Economic times not leaving private equity credit ratings immune
Posted by: in Financials and AnalyticalsFiled under: Financials and analyticals, Raising money, Private equity industry, Investments
There has been much talk about how the credit squeeze and slowing economy has affected the public markets, but how has it affected private-equity firms? An article in the Hartford Business discusses how private equity firms are feeling the pain, especially as many private-equity owned companies have very high risk ratings and default risks. This appears to be more concerns of the past coming to fruition over leverage and credit quality more than breaking news, but it may come front and center before long.
Additionally, private equity-backed companies have big debt loads and when combined with decreased consumer spending, companies have less cash to service those loans. Leverage has enhanced returns, but it also augments the losses and decreases the returns to the private-equity firms that own the companies. This says that 25 of the 42 companies that ratings bureau Standard & Poor’s states have the lowest credit ratings are owned or controlled by private-equity firms, which gives them the highest chances for default.
It also appears that many private-equity firms overestimated the potential value and performance of the companies they bought, or at least that conditions exists now that credit is tight and the economy slower. If many industries and sectors are struggling in today’s economy, it should come of no surprise that private-equity firms that purchased them with leverage are feeling the burn as well. A less-leveraged economy isn’t leaving the billionaires entirely immune.
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