Thursday, June 22, 2023

PEUs On Both Sides of Buyouts

Advent International and Warburg Pincus will buy Baxter's BioPharma Solutions business for $4.25 billion.  The two private equity underwriters (PEU) will close the deal in the second half of 2023.

At least four PEUs will provide funding for the deal.  They include Ares Management, Blackstone, Blue Owl Capital and HPS Investment Partners.

Bloomberg reported how PEUs have become the "Kings of Debt, Suppliers of Private Credit."  The Carlyle Group's new CEO cited private credit as a critical growth area for the firm.

Carlyle employed private credit in the past to conduct backdoor takeovers, via "loan to own" strategies. It took over Brintons' and Mrs. Fields using that method.

Retirement funds don't have to look far to identify the risk of PEUs being on both sides of a deal.

KKR is handing over mattress maker Hilding Anders International to creditors as it did with Telepizza in early May.  Telepizza bondholders – Oak Hill, Blantyre, HIG, Fortress and Treo funds-- became equity owners after KKR, Artá, Torreal, J Safra Group and Altamar surrendered the company to creditors.

Retirement funds may wish to consider whether the greed and leverage boys are planning to fund each other's junk.  

A friend recently wrote on the PEU move to supply credit:

During the 2008 crisis private equity almost met it's death knell but were rescued by the Fed... After the next 15 years the banking sector, especially the regionals, have been dying on a vine, some say to targeted regulations that pushed them into a precarious situation by default... Who comes in to replace that piping in the system.  It's our saviors, the private equity capital guys... So they have the funds to lend and they are also the holders of those credit instruments, i.e. blink-blink they make the rules, the accounting, the marks, the leverage, who defaults, who doesn't... Hmm, kind of reminds me of the rules of the ISDA.  They get to determine when a default is a default.  It's a circuitous reward system, like its own ecosystem.. 

CalPERS wants to put more money into private equity to supercharge returns.  They should know given their prior equity stake in Carlyle.

With PEUs on both sides of buyouts, it's a loan to own era.

Update 6-23-23:  Regarding "the accounting" the SEC and the Public Company Accounting Oversight Board fined Marcum LLP a combined $13 million for piss poor audits of SPACs.

The SEC found the deficiencies were not limited to Marcum's SPAC clients.

Someone has to look the other way at multiple junctures for things to occur as they have.   

Update 8-23-23:  It took 15 to 20 lenders to refinance Vista Equity's Finastra Group.