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EquityFC Blog
PE firms pay it forward | 8 April 2010
All the talk of PE-backed businesses facing a debt roll-over problem thanks to reduced liquidity in the leveraged loans market has been a little overblown. True, it's not just the $500bn owed on big LBOs that falls due between now and 2015 (that's just in Europe). Reuters quotes Jon Moulton as saying £30bn pounds of debt in small and medium-sized British companies needs to be repaid in the next three years. That's nothing to be sniffed at.
But I watched an interesting snippet (podcast? vodcast?) from Standard & Poor's earlier this year pointing out that although the banks are wary of making new big loans to PE-backed businesses - largely thanks to a more conservative approach to their own balance sheets, but also because of THE RISK! - other sources of finance are coming in. A variety of investment funds need yield, and higher-risk LBO loans can deliver.
Better yet, said the S&P guy, many lenders are cutting PE-backed firms some slack in the interim. What choice to they have? Sure, in really bad cases they can grab the equity, but that rarely ends well. So all sorts of mezz-type finance and coupon roll-overs get layered in and everyone hopes for the best. (Good news for finance functions, politically at least. You can get a lot of status for carrying that much water...)
PE firms are also paying that (rather forced) good-will forward bt being nice to entrepreneurs and their teams. I noticed this entry at a Wall St blog on the subject of VC-backed management scoring their bonuses even if things have gone a bit "off plan":
I thought it was pretty funny how VCs have to handle entrepreneurs with kid gloves these days, if for no other reason than if you won't another VC will. That probably speaks volumes to the fact that there are too many venture capitalists chasing too few deals these days. But I was more struck by the expectations of the entrepreneurs than I was by how the VC's deal with them today.
Interesting. In short, if you're in a good team with a business that has obvious potential, perhaps the rewards (bonus, equity etc) will come even if you've been troubled by the recession.