Private Equity Firms Dig Deep for Acquisitions While Banks Nurse Losses

Do you want to know about European markets? It's in your inbox before the opening. If you sign up, you'll get notifications.

If the industry wants to return to its record pace of deal making, it will need to get the check book out.

Banks stuck with billions of dollars of risky corporate loans are unlikely to back large new transactions until well into the future.

It may be the second half of the year before banks return in force to leveraged buyouts, according to the Chief Executive Officer of the company.

He said that the lenders haven't been there to lend and still aren't.

It's a far cry from previous years when they took advantage of cheap borrowing rates to make debt-financed acquisitions. In just over a decade, the easy money era has helped increase assets under management.

Disrupted Model

Private equity firms often buy companies with debt. A bridge loan from a syndicate of banks is used to secure the debt portion.

The model has been disrupted by rising borrowing costs, which have left the loans that are now worth less than when they were advanced. $13 billion of that is made up of Musk's acquisition of the social network. Billions of dollars more have been committed by the banks for other acquisitions.

Banks have $42 billion in debt, and have a chance to offload it.

All-cash acquisitions are a trend that benefits players that have raised large amounts of money.

According to people with knowledge of the matter, KKR agreed to acquire French insurer April Group. There have been new acquisitions without debt financing in the last few weeks. Firms could end up with big single positions in their funds that could cause returns to be volatile.

Cash Deals

Pete Mason said that the buy now borrow later trend would likely continue into the first half of next year. Banks will take into account where we are in the credit cycle when making their loans.

Companies no longer carry the expensive price tags that they did during 2020 and 2021. Private equity can't take advantage of the drop in valuations due to the spike in borrowing costs

Rising Competition

One of the keys to large acquisitions is lost without cheap credit. The competitive edge will return to companies with stronger balance sheets that used them to get less expensive loans.

While valuations are very attractive for a potential buyer, financing will not be an issue for these companies in the current environment. This is expected to drive transactions in the future.

Citigroup Inc. and Bank of America Corp. acted as lead arrangers for the balance sheet cash and bridge loan that was used to fund the acquisition.

Reschke says that JP Morgan is willing to fund large acquisitions. He said that the bridge book had a lot of spare capacity and would be used for strategic deals.

The share of buyout funding is going to be lifted by direct lending from JP Morgan.

Vendor loan notes, a form of financing provided to buyers and typically secured on an asset like the company's goods, are a type of financing Alternative asset managers that want to add companies to their portfolios will have to become more creative with financing.

Financing to the buyers is provided by some private equity firms. All of the new deals we've done this year have been with private credit.

There is a swelling market for private credit, but it doesn't have the same capacity to support major deals unless a lot of them get involved.

It is seen as less preferable to deal with a small number of trusted bankers. Borrowing conditions will eventually improve, so others will stick with all cash deals.

If they come to the debt markets, they'll have to pay more to get their deals away. It's time for private equity firms to use their dry powder.

Fareed Sahloul and Giulia Morpurgo assisted.