It feels like a deja vu, at least for all those who already made deals after the Lehman crisis in 2009/2010, when we had a similar „heavy market“ in Private Equity. This time, rising interest rates have devalued assets on the buy and sell side alike and a recession (combined with high inflation) impacts revenues and profits in the industry. Buyers and sellers do not yet find common ground because the „new prices“ have not yet been established. As a result, „Sun Shine M&A“ has drastically decreased whereby (simultaneously) distressed opportunities come up, because numerous PE portfolios run into financial covenant breaches due to high leverage ratios.
For LBO funds this means heavy portfolio work and sometimes the necessity to provide an equity cure as a last resort to keep the asset. In some cases however, if an equity cure cannot be provided for contractual reasons or lack of funds, or if debt providers loose their head and terminate loans unreasonably (which unfortunately sometimes happens), even good assets might now come to market prematurely. As sad this might be for the fund in question, it however generates multiple opportunities for those investors who invest opportunistically. This does not only mean already invested debt funds who see a chance to „snatch an asset cheaply“ through equity options or swaps, or typical distressed funds who now see an increase in targets in their core field of business. Also for typical LBO funds and family offices with sufficient dry powder and the guts to step out of their comfort zone this new environment can create nice opportunities.
Under a German legal regime there are multiple techniques to take advantage. In particular in cooperations with the management or jointly with the old fund. The „self-governance“ procedures and acting as a plan sponsor are just the frameworks that come to mind first. For the owner fund this might be a chance to at least keep part of the asset value on board to avoid complete write offs. Analyzing highly leveraged structures of the past 3 years which have a sound operative business with distressed acquisition vehicles will reveal multiple of such cases it seems. Having the right team (internally and externally) is key to address such opportunities.
It will be interesting to see how typical LBO funds or other institutional investors react to this new environment. The next 12 month will lead the path.