Europe Private Equity Firms Take Steps to Stave Off Cash Crunch

(Bloomberg) -- European private equity firms are preparing their portfolios for a potential liquidity crunch as the impact of the coronavirus roils markets and threatens global growth, people with knowledge of the matter said.

EQT AB and Permira have urged some companies they own to draw down credit facilities to prevent shortfalls of working capital if economic prospects worsen, according to the people. CVC Capital Partners is also discussing the potential of tapping unused credit lines for certain firms in the future, the people said, asking not to be identified because the information is private.

The investment firms are focusing some of their efforts on companies in consumer-facing industries most likely to be hurt by the outbreak, the people said. Representatives for EQT, Permira and CVC declined to comment.

Businesses controlled by private equity firms tend to carry more debt than others. While lender protections have eroded massively over recent years, some banks have held onto rules requiring borrowers to meet certain standards of financial health to use their credit lines. Acting now, even if the companies aren’t in need of cash, can help stave off the possibility they would be unable to access funding later when the impact of the virus becomes apparent in their earnings.

“Private equity funds have learned from 2008-2009, and they are trying to draw as much credit facilities and working capital facilities as they can,” said Wolfram Schmerl, a managing partner at advisory firm Alantra Partners SA in Germany.

Mid-sized private equity managers in Europe have also been asking their portfolio companies to chase any money they’re owed and do risk assessments on how they would operate with reduced staff or fewer facilities, Schmerl said.

Managing Downturn

Blackstone Group Inc. and Carlyle Group Inc. have also been recommending that certain portfolio companies draw down credit facilities, Bloomberg News reported this week. They join corporate titans including Boeing Co., Air France-KLM and Hilton Worldwide Holdings Inc. that have been building up their cash reserves.

Buyout funds have been rushing to spend near-record amounts of dry powder, in many cases competing against each other and driving up asset prices. If the coronavirus triggers a global demand shock, it could force private equity firms to shift their focus from hunting for targets to managing their existing holdings and finding ways to weather the downturn.

Still, there’s so far little fear the coronavirus pandemic will trigger a widespread credit crunch comparable to the 2008 global financial crisis. A decade on, banks are better capitalized and buyout firms generally use lower amounts of leverage, making them less vulnerable in times of stress.

The market downturn and falling interest rates could also create an opportunity for buyout firms to make new acquisitions -- if they can line up the financing.

“Every day, it’s becoming a better day to buy,” Steve Schwarzman, the chief executive officer of Blackstone Group, said last week.

©2020 Bloomberg L.P.

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