Private equity’s problems explained in one blow-up

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And a scoop: Caesars Entertainment is weighing takeover offers including a bid from Texas gaming and hospitality billionaire Tilman Fertitta, setting the stage for a potential buyout of one of the jewels of the Las Vegas Strip.

In today’s newsletter

The small fund and private equity’s $4tn problem

What do veterinary clinics, dental offices, language translation services, customer service chatbots and software used to handle turnstiles for the New York City subway have in common?

These businesses collectively received billions of dollars in investment over the past decade as part of a record boom in private equity dealmaking. But now, as they collect dust in the portfolios of large buyout shops and private credit firms, many are unravelling.

On Thursday, a public credit fund that lent to these types of private equity deals plunged amid mounting financial distress across its portfolio of private equity loans, DD’s Antoine Gara reports.

The fund offers a window into a private equity industry suffering from a vicious hangover.

PE firms, during an era defined by rock-bottom interest rates, went on a deal binge. The pressure to deploy money was so great that firms chased sky-high valuations and conjured ever more cookie-cutter ideas to put growing stockpiles of investor cash to work.

An industry that had once owned corporate icons such as Hilton, Continental Airlines and Broadcom turned its attention to obscure software companies and unglamorous roll-ups of car washes and insurance brokerages.

Many of these deals have limped along for years but a long-awaited reckoning has surfaced at niche publicly listed lending vehicles called “business development companies”.

FS KKR Capital Corporation, a BDC managed by KKR, exemplifies the trend. On Thursday it reported large losses on some of its loans and watched its shares fall 15 per cent after saying it would slash its dividend.

FSK’s portfolio is characteristic of the older private equity deals that are now having their comeuppances.

The BDC wrote down the value of Cubic Corporation, which manages tap-to-pay technology for the New York City subway system and is owned by private equity group Veritas Capital and an affiliate of hedge fund Elliott Management.

Other writedowns included AmeriVet, a network of more than 100 vet hospitals acquired in 2022 by AEA Investors, a PE firm founded with backing from the Rockefeller, Mellon and Harriman families, and a roll-up of dental offices.

The most prominent was the further markdown of Medallia, a customer service software company acquired by Thoma Bravo for $6.4bn in 2022. BDCs reporting earnings this week slashed the value of their Medallia loans to below 80 cents on the dollar.

The deal was part of a surge in software takeovers struck by Thoma and others in 2021 and 2022 that won financing because of groups’ massive equity investments. Thoma ploughed about $5bn of investor equity into the deal.

Blackstone, which also lent Medallia money, said it had appraised the software company’s enterprise value lower by 70 per cent, valuing its loans at a steep discount of 78 cents on the dollar. That implies that Thoma’s equity investment has mostly evaporated.

DD readers are familiar by now with the troubles percolating the private capital ecosystem.

Funds managed by Blue Owl have triggered broader fears that private credit lenders are vulnerable to the software sell-off and flighty investors. A golden age of software returns also faces the existential threat of AI.

But what about all of those grittier PE deals, like roll-ups of janitorial service companies, waste disposal networks, or local HVAC and plumbing operations? They don’t look too hot either.

Football’s up; chemicals are down

Manchester United co-owner Jim Ratcliffe has had an eventful few weeks.

Earlier this month the Monaco-based billionaire captured the headlines and drew fire from UK Prime Minister Keir Starmer after saying Britain had been “colonised by immigrants”.

In the meantime, the FT reports, he’s been busy looking for ways to drum up cash for his chemicals empire Ineos, which is heaving under the weight of its more than $20bn debt pile.

Ineos is exploring the sale of assets within its vinyls business Inovyn. It had also been in talks to refinance bonds due to mature next year before shareholders decided to inject €200mn of new equity into the business alongside raising another €300mn of inventory financing.

It comes at a difficult time for Europe’s chemicals makers. The sector has been struggling globally because of low demand and oversupply from China, which has spent the past decade ploughing money into new plants in an effort to dominate the industry.

Locked out of the US by tariffs, much of that Chinese product has flooded into Europe at discounted prices, challenging European producers which are already dealing with suffocating red tape and energy costs that are up to four times higher than the US.

Industry insiders say Ineos is among the best placed to survive the storm as one of Europe’s biggest chemicals groups. But the leveraged acquisitions that allowed it to grow into the behemoth it is today have also saddled it with a debt burden that has lenders worried.

In the EG family

The petrol forecourt empire EG Group is selling down some of its assets as it prepares for a $9bn New York IPO as soon as the coming months.

And few people if any are as familiar with the business as Zuber Issa, a co-founder and shareholder of EG Group who struck out to form his own venture in 2023.

On Wednesday Issa agreed a deal that will see his new company, EG On The Move, acquire EG Group’s French operations encompassing 260 sites, DD’s Ivan Levingston revealed.

For EG Group, which is jointly owned by Issa, his brother Mohsin and private equity firm TDR Capital, the deal will further refocus the business on the US and allow it to lower its debt burden.

The company has already exited markets including Australia and Italy, generating £530mn and €425mn from the respective sales. The value of the deal for the French assets was not disclosed.

The transaction will also bolster his effort to repeat his earlier success with EG Group, by expanding EG On The Move outside of the UK for the first time and taking its total number of sites to more than 650.

Issa wants to grow his new business, which generates annual earnings before interest, tax, depreciation and amortisation of more than £100mn, to a size where it is making £500mn, he told the FT last year.

His new ambitions to expand coincide with EG Group’s desire to slim down and deleverage on the road to a New York IPO.

Job moves

• Millennium Management has hired Erdit Hoxha to the hedge fund’s Office of the Chief Investment Officer, according to two people familiar with the matter. He joins from Goldman Sachs, where he was co-head of global equities.

• World Economic Forum president and chief executive Børge Brende has resigned following an investigation by the forum into his links with Jeffrey Epstein. 

• Willkie Farr & Gallagher has hired Greg Olsen as an antitrust partner in London. Olsen was previously head of UK antitrust at Clifford Chance.

• HIG WhiteHorse, the credit affiliate of HIG Capital, has hired Andy Armah-Kwantreng as a managing director and Marimba Odundo-Mendez as a principal to lead its UK direct lending team. Armah-Kwantreng joins from Natwest and Odundo-Mendez joins from JPMorgan Chase.

• Citigroup has formed an AI infrastructure banking team, including investment bankers Ric Spencer and Ashish Agrawal, M&A banker Ben Mortimer, head of technology financing Alex Watkins and corporate banking head of technology Doug Baird.

Smart reads

Destination IPO The Hong Kong stock exchange is back with a vengeance. After a slump in 2023, the FT reports, the exchange posted record profits the past two years — driven by a surge in Chinese listings.

Living off chips Tech giants are funding AI spending with loans backed by chip infrastructure, the FT reports. Investors are attracted to the high yields on the loans and companies like that they don’t appear on their balance sheets. 

Bull case FT Alphaville considers arguments from Blue Owl and analysts that concerns over private credit’s recent wobbles are misguided. 

News round-up

Vanguard reaches settlement with Texas in key case on ESG investing (FT)

US regulator scrutinised over bank licence sought by Trump crypto venture (FT)

Wall Street turns to complex trades to dodge AI ‘implosions’ (FT)

Victory Capital sparks bidding war with offer for Janus Henderson (FT)

US warns it will axe all Anthropic agreements without Pentagon deal (FT)

Barclays, Apollo’s Atlas among lenders to failed UK firm MFS (Bloomberg)