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There may be much more leverage in leveraged buyouts than meets the eye. Evidence comes from Elon Musk’s $43bn Twitter bid and a far lower-profile fundraising by London-based asset manager 17Capital.
Musk plans to obtain $12.5bn from a margin loan against Tesla shares worth $62.5bn. The money would contribute to the $33.5bn of cash equity he has committed to buying Twitter. The Tesla boss has already lined up $13bn in debt commitments.
17Capital has meanwhile raised $2.9bn to lend to buyout groups against their net asset values. Loans like these give private equity businesses more firepower to buy portfolio companies or simply greater financial flexibility.
NAV lending is just one of a proliferating range of products that apply financial engineering to financial engineers themselves. These innovations demonstrate that the private capital industry is deep and maturing. 17Capital estimates there is something like $5tn of unrealised NAV out there.
But such products are also a function of an era of low interest rates and rising asset prices, when any type of exposure to private capital looks appealing.
Among the other types of “general partner solutions” are “subscription lines” from banks. These provide breathing space before limited partners are required to put up cash for buyouts.
General partners are tapping the bond markets themselves to raise debt for their operations. Firms such as Dyal Capital and Petershill buy equity stakes in general partners, giving executives the liquidity and cash needed to invest as a limited partnership. “Secondaries” funds have meanwhile raised hundreds of billions of dollars to trade stakes in portfolio companies.
These ancillary strategies often have the same institutional backers as core buyout funds. Returns are typically lower. They are conceivably safer, particularly when focused on lending. 17Capital lends at just a 20 per cent loan-to-value, for example, and targets high single-digit returns.
Extra liquidity should theoretically make the private equity industry more efficient, if not bigger. A fully-fledged economic downturn, if it comes, will show which innovations are genuinely useful and which are just bull market froth.
The Lex team is interested in hearing more from readers. Please tell us what you think of the proliferation of ancillary products in private equity in the comments section below.
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