Matt, I love you to death, but there are a lot of problems with this write up. You can do better.
Some Questions:
Is there anything especially unique about a debt financed distribution to equity? Public companies have debt and they pay dividends. Is this considered a “dividend recap?”
If this is so bad, why do lenders agree to finance the d…
Matt, I love you to death, but there are a lot of problems with this write up. You can do better.
Some Questions:
Is there anything especially unique about a debt financed distribution to equity? Public companies have debt and they pay dividends. Is this considered a “dividend recap?”
If this is so bad, why do lenders agree to finance the distribution? Banks are pretty sophisticated last time I checked.
You claim that companies are “saddled with high debt.” This claim deserves some numbers to support it. Are PE owned companies levered more than their publicly traded counterparts?
You claim that PE owned companies are inherently more vulnerable to tariffs than publicly owned companies. What is the basis for this claim? It seems counter intuitive since PE owned companies are smaller and more likely to sell to domestic consumers. All else equal, they are likely to benefit from tariffs. And aren’t the tariffs responsible for this economic destruction?
You state that “investors are running for the hills and dumping their shares in private equity.” This is not how it works. Investors in PE backed companies commit to a limited partnership. They cannot sell their shares. After all, the “P” in “PE” refers to “Private” which implies there is not a liquid market for the underlying asset.
I am happy to serve as a source for you on this subject, it is an area that I have 20+ years of experience with.
It is true that in your example you can in the strictist sense of the word call a public company paying dividends a "dividend recap" but there is a big difference when a company takes out $4.3 billion SOFR +325 in order to take investors out of their investment as well as some profit. Brookfield did this with Clarios because the partnership's time horizon was up, public sale/IPO was not available so this is what they did.
The bank finances the distribution because, use the Clarios example, had very hot demand for the paper...CLOs, mutual funds and ETFs. The lenders in these broadly syndicated loans don't hold them...UNLESS you have a situation like right now...funds are pouring out of the high yield loan funds and many of the lenders are now "Hung" with a few billion of broadly syndicated loans.... Hung has a nice ring to it.
As far as running for the hills, this is definitely the case now. There are many current examples of private equity investors trying to sell their shares with the PE general partners conditioning the allowance of a sale to another party only if the investors commits to a new fund. I believe Carlyle has just done this.
As far as whether private equity companies are more vulneralbe to an economic downturn than public..we can certainly study.
1. Corporate finance is not exclusive to private equity. Share buybacks and dividends are done if they enhance return on equity. They are not done if they do not.
2. Banks must retain some amount of all loans that they originate. Risk is distributed regardless if it is a loan to a private company or a public company. Banks are not incented to make shitty loans.
3. A couple of things re: running for the hills. 1) LP interests are not "shares." Accuracy matters. 2) You are a bit confused in your understanding of the current market. Your reference to GPs conditioning a new commitment is what is known as a "stapled" deal. This is not new. GPs have always had approval rights and have always controlled who is allowed as an LP.
But to the point, are investors actually "running for the hills." Not really. You can look at pricing in the secondary market. Pricing is still very firm and in 2024 was up y/y. Google "Jefferies Global Secondary Market Review" if you are interested. What is new is the various structured transactions and continuation vehicles that are coming to market although I would hardly consider this "running for the hills." In fact restrictions disallowing retail investors from participating in private markets are coming down, which is increasing demand.
The broader issue with PE is twofold: 1) the increase in rates has destroyed NAV - the value of these assets is based on a discount cash flow model and the higher the rate on the 10-year the higher the discount; and, 2) capital markets are now freezing up which means no public issuance of stocks or bonds, which means there is no way to finance the exit of companies from PE portfolios. To the extent PE owned companies have to make hard decisions, all companies will have to make hard decisions, because access to capital will be constrained in a post tariff world. This is a function of the tariffs, not a function of the fact the equity is privately or publicly held.
Matt, I love you to death, but there are a lot of problems with this write up. You can do better.
Some Questions:
Is there anything especially unique about a debt financed distribution to equity? Public companies have debt and they pay dividends. Is this considered a “dividend recap?”
If this is so bad, why do lenders agree to finance the distribution? Banks are pretty sophisticated last time I checked.
You claim that companies are “saddled with high debt.” This claim deserves some numbers to support it. Are PE owned companies levered more than their publicly traded counterparts?
You claim that PE owned companies are inherently more vulnerable to tariffs than publicly owned companies. What is the basis for this claim? It seems counter intuitive since PE owned companies are smaller and more likely to sell to domestic consumers. All else equal, they are likely to benefit from tariffs. And aren’t the tariffs responsible for this economic destruction?
You state that “investors are running for the hills and dumping their shares in private equity.” This is not how it works. Investors in PE backed companies commit to a limited partnership. They cannot sell their shares. After all, the “P” in “PE” refers to “Private” which implies there is not a liquid market for the underlying asset.
I am happy to serve as a source for you on this subject, it is an area that I have 20+ years of experience with.
It is true that in your example you can in the strictist sense of the word call a public company paying dividends a "dividend recap" but there is a big difference when a company takes out $4.3 billion SOFR +325 in order to take investors out of their investment as well as some profit. Brookfield did this with Clarios because the partnership's time horizon was up, public sale/IPO was not available so this is what they did.
The bank finances the distribution because, use the Clarios example, had very hot demand for the paper...CLOs, mutual funds and ETFs. The lenders in these broadly syndicated loans don't hold them...UNLESS you have a situation like right now...funds are pouring out of the high yield loan funds and many of the lenders are now "Hung" with a few billion of broadly syndicated loans.... Hung has a nice ring to it.
As far as running for the hills, this is definitely the case now. There are many current examples of private equity investors trying to sell their shares with the PE general partners conditioning the allowance of a sale to another party only if the investors commits to a new fund. I believe Carlyle has just done this.
As far as whether private equity companies are more vulneralbe to an economic downturn than public..we can certainly study.
1. Corporate finance is not exclusive to private equity. Share buybacks and dividends are done if they enhance return on equity. They are not done if they do not.
2. Banks must retain some amount of all loans that they originate. Risk is distributed regardless if it is a loan to a private company or a public company. Banks are not incented to make shitty loans.
3. A couple of things re: running for the hills. 1) LP interests are not "shares." Accuracy matters. 2) You are a bit confused in your understanding of the current market. Your reference to GPs conditioning a new commitment is what is known as a "stapled" deal. This is not new. GPs have always had approval rights and have always controlled who is allowed as an LP.
But to the point, are investors actually "running for the hills." Not really. You can look at pricing in the secondary market. Pricing is still very firm and in 2024 was up y/y. Google "Jefferies Global Secondary Market Review" if you are interested. What is new is the various structured transactions and continuation vehicles that are coming to market although I would hardly consider this "running for the hills." In fact restrictions disallowing retail investors from participating in private markets are coming down, which is increasing demand.
The broader issue with PE is twofold: 1) the increase in rates has destroyed NAV - the value of these assets is based on a discount cash flow model and the higher the rate on the 10-year the higher the discount; and, 2) capital markets are now freezing up which means no public issuance of stocks or bonds, which means there is no way to finance the exit of companies from PE portfolios. To the extent PE owned companies have to make hard decisions, all companies will have to make hard decisions, because access to capital will be constrained in a post tariff world. This is a function of the tariffs, not a function of the fact the equity is privately or publicly held.
Thank you ToS. I have worked in the sector (not as much as you - 5 years) and had similar queries.