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Private Equity Guru Sounds Warning Over High Debts

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Guest wrongmove

Private equity guru sounds warning over high debts

"One of the founders of the UK's private equity industry has warned that the high levels of debt are unsustainable and could lead to several companies going bust.....

.....According to industry figures, the amount of leveraged debt held by European companies is €500bn (£341bn) this year, compared with €30bn in 1998.

The average amount of leveraged debt held by buyout firms is now six times earnings, compared with four times earnings four years ago. Companies bought by buyout firms in the past few years are reported to be borrowing even more with the retail sector particularly vulnerable.

Some industry sources suggest companies are borrowing as much as 11 times their earnings before interest, tax and depreciation......"

11x gross earnings !! I wonder who the lrnder is ? Even I could "afford" a decent house !

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Liked this quote right at the end...

Sir Ronald, a close associate of the chancellor, Gordon Brown, had told the Financial Times: "It is a dangerous combination if a company's sales and profits fall at the same time as debt servicing costs rise."

No S**t Sherlock :lol:

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Liked this quote right at the end...

No S**t Sherlock :lol:

They can sound amazingly incompetant can't they. On last nights news they interviewed a German migrant Economist and asked if immigration had a deflationary effect on labour costs, especially to the lowest paid. He did not know, was his answer. Its a complicated situation, he said. Oh come on - its not complicated when negotiating your hourly rate on a building site with 2 poles sayinging they will do it for £5 per hr.

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Private equity guru sounds warning over high debts

"One of the founders of the UK's private equity industry has warned that the high levels of debt are unsustainable and could lead to several companies going bust.....

.....According to industry figures, the amount of leveraged debt held by European companies is €500bn (£341bn) this year, compared with €30bn in 1998.

The average amount of leveraged debt held by buyout firms is now six times earnings, compared with four times earnings four years ago. Companies bought by buyout firms in the past few years are reported to be borrowing even more with the retail sector particularly vulnerable.

Some industry sources suggest companies are borrowing as much as 11 times their earnings before interest, tax and depreciation......"

11x gross earnings !! I wonder who the lrnder is ? Even I could "afford" a decent house !

The company I work for has on the board an ex-chairman of a large investment bank,

a fairly conservative guy.

He came into the office a few months ago, picked up a newspaper with another massive private equity

buy-out on the cover and just said: "I don't trust this market at all, you heard it here first".

When this whole hedge-fund-private-equity-easy-money merrigoround goes into reverse

the fallout could quite easily dwarf whatever happens to be going on in the housing market.

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Private equity guru sounds warning over high debts

"The average amount of leveraged debt held by buyout firms is now six times earnings, compared with four times earnings four years ago. Companies bought by buyout firms in the past few years are reported to be borrowing even more ...Some industry sources suggest companies are borrowing as much as 11 times their earnings"

In other words, it is the buyout firms themselves and the companies bought by them that are most stretched.

So just what is this joker saying:

"Sir Ronald Cohen, the founder of Apax ... played down his warning that buyout firms were overpaying for companies by over-leveraging their deals. He said a downturn would lead to "huge opportunities for the private equity market" because of the number of struggling companies."

So the struggling companies are gonna buy ... the .. struggling ... er, right ...

Reminds me of all those BTL "gurus" claiming a property crash would be great for them cos they'd hoover up all the cheap props...

Edited by Sledgehead

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Some industry sources suggest companies are borrowing as much as 11 times their earnings before interest, tax and depreciation......"

11x gross earnings !! I wonder who the lender is ? Even I could "afford" a decent house !

... to be fair the bought-out companies probably have depressed profitability. For the buyout team to consider theri purchase a good deal they should be hoping, in some way, to transform profitability (or just asset stip the thing). Add to that the probable low tax bill of such an indebted target and you are probably looking at a company whose gross earnings differ little from their net earnings plus interest charges.

Conversely, as an individual, a sizeble chunk of your earnings go towards living expenses, taxes and other expenses such as pensions. What is left services the debt on your mortgage. Using my assumptions above concerning the bought out company, near 100% of its earnings may be available to service the debt (apart that is from the LBO teams costs).

Whilst there are always bad apples, som eof these deals can be pretty sweet. In particular I am reminded of how Britax lost the faith of SM investors in 2001. The management bought out the company for 440m but had to sell it on for 220m (possibly as debt distressed) to private equity firm The Carlyle Group in 2005. Now the the company, as Europe's leading child car safety seat manufacturer, is set to capitalise on an EU directive (coming into enforcement in Sept) that means every child under 1.3 metres will have to sit in specially designed child safety seats (the directive was known to UK investors in 2001). Like so many of our listed companies, Britax found British shareholders have no stomach or understanding of investment and so a US HQd fund with US investors now stands to benefit - along with polish workers who make up a full 1/3rd of employees at Btitaxes UK manufacturing site. Class.

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Guest wrongmove

So the struggling companies are gonna buy ... the .. struggling ... er, right ...

Indeed. This does seem to be a bit of flaw, Sir Robin.

If a company borrows 11x gross (earnings before interest, tax and depreciation) at 8% IO, the servicing costs are 88% gross. At 6% they are 66% and at 10% they are 110%. I'm sure there are good deals to be done, but it does look very IR sensitive.

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Private equity guru sounds warning over high debts

"One of the founders of the UK's private equity industry has warned that the high levels of debt are unsustainable and could lead to several companies going bust.....

.....According to industry figures, the amount of leveraged debt held by European companies is €500bn (£341bn) this year, compared with €30bn in 1998.

