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Businesses The Almighty Buck

Private Equity Is Piling Debt on Itself Like Never Before (bloomberg.com) 86

Posted by msmash from the troubling-signs dept.
Private equity firms have been increasingly adding another layer of debt to their complex borrowing arrangements, raising concern among some investors about potential risks to the wider industry and the financial system. Bloomberg: Hit by a drought of deals and dwindling cash, some buyout firms are starting to resort to backroom financing to help meet fund commitments or enable succession planning. The loans -- backed by assets including the promise of future income -- carry interest of as much as 19%, a rate that's more akin to the charges faced by consumers rather than corporate borrowing. Even a junk-rated company in the US paid 10% on a bond recently.

Those high costs aren't deterring private equity firms and experts say demand is at an all-time high. While some of the biggest lenders -- such as Carlyle Group -- say these debts are relatively safe, others are already starting to take precautions by adding covenants that enable seizure of other underlying fund assets, highlighting worries about possible losses. Some are warning of perils when a firm faces claims from more than one type of loan simultaneously. "If the value of the fund drops, for example, you're looking at a margin call situation," said Jason Meklinsky, chief revenue and strategy officer at Socium Fund Services, a New Jersey-based firm that helps administer PE portfolios. "It would be like a volcano meets a tornado." For an industry long used to easy money, the rush for such loans marks a reversal in fortune. Buyout firms have been battling rising interest rates and economic uncertainty, forcing takeover volumes to almost halve this year. Cash on hand at PEs is near the lowest since at least 2008, according to data from PitchBook.
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Private Equity Is Piling Debt on Itself Like Never Before More

Private Equity Is Piling Debt on Itself Like Never Before

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  • The silent depression (Score:2, Interesting)

    by guruevi ( 827432 )

    Companies are worse off now than they were in the 1930s, more debt is held privately and publicly and inflation has risen by double digits over the last 3 years. Food, housing, fuel and transport have all doubled in cost if not more over the last 3 years.

    The media doesnâ(TM)t want to admit it, but this is a major financial depression, companies are out of cash, the Fed is printing money to backstop this debt and has quietly bailed out dozens of banks by now.

    • Re: (Score:2)

      by Tablizer ( 95088 )

      > the Fed is printing money to backstop this debt

      Source?

      • Re: (Score:3)

        by Pascoea ( 968200 )

        Source?

        I'm going to guess it involves a talking-head 24 hour "news" channel.

        • Printing Money is a figure of speech since we aren't on the gold standard anymore. Examples include spending money or forgiving debts when it's not offset by revenue. So I guess you could claim that Biden isn't actually forgiving any debt and it's all just a GoP smokescreen, but you're going to look a bit unhinged since the President has been bragging about it pretty openly.

          • Re: (Score:2)

            by Pascoea ( 968200 )
            Does any of that bragging involve the topic at hand: "Fed is printing money to backstop this debt and has quietly bailed out dozens of banks by now."
        • Or all those other news that reported the various mid sized banks bailed out over the past year.

          • Re: (Score:2)

            by Pascoea ( 968200 )
            I try to keep a decent enough eye on the news, sans the various talking heads. The only two, of the top of my head, are Silicon Valley Bank, and the other one at the same time.

            • More importantly, neither bank was bailed out by the Fed. They were both purchased which is exactly how it supposed to happen. The Fed has been raising interest rates instead of printing more money like they used to. They should have done it a long time ago but Covid recovery gave them a good guilt free excuse to finally raise rates.

        • Re: (Score:1)

          by Tablizer ( 95088 )

          If one factors out inflation and covid stimulus, seems relatively flat.

          • Re: (Score:2)

            by guruevi ( 827432 )

            Yeah, if you factor out all the problems, there are no problems.

            • Re: (Score:1)

              by Tablizer ( 95088 )

              The context is "printing money", not the general existence of problems.

              • Re: (Score:2)

                by whitroth ( 9367 )

                Explain to us how "printing money" is different than "mining cryptocurrency"?

                Oh, that's right, there's FDIC insurance on bank for small depositors, and there's nothing whatsoever standing behind crypto.

    • Can you name the banks? Not saying you're wrong but only one or two made it into the news.

      • Re: (Score:2)

        by guruevi ( 827432 )

        Publicly bailed out (see FDIC website): SVB, SVB Financial Group, First Republic, Signature Bank, Heartland Tri-State Bank
        FDIC accidentally released a list of financial companies that subsequently got bailout money from the Fed for having investments in some of the above such as, but not limited to: Sequoia, Marqeta, IntraFi, Circle Internet Financial, Bill.com but also companies like Apple and others.

