Not familiar with terms like ‘leveraged buyout,’ ‘distressed debt,’ or ‘capital structure’? If you own a small- or medium-sized business, you might want to consider spending some time brushing up on the lingo of private equity funds, because they may be the ticket to your next big loan.
Mid-sized companies used to depend on banks for funding. They’d take out loans needed to invest in their businesses, and repay the banks, which were the ultimate creditors. But that’s all changed since the financial crisis, when banks around the world started cleaning up their balance sheets by selling off assets and cutting back on risky loans. Post-crisis regulations require that banks maintain a certain amount of equity capital to risk-weighted assets.
Enter private equity shops, flush with cash after years of uncertainty, and ready to lend to you—at a price.
“I love [banks] more now. They sell [assets] to us a lot,” Marc Lasry, the chief executive of Avenue Capital Group, joked to investors last month. In Europe, for example, it’s now possible “to make a 10% return on senior secured paper [senior debt—one of the first liabilities to get paid off in bankruptcy] when you would normally have made a 2-3% return.”
Taking out a loan is a must for some companies, like those that need to roll over debt or complete half-finished projects. Take, for example, a $240 million renewable energy plant in Plainfield, Connecticut, which was initially funded by a consortium of European banks and managed by two US technology and energy giants. 2011 happened to be a really terrible year for European banks, as the euro reached the brink of failure, and banks tried to wipe all their risky assets from their balance sheets. But the plant needed to begin construction by the end of the year in order to qualify for up to $70 million in cash grants from the US Treasury Department. In came private equity giant Carlyle Group to save the project. Under a tight deadline, Carlyle’s middle-market energy fund agreed to lend the company $125 million, and the power plant went ahead as planned.
The deals are even sweeter in Europe, where banks are still paring back risky investments. Big asset managers have bought up billions of dollars in distressed European debt, typically at 40-50% of the assets’ par value, according to Pricewaterhouse Coopers.
In Asia, KKR is making loans as small as $50 million. Before the financial crisis, KKR might have preferred to buy out the whole business; now, with so much demand for credit as banks pull back on regional lending, it’s willing to extend plain vanilla loans with high price tags.
The shift couldn’t come at a better time for private equity shops, which are looking for ways to make money beyond buyouts. In a sluggish market for mergers, acquisitions and IPOs, the PE world will take all the promising business it can get.