The Wall Street Journal has an interesting article discussing the changes that are surrounding the debt markets currently in private equity, and this plays right into how it looks like there is a major de-leveraging coming across the board. It is no real secret about private equity firms are having to change many of their ways. The days of the giant double-digit-billion dollar club deals using all O.P.M. for the debt are gone.
Private-equity deals are changing to where the buyout firms seek internal leverage from their investors and partners instead of using third party lenders. Due to the recent volatility, sellers are often more concerned with closing a deal at a locked-in and certain lower price using internal debt than dealing with the hassle of third party lending. The banks aren't totally out of the game, but they have their own troubles and are trying to avoid anything now in new placements that has any real shot at causing future markdowns. This plays right into that article from last week noting that some bank lawyers were even advising clients to just walk away and pay break-up fees.
Big buyout firms that were named in the WSJ article are Carlyle, TPG Capital and Silver Lake Partners, which have utilized this tactic in the past. They are finding themselves calling their investors much more frequently to finance deals. Buyout firms with the ability to utilize their own financing are even at an advantage at the bargaining table. This is what I have been expecting since mid-2007 when the buyout craze was peaking.
If things continue to slow sharply in the economy and if the pressure for de-leveraging continues, the private equity will truly look like private equity again rather than its 2007 masquerade as LBO firms. I actually think there is a bit of good news here. Private equity firms will go back to smaller and less leveraged deals that make more financial sense rather than the sense being around having to commit their raised funds in order to avoid redemptions.
Jon Ogg is an editor and partner in 247WallSt.com.
Debt game changing sharply in private equity
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