    • Comment removed (Score:4, Informative)

      by account_deleted ( 4530225 ) on Tuesday September 26, 2023 @03:56PM (#63879319)
      Comment removed based on user account deletion

      • That metric is artificially inflated by the White House. Youâ(TM)re looking for labor participation rate, which for men was 77% during the Great Depression, today it is in the upper 50s. Having half the population of able bodied men on government handouts is bad for the economy regardless of how you cut it.

        • Comment removed based on user account deletion
          • Theres also the difference that up until the boomers most households could live comfortably off a single income and the wife generally stayed home to do duties at home. Now its pretty much a requirement to be a dual income household. Things don't get done at home since everyone is working, people instead are going out to eat, uber eats or throwing some frozen dinner in the microwave rather than having proper home cooked meals. Having to pay for daycare/babysitter since wife has to work. House chores get don
            • Comment removed based on user account deletion
              • To be frank there's no such thing as "financial independence" in a marriage unless it was spelled out in a prenup. All the assets of the marriage are going to be split up between both parties it doesnt matter who "earned" it. If a maried household can survive off a single income it is beneficial to have one of the parties be a stay at home to take care of the kids during their development years and to take care of hosehold tasks that you would otherwise have to pay someone else to do because theres no time

          • Re: (Score:2)

            by guruevi ( 827432 )

            Pretty steady actually, but there are no clear statistics, because women were only included in 'gainful employment' (commercial employment) statistics, whereas the majority of the labor force was primarily agricultural.
            Taking that into account, economists estimate percentage for 1930 is 53.2 and it is 56.8 percent in 2022

            Women enjoyed less unemployment and I quote: the main reason for women's higher employment rates [during the Great Depression] was the fact that the jobs available to women—so-called

        • What handouts do 4 out of 10 able bodied prime working age men get from the government and from what programs?

        • Thereâ(TM)s a lot behind that statistic. Back then a man could be an idiot and still work. He could be n absolute moron with absolutely nothing between his ears, and he could make a halfway-decent living by hauling bricks from point A to point B. Probably enough to have a family. And the entire society expected him to, since women were basically shut out of working. So even the bottom-of-the-barrel men worked, if their backs and knees were good.

          Nowadays a guy in the bottom third is generally useles

          • Re: (Score:2)

            by guruevi ( 827432 )

            Here's a stat, women unemployment rates during the Great Depression were lower than that of men. And for the rest of your argument, the bottom-of-the-barrel men can still work like that, plenty of contractors are out of people that just need to 'haul bricks'.

            The problem is that our government has made it so that it is easier to stay home and not work. Why would you go to work and risk life and limb, when the government pays you the same wages (or more) to stay home. You are correct, society back then expect

            • Ok, thats really interesting. Know the reason why? Is it that construction and the physical job got hammered, putting more men out of work? Or some other mechanism?

              • Re: (Score:2)

                by guruevi ( 827432 )

                The fields that disproportionately employed women, like nursing, teaching, government and social work were and today still are crisis-proof. Regardless of what happens, people still get sick, kids get born, go to school etc etc. The fields that disproportionately employ men also have the highest risk, men take more risk throughout life, which is just a matter of biology, the first thing that is eliminated however is anything that carries high risk when the economy goes on a downturn.

          • Re: (Score:1)

            by Tablizer ( 95088 )

            > Back then a man could be an idiot and still work.

            Still can in Congress.

        • Re: (Score:2)

          by Tablizer ( 95088 )

          > That metric is artificially inflated by the White House.

          Not this foil-hat crap again. There are many different ways to measure employment, each with tradeoffs. There is no perfect way. The one commonly used in the press has been a long-standing convention. Standards (conventions) are rarely perfect, but at least they are standardized. The others are also published, it's just that they are usually ignored, except by spinners who cherry-pick one to make a fake point.

          > Having half the population of abl

          • Re: (Score:2)

            by guruevi ( 827432 )

            Per HHS in 2020, 100 million people participated in one of the 10 major government programs, there are approximately 200M working-age (18-65yo) adults.

    • High inflation is a reason to take on debt. The debt is inflated away, however if interest rate is high this is self defeating. The whole idea of inflation and interest rates is that interest rate exceeds the inflation rate or you create a problem but I think we have enough other problems that people are not worried by one more.

    • "Food, housing, fuel and transport have all doubled in cost if not more over the last 3 years."

      Totally untrue, and many companies are rolling in cash at present due to their ability to raise prices without fear of competition. Dozens of banks are having trouble due to their investment in Treasury bonds which have become seriously devalued. But there's no sign they have required bailouts.

