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PE Panorama: Another case of looser leverage controls

By Paul Mackintosh  
Jul 15, 2019

As first reported by the Financial Times (FT), KKR’s acquisition of Canadian software firm Corel from private equity peer Vector Capital has demonstrated an unwelcome aspect of buyout dealmaking in the current market. According to the FT, KKR inserted a provision into the loan it was using to buy the company, giving Corel 120 days instead of the 90 that’s the current norm, to deliver its annual report to creditors, and an even more relaxed timeframe of 150 days in the first year.

Although financial terms of the deal were not disclosed in KKR’s July 3 announcement, it’s widely reported to be paying around US$1 billion, some fuelled by capital from its Americas XII Fund, and much of the rest from around $550 million of debt provided by KKR Capital Markets, Citi and Barclays. The FT report says the loan had to be discounted to find investors, which may or may not be due to the timing issue.

Private equity already attracts plenty of criticism purely for its addiction to leverage.

One snarky commentator on the Ycombinator hacker news page remarked of the KKR/Corel deal: “Private equity's playbook is very, very transparent. They will take massive loans and use the money to try to create fake growth.”

On top of that, covenant-light loans have become indelibly associated with the private equity industry despite the erosion of creditor protection they entail, as buyout firms and their financial advisers persuade yield-hungry creditors to ease up on the safety margins for their loans. And despite a worldwide push for greater transparency and accountability in finance, business and investing worldwide, private equity’s Great and Good still appear to be ready to push for even more time freed from oversight.

The private equity industry’s justification for such moves, as cited by the FT, is that they may need extra time to produce the financials for a recently invested entity, or when dealing with new loan investors. That hardly seems to apply in the case of the Corel deal, which is a straight secondary buyout from another private equity owner, with seasoned firms backing the loan. In any case, it hardly seems enough reason to justify withholding actionable financial information from creditors.

However, the problem may be about to correct itself. According to Lipper figures reported by The Wall Street Journal, leveraged loan funds have seen consecutive outflows for 33 weeks as investors reassess the attractions of the asset sub-class against the background of a likely rate cut by the US Federal Reserve. Those who live off investor sentiment must also be prepared to die by it.