Bankers and lawyers report a significant rise in demand for use of bridge financing – a short-term loan leveraged on the limited partners’ commitments to finance acquisitions made by fund managers – over the last 18 months.
Low interest rates and the access to cheap debt are making external financing more attractive.
General partners also report increasing availability of credit for private equity deals compared with 12 months ago.
In a survey of GPs and other market participants by Caplantic, a German-based independent advisor for private equity funds, 57 percent of GPs said credit had become more readily available to fund deals over the last year.
The survey showed the majority of GPs believe credit conditions and terms for private equity deals have improved over the last 12 months.
But the study also suggested that fund managers believe the rising levels of dry powder and bridge financing is leading to tougher competition for deals and higher valuations.
Fund financing is also regarded as leading to a slowdown in capital calls, according to 40 percent of the GPs surveyed. More than a third – 37 percent – thought that higher returns were a favourable result of fund financing.
For the survey, Caplantic polled more than 80 GPs, placement agents, consultants and other market participants, with GPs making up around three-quarters of the sample.