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With jitters in financial markets, private equity ventures into funding tech buyouts

Banks and junk bond investors have grown nervous over runaway inflation and geopolitical tensions since Russia invaded Ukraine. This has allowed private equity firms to step in to fund deals involving tech companies whose businesses have grown with the rise of remote working and e-commerce during the COVID-19 pandemic.

Buyout companies, such as Blackstone, Apollo, KKR & Co Inc and Ares Management Inc, have diversified their activities in recent years beyond acquiring companies to become corporate creditors.

Loans offered by private equity firms are more expensive than bank debt, so they were generally used mostly by small businesses that did not generate enough cash flow to obtain bank support.

Today, technology company buyouts are prime targets for these leveraged loans, as these companies often show strong revenue growth but poor cash flow as they spend on their expansion plans. . Private equity firms are unhindered by regulations that limit bank lending to companies that show little or no profits, and banks have also become more cautious about underwriting high-risk debt in the current turbulent environment. markets. Private equity firms don’t need to underwrite the debt because they hold it, either in private loan funds or in publicly traded vehicles called business development companies. Rising interest rates make these loans more lucrative for them. “We are seeing sponsors going through two leverage processes for new deals. They are not just going to investment banks, but also direct creditors,” said Sonali Jindal, debt financing partner at the law firm. Kirkland & Ellis LLP. It is difficult to obtain complete data on non-bank loans, as many of these transactions are not advertised. Direct Lending Deals, a data provider, says there were 25 leveraged buyouts in 2021 funded by more than $1 billion in so-called unitranche debt from non-bank creditors, more than six times the number of these operations, which numbered only four a year earlier. Thoma Bravo financed 16 of its 19 takeovers in 2021 by going to private creditors, many of whom were offered based on the recurring revenue generated by the companies rather than their cash flow. Erwin Mock, head of capital markets at Thoma Bravo, said non-bank creditors give him the ability to add more debt to companies he buys and often close a deal faster than banks. “The private debt market gives us the flexibility to do recurring income loan transactions, which the syndicated market currently cannot provide that option,” Mock said. Some private equity firms also offer loans that go beyond leveraged buyouts. For example, Apollo last month increased its commitment to the largest loan ever made by a private equity firm; a $5.1 billion loan from SoftBank Group Corp, backed by the technology assets of the Japanese conglomerate’s Vision Fund 2. NOT CONSTRUCTED Private equity firms provide debt using the money institutions invest with them, rather than relying on a depositor base as commercial banks do. They claim that this protects the financial system as a whole from their potential losses if certain transactions go wrong. “We’re not limited by anything other than risk when we do these private loans,” said Brad Marshall, head of private credit for North America at Blackstone, as banks are limited by “what agencies ratings will say, and how banks think they will use their balance sheets”. Some bankers are worried about losing market share in the junk debt market. Others are more optimistic, pointing out that private equity firms are providing loans that banks would not have been allowed to make in the first place. They also claim that many of these loans are refinanced with cheaper bank debt once the borrowing companies start generating cash flow. Stephan Feldgoise, global co-head of mergers and acquisitions at Goldman Sachs Group Inc, said direct lending deals allow some private equity firms to leverage companies to levels that banks would not allow. “Although it may, to some extent, increase the risk, they can see it as a positive,” Feldgoise said.

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