Evening Brief – 12.22.23
PE Managers Cutting Debt Risk
More private equity fund managers are migrating to lower-risk bank loans as interest rates hamper activity, with 75% of general partners seeing leverage multiples fall amid an increasingly “pragmatic” financing climate, according to Investec research.
The London- and Johannesburg-based global banking and wealth management group surveyed 150 GPs for its latest annual Private Equity Trends 2024 Report.
Overall, 54% of private equity fund managers said senior bank debt/term loan A finance was the most-popular financing option over the last 12 months. The appeal of this sort of financing stems from banks’ capacity to provide fewer turns of leverage at lower margins, Investec said, helping GPs manage costs at a time when the overall cost of capital is rising.
The report, which will be released in January, examines significant developments in fund finance, M&A, leveraged finance, and ESG and diversity in the private equity market, as well as how the industry’s growing pragmatism is influencing fundraising and values.
Investec’s analysis indicated a persistent decline in the level of debt employed by GPs in their financial strategy as the private equity industry continues to deal with a high interest rate environment. Approximately three-quarters of managers, or 73%, reported that their leverage multiples for new acquisitions had decreased compared with a year ago, with 45% of respondents indicating a fall of at least 1x EBITDA.
According to Investec, this move could be due to either a more cautious approach to debt throughout the private equity sector, the availability of higher-risk finance, or a mix of the two.
“GPs are rightly becoming more conservative in their approach to debt — a sign of industry pragmatism,” said Helen Lucas, Investec’s co-head of U.K. origination — direct lending. “While private equity doesn’t yet anticipate a return to the abundant and less discerning debt supply enjoyed in 2021, we see this as a normalization of activity as opposed to a slump.”