Please explain to me why PE is not going to shit the bed
Preface: I am a fucking idiot, and may or may not understand half of what I’m writing
But, how does most private equity survive if we go full blown recession/depression? There are a ton of private equity backed dogshit highly levered companies out there, which were probably bought at retarded multiples. If COVID lasts a while then you’ll see most of these companies begin to lose key revenues they need to service their massive amount of debt.
Not to mention liquidity dried up real fucking fast, which I guess was the reason for the Fed stimulus, but still, if this thing lasts I don’t see how with a sufficient drop in revenue they will be able to service their massive debt. If this happens to a few PortCos of a Lower to Upper MM fund, then the fund naturally goes bust right?
Of course you have the largest funds which can weather the storm, but plenty of PMs at pension/public funds have a sizable chunk of their portfolios allocated to this asset class, meaning they will surely be affected. Starting to sound a lot like 2008 right?
Except you don’t have people buying houses and not understanding that when shit hits the fan they won’t be able to pay their mortgage — no, this time you have PE professionals thinking the same shit but they’ve used a shit load of debt because it was cheap, and now if the PortCo goes bust, everyone at the PortCo loses their jobs, then if the fund goes bust normal people take a hit on their pensions as well.
These kinds of events would obviously lead to an even more fucked economy. Am I missing something big here, or could this easily happen? Again I’m an idiot, but this guy is smarter than me and I got some of my ideas from him adventuresincapitalism com/2020/02/18/is-pe-having-its-wework-moment/
The banks that lent out at the retarded multiples of leverage will have to work through this with the PE firms, making amendments to credit agreements etc. They arent obviously go to go bankrupt just because revenues decreased for a quarter or two- the whole thing is overblown, I dont think people understand how restructuring works, or credit agreements/workouts. Yes the syndicate can technically accelerate the loan resulting in default but its in nobodys interest to do that especially if its not a real fundamental problem with the business model
Alright so fair enough on that point, as it’s one of the more exaggerated ones. Of course the banks restructure the loans and change amendments etc. So yes bankruptcy is unlikely, but there are a lot of newerish funds that bought things at ridiculous multiples in the last 2-3 yrs. If we enter a recessionary environment that lasts 2-3 yrs, then do these funds have to extend the window in which they sell, or are they forced to sell/ipo/whatever at what would be an obvious loss?
The 2-3 years of recession from what most people predict will be a 2-3 month decline in revenue is way out of line and not worth discussing IMO, although maybe someone else will feel differently as truly nobody knows what will happen.
This is hitting every industry/sector all at once... we have two industries (airline, energy) asking for bailouts already and this thing hasn't even picked up steam.
Am I missing something? This has never happened before in modernity. It will be far, far worse than 2008.
Are these 2 PE-backed companies? Why are they already cash-strapped?
He referred to industries not companies? And if you’ve been following the markets/news it should be obvious why they are getting fucked.
PE portcos are drawing their RCs. the only time you do this is when you need to, and anticipate there is a real possible struggle ahead
Yes they are, but so are normal companies that are not as highly leveraged, and we all know that even with how well the balance sheet banks have had to position themselves to meet regulatory reqs, they cannot afford everyone drawing their RCs at the same time, right? Then what happens??
A lot of PortCos are tapping RC proactively to have excess liquidity if things do get bad and there is a liquidity crunch where that capital might not be available. Not as much of an issue for the banks vs. potentially FinCos. This also creates a spiraling issue where it creates an unnecessary crunch. I know of at least one lender that called up borrowers today. to ask to manage their RC draws over a couple days.
Do you think this has potential to be a catalyst for changes in regulation surrounding FinCos/shadow banks that may have played a little too fast and loose with working with PortCos?
My entire retirement fund is in ETFs. I usually deposit and forget. When vol kicked up last week, I took a look at my FI holdings and realized that 20% of it was in junk bonds. I was royally pissed to the point that I called the fund manager.
It might not be in anyone's best interest to foreclose or force bankruptcy, but any company that needs to roll debt, hasn't fully drawn committed capital, or needs an exit is going to be absolutely screwed here. There's a reason that you're supposed to measure PE returns against levered comps. It was painfully obvious last time around. It will be obvious again this time.
Bet you thought it would be so smart not to pay 50bps fees for an active manager who would have saved you 600bps in this downturn. Have fun being down -30%, with your shit 7% LT return lol, I'll just enjoy my 16% LT return and retire 10 times richer than you
Yeah dude, what a fucking loser invested in ETFs! Hedge funds are so sick bro!
That is a myth. Active managers do not save you in down markets. It is not like they are going to go to cash or suddenly start shorting the market.
Bump. Really interested to get opinions now that:
I was the OP, and work in a sort of specialized lending group at one of the BBs. Most of our clients are middle market companies with a few smaller publics thrown in. Basically it seems that for some companies they have been relatively unaffected, and had what basically amounted to a bad quarter. Some are still being affected but have competent management so are doing alright. Those that were performing poorly prior to all this are getting fucked tbh. While I don’t see anything apocalyptic coming down the pipe, I would keep an eye on the employment numbers. If they worsen without any new stimulus then things might get bad (especially on companies that rely on consumers).
I work in a sort of specialized (to region) lending group at a bank. Most of our clients are smaller businesses and LMM companies. Certain indstries are down and other are doing just fine. It may speed the demise of businesses where management has been struggling for a while but otherwise everything is business as usual outisde of the huge blow to particular induastries.
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