Storm Clouds in Sunny Munich

The great and the good of the private equity industry have gathered in sunny Munich for SuperReturn 2008. David Rubenstein, Thomas H. Lee and Guy Hands are in attendance.

Despite the pleasant weather, a dark cloud hangs over most of the conversations as the debt crisis plaguing America makes itself felt across European capitals.

Rod Selkirk, CEO of Hermes Private Equity which invests over US$3bn on behalf of the UK´s largest pension funds including BP, summed up the mood when he said: “God help us if all senior lenders take the attitude of distressed debt players. If conventional senior lenders do that then we´ve all got some major problems.”

Gustav Ohman of Industri Kapital, a major player in the European mid-market who almost lost its largest holding to a distressed debt fund a few years back, highlighted the very real threat from distressed debt folk. Ohman said: “We almost lost our largest holding because these players were leaning on the bank to refuse our waiver. In the current market distressed debt houses can just buy a position in the senior debt and will have much more control.”
Even without this shift in attitude European private equity investors are worried about minute breaches of covenant. Selkirk said: “Most deals in the mid-market have covenants not many, if any, are covenant light. As we all know sometimes you meet the covenants and sometimes you miss them but now it seems that the banks will use any small breach in the covenant to change the terms on the debt to what they wish they had in place now rather than what they regret agreeing to last year.”

As many private equity investors used the freely available credit last year to pay premiums for companies managers may find themselves coughing up much more equity than they originally intended.