June 23, 2024

Private Equity Shifts as No More Cheap Money Forces Handing Over The Keys of Distressed Assets

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Leading players in the private equity arena, including KKR and Bain Capital, are facing a challenging landscape as they transfer control of struggling companies to the lending arms of their competitors. This wave of handovers to creditors highlights the intricate difficulties that private equity firms grapple with as their portfolio companies confront an environment characterized by rising interest rates, persistent inflation, and supply chain disruptions.

The decision to relinquish ownership of distressed companies underscores a twofold issue: the pressures faced by private equity firms amid economic turbulence and the increasing significance of credit offered by the lending divisions of these same private equity giants. The prominence of private credit has grown exponentially over recent years, outpacing traditional buyouts for major industry names such as Apollo, Carlyle, and KKR.

In an intriguing example, Bain Capital’s European arm reportedly ceded ownership of German manufacturer Wittur to KKR’s credit division. Similarly, discussions are ongoing between Goldman-backed ink supplier Flint and its creditors regarding a potential control transfer. Notably, Carlyle is anticipated to relinquish control of security firm Praesidiad to a consortium of lenders, which includes Bain Capital’s credit business.

Meanwhile, KKR’s private equity arm found itself losing control of German payments company Unzer to a consortium of creditors featuring Goldman Sachs, Partners Group, and Alcentra. The challenges aren’t confined to Europe alone, as evidenced by KKR’s involvement with healthcare firm Envision in the US, which resulted in KKR’s investment being wiped out as senior lenders, including Blackstone, took over the company.

There have been many years of easy cheap money where companies owned by private equity took advantage and that party is over for now. This ease of access to capital led to debt accumulation, which has now proved problematic with the advent of global disruptions and interest rate hikes.

A key concern emerges from the lack of strong covenants in the loans that financed these deals. These covenants provide creditors with contractual safeguards to assess a company’s financial health. Unlike previous cycles, the current trigger event for turmoil often revolves around liquidity rather than contractual violations.

The absence of early warning signs, combined with the flexible lending terms that allow private equity owners to address issues by incurring more debt, poses challenges for both lenders and investors. The alignment of incentives between private equity and private credit firms at present underscores their shared interest in maintaining the viability of portfolio companies, but the potential for multiple defaults raises concerns about losses and the logistical complexities of owning unintended assets.

As the global economic landscape evolves, the challenges faced by private equity firms underscore the need for vigilance, prudent risk management, and the strategic utilization of credit options. The intricate interplay between these financial juggernauts and the evolving financial climate will continue to shape the trajectory of distressed companies and the broader investment landscape.

David Thompson
Financial Desk

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