China's leadership is concerned about officials with private equity stakes abusing their power for personal gain.
Chinese party officials were found to have set up PE funds after they learned of firms seeking to go public & made “huge gains” after the IPOs...Others provided financing for firms they indirectly owned...They also became secretive channels for bribery"
U.S. private equity underwriters (PEU) are concerned about the slightest limitations on their immense power. At issue ares fee disclosures and preferred exits from funds for certain investors.
Another concern is the pledging of affiliate equity as collateral for net asset value loans and the use of payment- in-kind or PIK loans. Such loans are used to pay current investors while holding assets with the hope/expectation valuations will increase.
PIK loans have the interest added to the principal and the whole shebang comes due at the end of the loan. Bloomberg reported:
“The inherent issue with PIK debt is that it is issued explicitly because the underlying company does not believe that it can service its current debt load.”
Private equity rolling the dice on current affiliate debt is one thing. Doing a new deal with PIK debt is another.
Carlyle is considering a PIK option on a $2.6 billion loan as the firm pursues some units of Medtronic Plc. The borrower gets the choice of paying half the spread in PIK.
A PEU refinancing wave is on the horizon.
There’s also a growing need to refinance portfolio companies carrying leveraged loans, according to Alan Schrager, senior partner at Oak Hill Advisors. “We have seen a few opportunistic refinancings to clean up capital structures, but we are going to hit a huge wave of these transactions in the next year as existing indebtedness matures,” he said.
About half a trillion dollars of leveraged loans are due through 2025, according to S&P Global Ratings, including junk-rated issuers who barely earn more than their interest payments or whose cash flow is already negative.
The greed and leverage boys are lining up to refinance each other's junk.
PEU founders are called "policy making billionaires" in the U.S. Those same people courted Chinese leaders in the 2000s. Twenty years later the Chinese are warning about conflicts of interest while Washington, D. C. pushes the conflicted interests of PEU sponsors.
Politicians Red and Blue love PEU and increasingly, more are one.
Update 11-16-23: Chinese President Xi dined with executives from Blackstone and KKR last night. The PEU boys paid $40,000 a plate.
The Carlyle Group cut its latest Asian fund target from $8.5 billion to $6 billion.
Private equity firms are struggling to sell China affiliates. Reports say secondary buyers are demanding discounts of 30 to 60%. Discounts in the U.S. and Europe run 10 to 15%.