PE Firms Add Capital to Debt-Laden Portfolio Companies

LONDON (Reuters) – Private equity houses are having to inject more capital into the companies they own to shore up balance sheets and stave off default as increasing numbers of private equity-owned firms are showing signs of stress.

Private equity groups invested heavily in highly leveraged deals in the 12 to 18 months leading up to the credit crunch and there are concerns deals — such as BC Partners acquisition of upmarket London estate agent Foxtons — are beginning to come unstuck.

“Everybody knows that the valuations and the leverage used at the larger end of the buyout market were not justified and could not really take a massive switch in the economy,” said one private equity fund director.

“What’s interesting, however, is that you have not seen a lot of public defaults in these big buyouts,” he said, adding that large fund managers can always inject more money into deals which they do not want to see “blow up”.

BC Partners, which bought Foxtons in May 2007 for a figure reported to be around 390 million pounds ($667 million), declined to comment on Tuesday. Foxtons has 260 million pounds debt and has been hit by the protracted downfall of the UK housing market.

Joseph Bergin, a director at lower mid-market buyout specialist NBGI Private Equity, said private equity groups are better placed to deal with financial difficulties than public companies because they have a “rich shareholder”.

“We typically have provided further rounds of funding to our existing investments. I would say private equity (owned) companies have the advantage that in difficult times they can call on their institutional shareholder to provide them with additional funding to help through any difficulty,” he said.

Malcolm McKenzie, managing director in charge of the performance improvement group at Alvarez & Marsal in London, said he has seen a 30 percent increase in inquiries, adding that both private equity owners and debt holders are approaching the company to advise on a turnaround strategy.

McKenzie said the decision to inject further funds into a company is a tough one, however, and often one of last resort.

“They will be very hard-nosed about that and try everything before going down that route, including considering shall we let this business go under,” he said.

He added the favoured exit, should a turnaround strategy not work, would be disposal of the company at a low price to get it off the books.

Where private equity owners do believe in the long-term health of a business and have injected more capital, they may look to do new deals on a lower debt multiple to bring down the overall average debt in the portfolio.

“One of the trends if you look over the next year is do you see a lot of activity generated by the bigger end of the private equity market – do you see them buy a lot of companies in the mid-market and the smaller mid-market? Are they using all equity in their deals as they already have great debt?” said the private equity fund director.

He added the buyout firms have a lot of money and a lot of time, “so it’s likely they’ll find a way to make money – it’ll just take longer and it might not have the same return”.

By Simon Meads

(Editing by Elaine Hardcastle)