alt Hacker NewsA $300B 'Debt Wall' Is Looming over Private-Equity Backed Companies
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One interesting knock on from the hyperscaler growth we've seen is that the Mag7 have issued so much debt that they are crowding out other companies who would otherwise have no trouble issuing debt.
The private equity and private credit crowd is one of these groups that are currently running into this issue.
There is no way a growing company($15M to $500M in yearly sales is the sweet spot for these private credit companies) can compete with Google on debt terms so they have to raise their rates to compete suddenly, not because of all rates rising but strictly because we've just seen a huge debt issuance from some very solid credit companies.
We haven't seen a shock like this in 20+ years I've followed the credit market where a small group of companies issue so much high quality debt in such a short period of time, note there is also a lot of less high quality debt issued in this same time:)
So much has been issued that credit funds have run out of appetite to acquire Lowe middle market debt at their current spreads. This is just the way markets work so no one is crying in the casino but it is a big shock to the credit markets.
heck there was concern that the US government may have trouble issuing 5-10Y debt at rates they are used to because of the amount of GOOG, META,etc debt that is available at better terms.
Its a wrinkle to the markets that no one really predicted as a knock on effect of AI's growth.
This is all the back drop for BDC(Business Development Companies) and other private credit issuers who normally loan money for 5-7 year terms.
Those cheap 2021 loans to these small private companies are now coming due into this market with the additional head wind that the largest single sector that issued debt was venture backed software companies, who now face the head winds of the macro factors described above and the additional factor of AI commoditizing alot of hte software that these companies are building.
Private credit and equity are going to have a rough couple of years.
Things to watch out for are lack of IPO's and exist from venture/PE backed companies and a proliferation of continuation funds that kick the can down the road.
On the plus side, its a great time to be a credit trader, but not necessarily a credit issuer:)
As I understand it, there's also a 'write-down wall' looming over many companies and assets in private equity portfolios.
Those holdings are carried in the books at valuations that arguably could be justified in the past but are no longer realistic.
Private equity firms are basically sitting on them, unable to sell them or list them at current valuations.
For someone like me who doesn't really understand this area, what does it mean for those big VC-backed or private equity-backed firms that have bought others, and have debt?
Are they forced to sell? To raise new capital? To increase value somehow (?) to show the debt can be met? I don't know enough to even know what questions to ask. Are they in trouble, I guess, as in, suppose they had to sell to cover debt, in this market, would anyone be around to buy?
Good, let it burn.
This is the PE playbook backfiring. Buy the company, load it up with debt, pillage every dollar that can be found, then try to pass it off to some unsuspecting schmuck by convincing them the company still has value. That works unless interest rates skyrocket mid flight and you have to renew the debt, then you’re royally f$&!ked.
If these PE firms are truly the business geniuses they claim to just run the companies they bought well and weather the storm. However I think we’re about to find out real quick who is actually good at business and who was just shuffling cheap leveraged money around trying to look important and smart.
Everyone seems to agree that PE is bad, but what about pension funds and other institutional investors in PE, would they be insolvent without PE?
We got through the Greek debt wall and CMBS debt wall unscathed. Is this debt wall more troublesome than the other two?
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I think ai leads to an accounting error in software assets. So if you book keept software at x amount of goodwill that must be written down. Reason ai can clone the software fast so the value is not what is book keeped.
For a while (2018-2022) it was hot to buy up software companies that dominated a single niche and jack up prices. The bet was that since software is such a 0-1 business that they would have great moats and have strong pricing power. My father-in-law is blind and used to use JAWS until it got bought up by a private equity firm (Vispero) which tried to dominate the software accessibility market and jacked up the prices to annual subscriptions. He's a electrical engineer so he was comfortable switching to free software NVDA, but a lot of people paid up.
Now with LLM's that business model is in shambles and the finance side of it is less attractive with interest rates so high. I suspect that this is actually driving the software engineer hiring slow-down, because these companies were actually doing most of the employing of software engineers, much more than the big tech companies.