Private Equity Expanding Into Leveraged Loans; Moulton Offers Warning

According to Standard and Poor’s cash-rich Private Equity firms are expected to continue to buy up leveraged loans at a high pace.  Leading firms such as Apollo (who’s raising up to £1.1B to buy badly performing loans from European banks), Blackstone (who bought GSO Capital earlier this year), TPG (which has raised a distressed credit fund), Cinven (which recently acquired half of debt advisory and management firm Indicus Advisors), Carlyle (which closed it’s second distressed fund of $1.35B earlier this year) and others have gotten into the game recently at a much greater level than in the past.

After the credit crunch hit last year, the banks were left holding more than $200B of “hung” leveraged loans, which they underwrote on generous terms during the debt boom, and no where to move them.  Enter the private equity firms with many fresh off of fundraisings to take the debt off the bank’s hands.  However, not everyone (particularly John Moulton of Alchemy Partners), is under the mindset that this is a match made in heaven.  Amongst his reasons he points to the limited possibility of returns if a firm uses a fund designated for buyouts to buy up debt as any gain would be capped versus the unlimited upside return potential of equity.  Time will tell!

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