Sunday, November 24, 2019

PEU Default Risk More than Twice Public Firms

WSJ reported:

The default risk of companies owned by private-equity firms is 2.5 times that of their public counterparts, according to data collected from banks, insurers and asset managers by analytics firm Credit Benchmark.

Private-equity firms use leveraged loans, rated below investment grade, for the financing of buyouts of target companies. Financial institutions raised their estimates of the average probability of default—or nonpayment—for such loans to about 6% in September from 5.44% a year earlier, according to the data.

A jump in leveraged-loan defaults could have more impact on global finance than in years past because there are far more of the loans in existence and they are broadly held by mutual funds, institutional investors and collateralized loan obligations, or CLOs.
Carlyle Group co-founder David Rubenstein said the following on CNBC earlier this year:

Let me just say that private equity has done a pretty good job of improving the efficiency of the companies in the United States for 30 or 40 years. And around the world, people like private equity, that come into their country to show them how to improve and modernize companies. And I think it has created value for the economies in which it operated. There’s no doubt there’s a fair amount of money in private equity now. That’s because the returns have been very good. The people aren’t putting money in private equity because the returns are bad. The returns are good.
How does efficiency result in a much higher debt default risk, which can turn into systemic risk in a major downturn?  That's outside Mr. Rubenstein's approved question list for the business media.

Forbes also wrote about private equity's rising default rate:

a significant amount of high yield debt and leveraged loans are not necessarily being used for sustainable growth strategies for the firms and no evidence points to those funds being used to increase workers’ wages or to hire more. Recently, I wrote about how private equity has been causing unemployment in thousands of the firms that they buy out.
 The greed and leverage boys have one interest in mind and it's not the common citizen's.

Update 11-25-19:  PEU's latest debt shtick, the unitranche which combines "senior and junior debt into a single tier and eliminates the syndication process, unitranches can be arranged in a fraction of the time it takes to complete a traditional leveraged loan."  The articles states they remain untested in distressed scenarios.