P.E. Downturn Coming, But Who Cares?

Sooner than later, say most private equity practitioners, there’s going to be a downturn in the industry. But most of them don’t seem to care.

Sooner than later, say most private equity practitioners, there’s going to be a downturn in the industry. But most of them don’t seem to care. In a poll at a recent Financial News-sponsored conference, about three out of four attendees predicted the dire situation to occur, along with a rise in default rates, yet only one-third say they are preparing for it. But rising interest rates along with oil prices and greater focus on regulation in the leveraged finance market, John Moulton of Alchemy Partners told the meeting, could signal a meltdown. On the other hand, those signals are not strong enough at this time to cause trouble. The interest rate environment is relatively benign,” said Matthew Robinson of Intermediate Capital Group, adding that “covenant levels have plenty of headroom on deals and amortization structures are back-ended.” The addition of collateralized loan obligation funds, Paul Hatfield of Alcentra told FN, helps provide diversity in the market that could aid in reducing the chances that a default could result in a systemic failure. Also at the conference, Wieland Jannsset of ABN Amro predicted that at least for the first half of next year, there won’t be a slowdown in debt, and Georg Grodzki of RBC Capital Markets noted that even while there has been a lot more high-yield paper issued in Europe, the percentage of defaults would seem small comparatively even if the number of actual number of defaults increased.