Private equity firms are making some bold moves on the market. Analyst reporting on the industry say the sector has turned its focus on two trends: investors buying debt to go with equity positions and firms cherry-picking buyers for loans.
Raising its bets
Private equity firms are not just taking distressed companies private, but are also injecting loans that make them both stockholders and creditors. The so-called distressed investing can be a beneficial strategy for the firms. When equity becomes a rare source for the companies, private equity backers, with the ownership of certain bonds, can then manage the restructuring process. This potentially has the firm regain ownership once the debt has been converted to equity.
Apollo Global Management has been a master of this kind of strategy, but other firms are starting to take notice. In a Bloomberg post on the topic, Lewis Grimm, a lawyer at Jones Day, said, “People have been looking opportunistically for creative moves when they saw how relatively aggressive approaches have proven to be successful in recent cases”.
The newspaper post went on to speculate companies that might start following Apollo’s footsteps. Neiman Marcus Group was mentioned as a firm that might benefit from the unique approach, along with Bain and Ares.
While there are plenty of positives for the strategy, investors must stay wary of the potential conflict of interest. Other creditors might also have a negative outtake on moves like this because the strategy generally is not advantageous for them.
Invitation only refinancing
Furthermore, private equity firms are becoming pickier when it comes to refinancing companies. The most recent example is that of Unilabs. The Swiss medical diagnostic company is owned by private equity firm Apax, which organised an invitation-only refinancing for the company earlier this month.
John Bolduc from HIG Capital told the Financial Times the cherry-picking is not a new phenomenon. “It is a sign of a hot market…where there’s more supply of money than there is demand so the borrowers can demand relatively egregious terms,” he continued.
The existence of the whitelists is not acknowledged by any firms, but analysts are adamant they exist. According to the experts interviewed by the Financial Times, firms like Apollo, Canyon Partners, Black Diamond and HIG Capital are part of the companies that don’t make it to the investor invitational.
Analysts are also concerned about the impact of eroding certain investment protections, such as allowing the investor sell the loan on. These have been a core part of private equity deals since the financial crash, but have since been slowly less common.
For investors, there can be a real frustration. Bill Wolfe, a credit analyst at Moody’s, said in the article, “How do you negotiate anything now? Credit agreements are becoming one page.” Nonetheless, investors haven’t been pushing against some of these restrictive terms and this has provided private equity with the room to manoeuvre. Now, it’ll be interesting to see how firms are going to continue and if these new strategies will prove beneficial or problematic.