      This isn't even a recession, much less a depression.

      • Re: (Score:1)

        by guruevi ( 827432 )

        Totally untrue? I dare you to get out of your mom's basement and take a look:

        Gas: 75%
        Wheat: 110%
        Wood: 16%
        Steel: 22%

        Annual inflation rate across the board jumped from 1.2% in 2020 to 7% in 2021, 6.5% in 2022 and we're still at 4-5% today - these increases are cumulative (7% + 6.5% + n% in 2023) = >20%

    • The bubble hasn't burst yet.

  • Leveraging the leveragers to get leverage (Score:5, Interesting)

    by Tablizer ( 95088 ) on Tuesday September 26, 2023 @02:31PM (#63879099) Journal

    Too many layers is usually a sign of Ponzihood.

  • Good (Score:5, Insightful)

    by Bahbus ( 1180627 ) on Tuesday September 26, 2023 @02:36PM (#63879115) Homepage

    Fuck private equity firms. Fuck whoever thought of and started the very first one. Fuck everyone who currently works for one. And fuck everyone who thinks there is nothing wrong with private equity firms. They do not, have not, and will never benefit society.

    • Comment removed (Score:5, Insightful)

      by account_deleted ( 4530225 ) on Tuesday September 26, 2023 @03:58PM (#63879325)
      Comment removed based on user account deletion

  • Why does this sound familiar? (Score:5, Insightful)

    by smooth wombat ( 796938 ) on Tuesday September 26, 2023 @02:43PM (#63879127) Journal

    Oh right. This same thing occurred in 2007 - 2008 when companies piled debt upon debt, then sold that debt for money.

    That worked out well, didn't it?

  • Setting themselves up for failure! (Score:3)

    by oldgraybeard ( 2939809 ) on Tuesday September 26, 2023 @02:57PM (#63879167)
    "the promise of future income" and "carry interest of as much as 19%" they are spending future money now!

    • In any other context, this would be called fraud.

      That sounds like the textbook example of a Ponzi scheme.

      =Smidge=

  • PE companies are sycophants on the economy (Score:5, Interesting)

    by wakeboarder ( 2695839 ) on Tuesday September 26, 2023 @02:57PM (#63879169)
    There are many cases where a PE firm has bought out a smooth running facility and bankrupted it. When debt is easy PE firms thrive, but then they either turn over the company with debt and play the hot potato game or just ruin the company. All of my acquaintances that have worked at a firm that was acquired by a PE firm said their company enjoyment declined significantly after purchase. I recognize that some acquisitions have a positive effect of streamlining some companies, but that doesn't out-weigh the drawbacks. I think we should ban PE firms.

    • Re: PE companies are sycophants on the economy (Score:5, Insightful)

      by NagrothAgain ( 4130865 ) on Tuesday September 26, 2023 @03:35PM (#63879267)
      Or just stop taking their money. I mean, it's pretty simple to say no, we're not going to sell our company.
      • The only people that would sell their company to a PE firm are because they themselves are just in it for the money and its a quick way to cash in on the business and move on to starting the next one. Or the company is in such dire straits a PE firm are all who will touch it before it goes bankrupt. PE companies are no different than house flippers. Come in make it look good on paper and flip it off to some other unsuspecting investor for a profit.

      • It's a little more complex than that.

        Several businesses and even government organizations either get previous PE sycophants in top positions, or pull from the PE playbook in the name of streamlining.

        Initial cost savings seem to justify the changes, but the reverberations ultimately grind the organization to a halt. It will take a decade or more to undo the damage, which is heavily compounded by the tight labor market now (and for the foreseeable future).

        The new rise of unions (which have their pros and cons

      • If a PE firm offers you a few hundred million for your startup, the odds are good you won't say "nada".

      • Money wins

  • Privitize the profits (Score:3, Informative)

    by ArchieBunker ( 132337 ) on Tuesday September 26, 2023 @03:05PM (#63879179)

    and socialize the losses, as the quote goes. Also this https://www.axios.com/2023/05/... [axios.com]

    Higher wages are not driving inflation.

    • Re:Privitize the profits (Score:5, Insightful)

      by alvinrod ( 889928 ) on Tuesday September 26, 2023 @03:19PM (#63879229)
      Anyone claiming wages are driving inflation is an idiot. Having to pay employees more may cause prices to rise as a business attempts to pass those costs along to consumers, but wage increases don't increase the supply of money in the system making existing currency less valuable relative to existing goods and services. Higher prices can also be a consequence of inflation, but in most Western countries the annual rate of inflation is too low to cause any drastic changes to prices. Most business will try to absorb wage increases by cutting hours back first, particularly if their customer base is price sensitive or there's a lot of competition in the market such that a price increase isn't as viable if competitors don't follow suit.

