Private Equity: Big Changes Are Coming to the Industry, Says Tim Melvin
DailyAlts market strategy Tim Melvin says that the game is changing for private equity.
“We will see a pullback in deal multiples, and leverage levels are going to decline,” he said on Tuesday.
Tim Melvin on Private Equity
While there is sufficient capital for private market lending at the moment, capital sources could dry up quickly if the public equity markets continue to decline. Lenders are also likely to become stricter about underwriting standards. It could be a very long time before we hear the phrase “adjusted EBITDA” again.
“The last time we had a steep recession, the number of private equity funds dropped by almost 25%,” he said. “I expect to see something similar as the economy is negatively impacted by the coronavirus. However, the number of firms in existence has doubled in the decade since the last recession, so there will likely be a significant impact on financial markets in the current environment.”
The combination of high leverage with 75% of deals being done with debt levels of more than six times EBITDA also is likely going to lead to higher default rates and business failures among private equity-owned companies all over the globe.
“It will be challenging to determine how high the failure rate will be this time as we are still in the early stages of economic disruption. It is likely to be much higher than the Great Credit Crisis when less than 25% of private equity deals were done at debt levels of 6 times EBITDA and higher,” he said.
Melvin also said we will likely to see a changing landscape in the private equity industry as a result of the virus. Smaller firms may struggle and have to close their doors as over-leveraged, highly valued buyout deals implode. The larger firms may see funds raised in the past few years decline, but they are big enough to absorb the blow. The capital they put to work amidst the carnage with more reasonable debt levels and valuation multiples should pay off big for the investors over the next several years.
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