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Private Equity's Dry Powder vs. Leverage Struggle



"It's a giant struggle because there's a lot of dry powder for the equity part of private equity deals. What there's not is a lot of leverage for the leverage part of the leveraged buyout" - Scott Barshay, chair of the corporate department at law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP


Private equity firms are facing a major challenge in the current market: a shortage of available debt financing, or leverage, for the debt portion of leveraged buyout (LBO) deals. This is in contrast to the abundance of available capital, or "dry powder," for the equity portion of private equity deals.

LBO deals involve buying a company or a significant stake in a company using a combination of equity and debt.


Private equity firms typically rely on debt financing to fund a significant portion of the purchase price, which is why the lack of available leverage is causing such difficulties. Without leverage, private equity firms may struggle to compete for deals, as they may not have the necessary funds to outbid other buyers.


Alternatively, they may need to put up more of their own capital to finance the purchase, which can reduce their potential returns on investment.

The shortage of available leverage is a result of several factors, including the ongoing rate hikes by Fed, regulatory changes that have made it more difficult for banks to provide debt financing for LBOs.


Private equity firms are exploring alternative financing structures to deal with the lack of available leverage, such as using mezzanine financing or seeking out other sources of debt financing. However, these options may not provide the same level of leverage as traditional bank debt.

In conclusion, the current lack of available leverage for private equity firms is a significant challenge that is impacting their ability to compete in the market and achieve strong returns on investment. Private equity firms will need to be creative and flexible in finding solutions to this problem if they want to continue to be successful in the current market.



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