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Economic Downturn Being Expected By Private Equity Funds

Economic Downturn Being Expected By Private Equity Funds
Despite a positive economic outlook for the world, leveraged loan markets and a positive mood in the private equity, the market is perhaps at its best currently, warns senior participants.
Factors such as aggressive deal plans, proliferation of huge buyouts and rise in purchase prices have forced many to contemplate whether the present robust market conditions constitute a bubble and people have begun today’s market with that of 2007 pre-crisis one.
“I think we’re now in bubble territory,” said Frode Strand-Nielsen, founder of Nordic private equity firm FSN Capital.
In 2017, a record high of 11.2 times average Ebitda was reached by multiple of leveraged buyout purchase price. And in the third quarter of 12017, a new record at UD$675 was reached by the average buyout sizes. According to a recent report by Bain & Co, that buyout figure is ten times higher than in 2016.
Some very large buyout loans were initiated in 2017 which includes the soon to be executed €10bn carve-out of Akzo Nobel’s specialty chemicals division and the purchase of Thomson Reuters’ Financial and Risk division by Blackstone for US$20bn.
Gregor Bohm, co-head of Carlyle’s European buyout business, said at Berlin’s SuperReturn conference that the target of private equity firms are those companies  that would be able to ride through a recession even though good investor demand is being witnessed in the strong debt markets.
“You have to sell all the companies that you don’t want to hold through a recession,” he said.
According to Strand-Nielsen, for private equity and leveraged credits, difficulty can be faced in the next five years, primarily because in case of rise interest, which is becoming more imminent, there would be pressure on companies that have used low interest debts to finance large buyouts.  
“There’s a lot of financial engineering, which usually indicates we’re going into a concerning environment,” he said at SuperReturn.
In addition to the rising geopolitical tensions, the ending of the policy of Quantitative Easing by the European Central Bank is being identified to be amongst the riskiest issues for the global markets.
At the same time, borrowers would be able to take in cheap debt because it is expected that the present light borrowing conditions would continue for some more time even as there is awareness among private equity firms and bankers that the market has reached its peak.
“Borrowers are enjoying peak funding conditions,” said Ed Eyerman, head of European leveraged finance at Fitch in London.
However, a bigger institutional buyside that is more diverse and covenant lite lending – that was nonexistent about a decade ago, are the two factors that have fundamentally altered the global loan market and hence comparisons with pre-2007 conditions are not accurate.
While it is estimated that the next economic recession would have the same severity as the earlier one, businesses are relatively better positioned to weather a downturn because of less cyclical growth as is being focused by Thomas H. Lee Partners, says co-president Scott Sperling.
 “It’s certainly not a brave new world that includes no cycle,” he said. “Our base case incorporates a recession of the size of 2008. The swings can be reasonably violent so you have to recognize how that could affect capital structures.”

Christopher J. Mitchell

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