Buyout firms ‘face big equity injections’

Private equity firms may need to inject some 450 billion euros (£384bn) of new equity into their portfolio companies as parsimonious banks cut back on money they will lend against these assets, buyout executive Guy Hands said.

Hands, who has been in the spotlight for the collapse of his £4bn EMI deal at the height of the buyout boom in 2007, said that some 3 trillion euros worth of “leveraged deals” would need to be refinanced between 2013 and 2015.

“These refinancings will require the investment of substantially more equity,” he said. Hands said loan-to-value (LTV) ratios for bank loans were likely to be closer to 60 to 70 per cent compared with 85 per cent at the height of the buyout boom.

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“On this 3 trillion of leveraged deals, if 15 per cent more equity is required, then 450 billion of new equity will be needed,” he said in a speech at the annual Superinvestor conference in Paris.

It was unclear from his speech whether the figure included only private equity deals or also real estate transactions.

That means that private equity funds will have to tap investors for more cash and will have less to spend on new acquisitions at a time when the market will be flooded with potential buyout opportunities, Hands said.

Those will include assets being sold on the cheap by banks under pressure to shrink their balance sheets, governmental and quasi-governmental assets, private equity portfolio companies and divisions of large companies that are seeking to reduce their debts.

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