The average amount of leveraged debt held by buyout firms is now six times earnings, compared with four times earnings four years ago. Companies bought by buyout firms in the past few years are reported to be borrowing even more with the retail sector particularly vulnerable.

Some industry sources suggest companies are borrowing as much as 11 times their earnings before interest, tax and depreciation......"

11x gross earnings !! I wonder who the lrnder is ? Even I could "afford" a decent house !

Well well!!!! Surprise surprise! Put your heads down, it's coming....... C R R R R A S H !!!!!

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I have spent 10 years doing private equity - even in the up periods a lot of the deals go wrong - which is the nature of the game. Everyone in the game knows debt levels are high, this is reflected in sale prices for companies, the banks have to lend the money and therefor lend on [iMO] excessively generous terms. It will be interesting to see how hard Basle II hits it.

Plus the article ignores the amount of refinancing and securitisation going on.....

"Mr Moulton's Alchemy fund has raised a special situations fund to invest in the debt of companies in danger of defaulting on loans. "I am a great believer in down years and we haven't had one in 12 years," he said."

There's your reason for this press release. If you listened to him at the BVCA awards dinner and if you have had the 'pleasure' of working with him directly, you would know that whilst there is some merit in what he's saying, there's an awful lot of self-interested spin in most things he says....

Edited by Rachman

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"Mr Moulton's Alchemy fund has raised a special situations fund to invest in the debt of companies in danger of defaulting on loans. ."

There's your reason for this press release. If you listened to him at the BVCA awards dinner and if you have had the 'pleasure' of working with him directly, you would know that whilst there is some merit in what he's saying, there's an awful lot of self-interested spin in most things he says....

Cheers Rachman, your industry insight is much appreciated. I did have my suspicions. Similarly I wonder whether the intense bearish spinning by brokerages houses concerning listed stocks has something to do with helping out the M&A depts and their shaddowy clients ... funny how the dips are always accompanied by another t/o. Equity markets are so thin and private investors so skittish, I'd be surprised if some direct price manipulation isn't being performed. Any views?

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Cheers Rachman, your industry insight is much appreciated. I did have my suspicions. Similarly I wonder whether the intense bearish spinning by brokerages houses concerning listed stocks has something to do with helping out the M&A depts and their shaddowy clients ... funny how the dips are always accompanied by another t/o. Equity markets are so thin and private investors so skittish, I'd be surprised if some direct price manipulation isn't being performed. Any views?

some of the most profitable shops specialise in distressed companies and as the mainstream PE people get into even more risky ventures, the margin is being pushed towards straight hedge fund investment style in distressed debt.

On a good fund of 10 investments, 3 will fail, 4 will wash their face, 2 will make good money and one will go to the moon. Anything better than that is a serious result. I should also ask the critics, just where do you think these PE funds raise their money - it's certainly not from shadowy Arabs and drug dealers you know....

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On a good fund of 10 investments, 3 will fail, 4 will wash their face, 2 will make good money and one will go to the moon. Anything better than that is a serious result. I should also ask the critics, just where do you think these PE funds raise their money - it's certainly not from shadowy Arabs and drug dealers you know....

They raise their money legitimately from large investment banks.

The typical path to becoming a private equity entrepreneur is to go and work in an Investment Bank.

Make some contacts, and then get them to lend you huge amounts of money on very good terms.

Where do you think the investment bank gets all this money?

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To follow on from Charlie the Tramp

THis is quite interesting, see table 1 at the bottom (which I have charted):

COMPANY WINDING UP AND BANKRUPTCY PETITION STATISTICS FIRST QUARTER 2006

THis list includes historic data back to Q1 1999. This includes Companies winding up petitions, and creditor and debtors bankruptcy petitions.

In the first quarter of 2006 the following number of petitions were issued:

- 3,150 company winding up petitions - an increase of 8.9% on the petitions in the same quarter of 2005;

- 5,615 creditors' petitions - an increase of 15.5% on the petitions in the same quarter of 2005;

- 13,897 debtors' petitions - an increase of 84.6% on the petitions in the same quarter of 2005.

chart1.gif

post-4797-1150981038.gif

Edited by greengreen

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They raise their money legitimately from large investment banks.

The typical path to becoming a private equity entrepreneur is to go and work in an Investment Bank.

Make some contacts, and then get them to lend you huge amounts of money on very good terms.

Where do you think the investment bank gets all this money?

Some of them raise money from IB - in fact a lot of the big PE shops started within the Banks and were bought out (often at NAV or less !!!!) - they take a lot of money from pensions cos, unions as well as traditional avenues in big family money sources and from IBs, so a lot of the money that they are lambasted for playing with and making fortunes on is not dirty money, it's yours....... - of course they get a big fat carry if the funds perform, but that's the nature of profit related remuneration - if the fund investors let them get away with a big management fee as well, who's fault is that - they are advised by the top law firms.......

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Some of them raise money from IB - in fact a lot of the big PE shops started within the Banks and were bought out (often at NAV or less !!!!) - they take a lot of money from pensions cos, unions as well as traditional avenues in big family money sources and from IBs, so a lot of the money that they are lambasted for playing with and making fortunes on is not dirty money, it's yours....... - of course they get a big fat carry if the funds perform, but that's the nature of profit related remuneration - if the fund investors let them get away with a big management fee as well, who's fault is that - they are advised by the top law firms.......

What I was hinting at is that the japanese carry-trade is very much at play in Private Equity, as it is in housing.

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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