Cohen and Moulton warn on rising debt levels

Sir Ronald Cohen and John Moulton have warned that the aggressive levels of debt being put into European buyouts could trigger a market correction.

The private equity industry in Europe is facing an impending correction, John Moulton, head of UK private equity firm Alchemy Partners, has told the Financial Times.

Moulton warned that the European market has gotten more aggressive and complex, with rising debt levels fuelled by increasing demand for cheap loans and bonds and low interest rates.

Moulton’s concerns were echoed by Apax Partners founder Sir Ronald Cohen, now retired, who said that a “permissive environment” had led to buyout transactions raising debt at eight times projected earnings. “Debt multiples are increasing all the time,” Cohen told the FT. “Judged by historic terms [private equity groups] are over paying.”

According to S&P Leveraged Commentary and Data, average debt ratios for leveraged buyouts of European businesses has risen from four times earnings to six times earnings in the past two years.

Cohen added that a change in market sentiment, with higher rates and weaker growth, could prove hazardous for the private equity industry. “It is a dangerous combination if a company’s sales and profits fall at the same time as debt servicing costs rise.”

However, Cohen noted that it is too early to tell whether an increase in interest rates alone would affect the European buyout industry.