bloggingbuyouts

According to The Deal, the S&P Leveraged Commentary & Data Index fell to its lowest level in four years yesterday morning. For anyone who follows the credit markets closely, this should come as no surprise. I recently spoke to one multi-strategy (but high-yield focused) fund manager who expressed extreme skepticism about the current debt market. In his eyes, the risks aren't being accounted for in interest rates and investors are being paid less to take risk than they have been in previous years. Therefore, this fund manager is much more heavily involved in equities than credit at this point in time.

As the article goes on to say, this is likely to have implications for the entire private equity industry for several reasons. First, it will likely become much more difficult for private equity firms to gain the capital to complete deals. In addition, and perhaps more importantly, the private equity firms might be forced into paying more for their credit as a result of the recent "repricing" in the debt market. This move could bust the financial models private equity firms use to justify their deals. For example, a company's value can vary dramatically in the eyes of a private equity firm if the cost of equity moves from 6% to 7%.

While this likely isn't the end of the private equity boom, I'd argue that events such as these suggest that the easy money days of buyouts are quickly becoming a thing of the past.