The private equity industry is back to using a bunch of borrowed money to finance its deals, the WSJ reports. We’re talking pre-crisis levels here of buying companies with around 30% of a firm’s own cash and the rest with leveraged debt.
When the financial crisis hit in 2008, no one had cash and no one wanted to do deals. As a result, private equity firms couldn’t do the big takeovers they once did because they simply couldn’t swing the financing. Now, because investors are hungry for yield in this low interest rate world, the bonds PE firms raise are looking attractive.
This is great for PE firms because when they ultimately sell an acquisition their margins are higher. On the other hand, it means companies are sidled with more debt and they have to work harder to become profitable. Since July, the average amount of debt that PE firm’s raise has been about 5.5 times a company’s earnings, just above the 2006 average of 5.4 times.
Additionally, since 2008, 42% of deals, on average, have been financed with a PE firm’s own money. In the past 6 months, that number has fallen to 33%. In 2006, that average was 31%.
Boilermaker Cleaver-Brooks Inc. is an example. The Thomasville, Ga., company earlier this month sought to raise $285 million of debt for its purchase by Harbour Group, the St. Louis private-equity firm.
But debt investors were so keen on the deal that Harbour Group decided Cleaver-Brooks would raise $300 million; the private-equity firm lowered its cash contribution to about 30% of the purchase price from 34%, according to a person involved in the deal. The debt was sold Tuesday. Harbour and Cleaver-Brooks declined to comment.
This, combined with the news that private equity firms are ramping up dividend recaps, a controversial practice in which a firm cashes out of a company before it is sold by having it take out even more debt, is a pretty telling sign that the industry is back with a vengeance.