Some investors warn that buyout firms are borrowing at interest rates of as much as 19% and the risk of wider fallout is growing.
Private equity firms have been increasingly adding another layer of debt to their complex borrowing arrangements, raising concern among some investors about potential risks to the wider industry and the financial system.
Another comes in the form of the more widely known net-asset-value, or NAV, financing that’s backed by a pool of portfolio companies. This is typically used by PE firms to help them return money to investors. About 83% of lenders reported an increase in the number of NAV transaction opportunities over the last year. The average number of deals rose to 22 in 2022, from 16 the previous year, according to a report by Rede Partners.
The need for extra financing sometimes comes from pressure from the investors in private equity funds, known as limited partners or LPs, requiring private equity managers, known as general partners, to make larger commitments to their own funds to ensure they have more skin in the game. Richard Sehayek, managing director of Ares Management’s alternative credit strategy, said manco loans can be highly customised and don’t typically fit into traditional debt models.
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