November 2, 2023
Non-LBOs: PE Equity Contributions Top 50% of Total Deal Financing
If you needed any more proof about how challenging M&A financing conditions are, check out this recent Axios article, which says that equity contributions to US LBO transactions are at record levels. The article says the reason that PE sponsors are putting more skin in the game is simple – debt is getting very expensive:
Debt’s gotten pretty expensive this year, so the companies being acquired by PE firms can’t afford as much of it. Loans to companies purchased by PE firms have yielded 11% on average at issuance during Q3, a record high, according to PitchBook LCD.
PE firms have been forced to use more of their funds’ own money. Equity contributions are collectively around 51% this year, PitchBook LCD says — the first time that metric crossed the 50% threshold since the firm began tracking the data back in 1997. For comparison, the average equity contribution in the 10 years through 2021 was 41%.
While debt may account for a lower percentage of total capitalization than in years past, that doesn’t mean the burden of carrying that debt is declining. According to the article, interest payments are eating up a larger share of target company earnings than they have since 2007.
– John Jenkins