The World Has Changed for Private Equity Firms

Private Equity Firms need to Pivot

There is a whole new generation of private equity professionals who, heretofore, have known a business and economic environment where the living is easy: economic growth; artificially low interest rates; fawning lenders competing for their firm’s patronage and, relatedly, covenants that are incredibly generous. Things have changed fast and private equity firms need to pivot.

It’s a different world now. The credit bubble has burst – no more easy refinancing or other lender money for underperforming companies. It may take another quarter or so, but the new economic order will bring its pressures to bear in the near-future, if not immediately.

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What are the Implications for Private Equity Firms?

Chief among them will be a likely painful education that investing can actually be a hard and difficult business. And that lenders can be demanding. And that hockey stick projections will not fly anymore. All of which presents new and challenging issues for a generation of private equity investors.

And that is primarily because, notwithstanding all of the brain power vested in private equity firms, there is no substitute for experience, and suddenly there is a real need to rely upon unconflicted advice about how to make creditors do what PE firms want them to do.

Where the Pivot Needs to Happen

Where do private equity firms need to pivot? The lenders’ new playbook, for portfolio companies now or shortly in default even under covenant-light credit agreements, is, generally:

  • we require more equity capital from you to prop up existing “Mt. Debt”
  • we want to keep you on a short leash in terms of covenants and performance
  • if you do not make us happy, we are glad to take over the business

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There are ways to address these new lender challenges. We here, lacking creditor conflicts, are busy advising PE firms on these matters, and expect to be doing so for a long time. Contact us if you’d like to discuss this further.

Authored by Gordian Group President and Head of Restructuring and Distressed M&A Peter Kaufman