In Private Equity Market, Debt Is Back and Risky as Ever

Private equity firms are loading up on debt like it?s 2007, and that could spell trouble ahead.

The debt buildup last time around went bust as private equity firms suffered big losses during the financial crisis of 2008-09.

Since January 2008, private-equity firms on average have put in enough of their own capital to finance 42 percent of the cost of large buyouts and borrowed the rest, according to Thomson Reuters, The Wall Street Journal reports.

Editor's Note: This Wasn?t an Accident ? Experts Testify on Financial Meltdown

But that average has dropped to 33 percent in the last six months, comparable to the 31 percent average for 2006 and the 30 percent average for 2007.

The large leveraging means successful deals make a ton of money, but failed deals lose a ton of money. That?s why it?s so risky.

"Leverage is a double-edged sword," Mark Goldstein, an investment banker for private-equity firms for RBC Capital Markets, tells The Journal.

"The gain is greater if the investment works out, but the consequence is also greater if things don't go as planned."

Another interesting development in the private equity industry is that firms are increasingly selling their holdings to other private equity firms amid sluggish demand for initial public offerings.

?It does seem like a confluence of sellers looking for points on the board and buyers looking to put dry powder to work before an investment period expires,? Robert Durden, managing director of Morgan Creek Capital Management, tells Bloomberg.

Editor's Note: This Wasn?t an Accident ? Experts Testify on Financial Meltdown

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Source: http://www.moneynews.com/StreetTalk/private-equity-debt-risky/2012/12/19/id/468329

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