RTR: Buyout funds rethink deal financing amid shortage of debt

REUTERS reports:

Private equity funds are rethinking how they pull off large deals after a 40.4% contraction in global buyout activity amid a shortage of debt financing caused by rising interest rates and banks’ reluctance to open their money taps.

Blackstone’s (BX.N) acquisition of Emerson’s (EMR.N) Climate Technologies business in the United States and KKR’s (KKR.N) purchase of French insurance broker April are just two examples of how buyout houses are having to turn to private lenders or put more skin in the game to secure deals, bankers and investors told Reuters.

After a bumper start to 2022, the leveraged buyout (LBO) market has slowed down, as the war in Ukraine and hawkish interest rate moves drove up financing costs and weighed down valuations.

The number of LBO deals announced worldwide to Dec. 14 has dropped 23.3% from the same time last year, while the overall value of transactions has taken a 40.4% hit, based on Refinitiv data.

Overall, dealmaking globally has plunged 37% to $3.66 trillion so far this year, based on Dealogic data, after hitting an all-time high of $5.9 trillion last year.

“The first quarter of 2023 is going to be relatively slow from a sort of M&A and financing front,” said Uday Malhotra, Citi’s co-head of leveraged finance and loans for Europe, the Middle East and Africa (EMEA).

“[But] private equity funds still have significant amounts of dry powder, and by the second half of next year, they will be looking to put some of it to work,” he said.

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