Private-Equity Provides Advantage in Illiquid Times
During periods of illiquidity like the current credit crunch, private equity-sponsored companies have advantages over most other firms that are experiencing distress, says Moody’s Investors Service.
Speculative grade issuers owned by private equity firms have the advantage of access to capital, says Moody’s, while distressed strategic firms need to seek outside investors to contribute liquidity for investments or stem a default.
We have found that many issuers backed by private equity have access to capital sources unavailable to strategic operators facing similar market constraints.
However, it is uncertain how the private equity market will respond to upcoming maturities or how long private equity firms will remain willing to fund capital needs without the benefits of incremental leverage, says Moody’s.
According to Moody’s, private equity-sponsored companies have had considerably less access to the credit markets than they did previously, and financing has become unusually expensive since the severe contraction of liquidity began in mid-2007.
Private equity firms’ access to capital is supported by the compelling advantage of having “locked up” their investors’ funds, Moody’s notes. Typically, investors provide capital for about seven years, although the range can be shorter or longer. Evidently, private equity still has remaining capital to deploy today; it is only the length of the credit crunch that may eventually test the liquidity of these firms.
Such companies as Kraton Polymers, owned by TPG Capital, and DeCrane Aerospace, owned by DLJ partners, have used the equity-cure feature of their credit agreement. Others, such as KIK Custom Products, owned by Caxton-Iseman, received a direct equity injection. “It is likely we will see more such moves in 2009,” Moody’s says.
For details see: The Private Equity Advantage: Sponsored issuers in the credit crunch
You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
