Private capital circumvents the IPO parade by taking billions in loans

A number of private investment companies go public. But another group is raising capital more discreetly – by selling record amounts of debt.

The largest private companies in the industry raised at least $ 9 billion through debt sales last year to invest in their own buy-out funds, finance growth or pay dividends to partners, according to industry executives and records received. from the Financial Times. These include Warburg Pincus, Bain Capital, General Atlantic and Vista Equity Partners.

Private equity firms have traditionally financed their leverage acquisitions by borrowing against the assets of a target company. But the debt borne by the buyout companies themselves, unlike their portfolio companies, is a change from the past. They were more likely to raise money by selling minority stakes to private investors or by initially offering them publicly, as TPG estimated at $ 10 billion this month.

Borrowing avoids dilution of property and offers tax benefits by deferring some capital gains. Private debt placements do not require registration with the US Securities and Exchange Commission.

“If, as a joint partnership, I want capital for some reason, there are many options besides having to go public,” said Saul D. Goodman, head of alternative asset management banking at Evercore.

Bar chart of debt sold through private placements in 2021 (billion dollars), showing that private equity firms take out loans to raise capital

Several companies said they had taken on new debt ahead of the Federal Reserve’s expected increase in interest rates. Many can borrow for a decade or more, about 3 percent, to invest in their own redemption funds, which have historically repaid 16 percent a year, according to Bain & Co.’s estimates of the industry’s long-term average return.

Companies make a difference.

“It helps them raise money without leaving their pockets,” said Joseph Lombardo, head of private equity consulting at Houlihan Lokey Investment Bank. “They can make money, and the price of the loan is less than their expected return.

Deals can also help companies manage the flow of cash flowing into the private equity industry.

In 2021, record deals of $ 1.2 billion were made and another $ 300 billion of new money was raised to invest in corporate buyouts, according to PitchBook. But inflows can create a monetary crisis. Pension fund investors require private equity firms to borrow at least 2% of each fund, commitments that can exceed $ 400 million, as the largest funds in the industry exceed $ 20 billion.

“It’s easier to make a 3 percent commitment when you have a $ 100 million fund against a $ 20 billion fund,” Lombardo said.

The biggest such debt proposals were $ 1.5 billion in deals made by Warburg Pincus in September and Boston-based Bain Capital in February. Global Infrastructure Partners sold $ 1 billion in debt in November.

In October, Vista Equity Partners took out a $ 930 million loan using private debt placement, which it sold to a group of US insurers, raising low-interest money that the company will invest in its funds along with its limited partner investors, according to documents received. from the FT and sources familiar with the previously undeclared proposal. The debt has an AA-rating of Kroll and fixed interest rates ranging around 3% for loans of 10-15 years.

Vista’s first such debt deal came a year after its founder, Robert Smith, filed a criminal investigation in October 2020 with the U.S. Department of Justice, in which he admitted to evading $ 43 million in taxes.

Other debt sales of less than $ 1 billion include US-based private investors General Atlantic, Stone Point Capital and Audax Group, credit manager GoldenTree Asset Management and real estate investor I Squared Capital, which uses part of its $ 300 million revenue to pay dividends to partners.

Insurers and asset managers such as AIG, MetLife, Voya, Allianz, Prudential and Legal & General are among the dozens of lenders who now want to lend on favorable terms with minimal agreements.

Athene, the insurance division of the private investment group Apollo Global Management, has also become a huge lender. It was one of the creditors who bought $ 1 billion in debt sold by Global Infrastructure Partners for between 10 and 20 years, which brought coupons ranging from 2.7 to 3.25 percent.

The market may cool as interest rates rise. When Warburg Pincus closed its $ 1.5 billion debt offering in late September, 10-year bond yields were just 1.37 percent. It has since increased by about half a percentage point.

However, activity shows that even private companies are treated by debt buyers as A-rated corporations.

“What people have realized is that there is a solid force in private equity companies outside of their founders or key people,” said Lombardo of Houlihan Lokey. “It is almost impossible to withdraw highly performing private credit or private capital in two or three years.

Additional reports from Kay Wiggins in London

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