of investors and offer the previous lot an exit. Net asset value or NAV loans — where a firm raises debt secured on its entire portfolio, rather than on a single company — have provided a way to keep feeding capital to companies that need it.

Buying time is not as dubious a plan as it might sound. Public market multiples have improved. The European IPO window has tentatively opened. Lower debt costs will improve earnings, and a longer lead time gives the private equity industry time to grow companies into their valuations.

But none of this changes the basic physics of this market. The industry has amassed $3.2tn of assets, says

Bain. Holding periods are increasing. And exits in the first quarter of 2024 only amounted to $81bn, down 22 per cent on the first quarter of last year, according to S&P Global Market Intelligence.

The pressure to return money to investors is rising. While efforts to delay exits may help firms avoid the worst of a crunch, the day of reckoning still beckons.

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