  • Just don't bail them out! (Score:1)

    by Anonymous Coward

    Enough people have been griping about inflation that the government is finally slowing down on subsidizing loans, causing us to end up with nearly-realistic interest rates. It's almost as though we're switching to a free market economy.

    And that's great! It really is.

    But it means it's a shitty time to go into debt. (Hopefully it'll remain this shitty forever, but eventually we'll end up with leftist president again, and they'll insist the Fed go back to heavy loan subsidies.)

    Assuming we can keep Republica

  • Whose problem? (Score:5, Insightful)

    by xanthos ( 73578 ) <xanthos@toke.CURIEcom minus physicist> on Tuesday September 26, 2023 @03:17PM (#63879223)
    "If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem." - J. Paul Getty

    And if the bank owes that money to the Fed, then suddenly it becomes all of our problem.

    • What banks ow large sums of money to the Fed, exactly?

      • Re: (Score:1)

        by Anonymous Coward
        Don't be such a dumbass. Never heard of the discount window? On July 1, 2021 (the last quarterly data file I'll bother to find for you), the following banks borrowed the following sums of money from the Fed. This is not an exhaustive list of all borrowers on that day, nor is it more than one day, and it's from a period when the economic outlook was significantly rosier:

        CANANDAIGUA NB&TC - $51.4M
        1ST SUMMIT BK - $24.7M
        TEXAS NB - $86.9M

  • drought of deals (Score:5, Insightful)

    by toxonix ( 1793960 ) on Tuesday September 26, 2023 @04:22PM (#63879371)
    Did we reach peak consolidation? We have oligopolies in a lot of key industries in the US. The PE business benefits nobody but the billionaires and executives.

  • We'll end up bailing them out (Score:4, Funny)

    by Required Snark ( 1702878 ) on Tuesday September 26, 2023 @05:55PM (#63879591)
    How the US economy really works.

    1. Some rich greedy bastards figure out a new scam.

    2. Every other rich greedy bastard piles on and does the same thing.

    3. All the rich greedy bastards make vast amounts of money.

    4. Since it's a scam, it eventually fails. So much money is involved that the economy tanks.

    5. In order to save the economy the government bails out all the rich greedy bastards.

    6. The bailout cost falls on the everyday tax payer.

    7. Taxes go up and/or services are cut. Cuts never hurt the rich greedy bastards and their profits are not clawed back.

    8. Repeat until the rich bastards have all the money.

    • Re:We'll end up bailing them out (Score:4, Interesting)

      by bool2 ( 1782642 ) on Wednesday September 27, 2023 @02:56AM (#63880271) Homepage

      Yet, come election time, we'll vote in the same bunch of corrupt, incompetent politicians who perpetuate this system. What real choice is there? Are Trump and Biden the best you've got?

      I wonder if democracy is a bit like capitalism. When applied at the local level where the players are small it works well. When applied at the national level, when so much power and money are accumulated in one place, it all goes wrong and no longer serves society well.

      It's a damn shame.

      • Re: (Score:2)

        by whitroth ( 9367 )

        Right: TFG, a convicted sex offender, who just had a judge declare that he was committing criminal fraud for decades in NYC and may lose Trump tower, who's the first (and only) president with 91 counts of indictment, and who, according to ex-aides who are just published, was utterly and massively incompetent and has no idea what he's doing, or what the law is, or what a government's supposed to do...

        Versus someone who knows what they're doing - which I don't always agree with - but just walked a picket line

        • You're a fucking moron whose brains have been turned to mush by whatever echo chamber you live in. Biden and Trump are both actors, they don't do or control squat, their puppeteers do. Isn't it funny how Democrats are equally corrupt and fascist as Republicans?

      • You're at least on the right track. There's overwhelming evidence of a conspiracy that involves both sides. The surface issues are all a distraction... the real issues are all financial, and at a high level involve gutting the wealth of America and transferring it to giant multinational corporations. 2008 + Bailout was the opening act, the 14 Trillion debt ceiling reached in ~2009 was a symptom and an enormous warning sign that debt was about to approach GDP. Only 14-odd years later debt is at $30 Trilli

    • re: points #3 and #5 Also at the billion-dollar level, buying politicians, donating to both sides, and regulatory capture are just peanuts. So they corrupt the government that's supposed to protect the public --> by definition these entities are public enemies and should be straight up sentenced to death. It all goes back to the insane logic that corporations are 'people' and have a 'right' to donate huge amounts to politicians.

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