PE turns to ‘structured equity’ as exit bottleneck persists
Private equity firms are increasingly using structured equity and other hybrid financing arrangements to return capital to investors while retaining ownership of businesses that have become difficult to sell at attractive valuations, according to a report by Bloomberg.
Private equity firms are turning to a new type of financing called structured equity to return capital to investors while keeping ownership in companies that are hard to sell at good prices, according to Bloomberg. This strategy has become popular as the buyout firms face a long wait for investors to receive their money back. Private equity managers now manage around $3.8 trillion in assets that haven't been sold yet, and they keep these investments for about seven years on average, as reported by Bain & Company.
Traditional debt is getting more expensive because of high interest rates, and public markets are not offering reliable ways to sell the companies, so managers are using hybrid financing that's part debt and part equity. Structured equity gives investors immediate cash without selling the whole company, and it lets the businesses raise more money without taking on too much extra debt.
Big private capital firms like Apollo and Bain Capital are among those offering this kind of financing. The returns can be in the teens, much higher than the returns from normal debt from the same companies, and the instruments usually rank above common equity if the business has financial troubles. Private equity managers like this because they can give distributions and possibly make their fund's performance look better, while still keeping an interest in the companies they think can grow more.
Some people think this doesn't really solve the problem of not being able to sell the companies, and that giving cash now might not be worth it if it ends up hurting their long-term returns. Structured equity is more than just a short-term fix, though. It's part of a bigger trend in the buyout industry where managers are using more financial tools like dividend recaps, net asset value financing, and special vehicles to create liquidity, since the usual ways to exit have slowed down.
Structured equity usually comes in the form of preferred stocks with set dividends and no fixed end date. Investors get their money back when the company is eventually sold or goes public. Some terms also include making the dividends bigger over time, giving extra control, turning them into common stocks, or letting investors push for an eventual exit.
Private capital providers say this demand is coming from companies that need financing that's more like debt than equity.
Written by urgent.news from Private Equity Wire's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
