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Top LBO fund investors pile on leverage to boost returns


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Nigeria

IMAGE: Oliver Gottschalg, a professor at French business school HEC Paris »

September.12.2014

Some of the world’s biggest investors in leveraged-buyout funds are themselves using unprecedented levels of debt to boost returns.

“Leverage is a double-edged sword,” said Oliver Gottschalg, a professor at French business school HEC Paris. “It can boost the performance on the upside and rapidly eat into capital on the downside. The more leverage you apply, the more extreme the outcome will be for the investor.”

Ardian, Coller Capital Limited and Blackstone Group LP all bought stakes in private-equity funds this year, using financing from firms including Bank of America Corp. and Lloyds Banking Group Plc to fund as much as half the purchase price, people with knowledge of the matter told Bloomberg.

Investors are poised to buy $30 billion of fund stakes this year, according to Evercore Partners Inc, twice the amount in 2007, before the credit crisis.

Borrowing lets the investors get cash upfront from their holdings, rather than wait for assets in a fund to be sold, or helps them fund new investments without having to ask their backers for money immediately.

For banks, the loans can produce higher returns relative to loans to companies of a similar credit quality, said Bill Murphy, a managing director at advisory firm Cogent Partners LP.

The number of banks willing to provide funding has more than tripled in recent years.

Bank of America, JPMorgan Chase & Co. And Nomura Holdings Inc. have joined smaller lenders such as Lloyds, Natixis and Royal Bank of Scotland Group Plc that have traditionally served the market.

“There’s pressure on buyers to generate returns and pressure on banks to put money out of the door,” said Cogent’s Murphy, who’s based in New York.

Bank of America, based in Charlotte, North Carolina, was one of a group of banks that in March participated in a $1.03 billion loan facility for Lexington Partners Inc., a so-called secondaries fund that buys stakes in private-equity funds.

The four-year arrangement gives Lexington the ability to buy stakes in funds without immediately having to seek money from its investors, according to a person with knowledge of the transaction. By delaying the request for cash from its backers, Lexington can improve its internal rate of return, a performance gauge that factors into account how long a firm takes to return money. A spokesman for the firm declined to comment on its use of debt.

Article Credit: Businessdayonline

Updated 3 Years ago
 

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Tags:     Oliver Gottschalg     Coller Capital Limited     Blackstone Group LP     Bill Murphy    

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