Tighter credit markets pave way for private equity bargains

Many multibillion-dollar leveraged-loan deals have been cancelled in recent weeks, leaving companies controlled by buyout firms unable to refinance

epa07657628 (FILE) - Stephen A. Schwarzman, Chairman, Chief Executive Officer and Co-Founder, Blackstone, pictured during a panel session¨on the first day of the 49th annual meeting of the World Economic Forum (WEF) in Davos, Switzerland, 22 January 2019 (reissued 19 June 2019). According to media reports, Schwarzman has donated 150 million Pounds (approx. 168.5 million euros) to Oxford University.  EPA/GIAN EHRENZELLER
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It’s a ripe time for buyout titans — if they can rustle up the financing to take advantage.

The stock market’s severe downturn is making takeover targets cheap again after a decade-long rally left buyout firms with record war chests. With interest rates getting pushed ever-lower, large investors may turn all the more to private equity bets for yield, as they have for the past decade.

“Every day, it’s becoming a better day to buy,” Steve Schwarzman, the chief executive of Blackstone Group, said last week.

But there’s a catch: private equity giants still need financing to make their deals happen, and investors who fund debt markets are shunning risk. Already, a growing list of multibillion-dollar leveraged-loan deals have been cancelled in recent weeks, leaving companies controlled by private equity firms unable to refinance.

“There’s no doubt that many of the underlying portfolio companies are going to be affected,” said Tony Tutrone, the global head of alternatives at Neuberger Berman. “The real question for any businesses is: Is there any long-term impairment?”

Some relief could come from private lenders with the capacity to step in and support deals even if markets for leveraged loans and junk bonds stay frozen. At a recent investor conference, $15 billion (Dh55.1bn) private credit vehicle Ares Capital said it expects heightened market volatility to create opportunistic scenarios to deploy capital.

Those sources of funding can be more expensive than liquid markets. But for private equity firms that tap them, the payoff can still be lucrative if it enables them to buy cheap.

“The best vintages for private equity firms have often coincided with dislocations in public equity markets,” Mark Haefele, chief investment officer at UBS Global Wealth Management, told clients in a note last week. He cited 2001 and 2008 as examples.

For now, even as the jittery stock market opens doors for deals, it’s shutting them on disposals, making it harder for buyout firms to exit holdings that should be coming to fruition. Initial public offerings have largely stalled. And strategic buyers are increasingly concerned the global economy will contract.

It all leaves private equity firms at a crossroads. As Tutrone put it: “It’s hard to tell the net positive and negative effects until the dust settles here.”