The buyout market is currently experiencing a phenomenon private equity professionals refer to as a “hiatus”. Put more bluntly, financing has dried up. This much was evident from figures produced earlier this week by data provider Dealogic, revealing that the value of private equity deals around the world fell 68 percent to $130 billion in the third quarter of this year.
At the heart of the problem is a $300 billion mountain of bridge loans and debt underwriting commitments that helped to fuel the buyout boom, but which now, following the summer’s liquidity crisis, can only be sold at a loss. Wary of making new underwriting commitments until the backlog has been cleared, the banks have pulled in their horns – and cut off GPs’ supply lines in the process.
So, how to relieve the blockage and get the supply lines humming again? Cue the “hung bridge” fund, so-called because its purpose is to buy up the product “hung” on banks’ trading desks. Examples include the $3 billion Oaktree Fund launched by Oaktree Capital Management and Texas Pacific Group’s $1 billion TPG Credit Fund. The phenomenon is spreading fast: some estimates suggest that hung bridge funds could consume as much as $170 billion of the LBO debt overhang.
In certain quarters, scepticism reigns. Do these funds not represent supreme chutzpah on the part of those LBO funds? They helped create the problem, for which they now offer a solution – at a price.
Less cynical market sources point to a strong mutual advantage in these transactions. GPs, they say, may be willing to pay a highly competitive price for the debt and, in the process, assume modest returns – typically in the high teens. For the banks, the advantage is obvious: reducing the size of the hit they might otherwise have expected to take. For GPs, the resumption of more normal market conditions once the old inventory has been shifted should mean the banks reopen for business.
There is a further twist. Some of these funds are sponsored by the banks themselves. Lehman Brothers and Goldman Sachs both have vehicles in the market and, earlier this week, the FT reported that KKR and Citigroup were launching a joint venture worth between $5 billion and $10 billion to invest in impaired loans, including LBO debt. You may see in this an irony given the zeal with which these organisations fuelled the boom in the first place. But at least they appear to be undertaking the clean-up with equal enthusiasm.