It is not news to anyone that leverage is not a significant driver of returns (anymore) for buyouts. All of this is primarily driven by financial crisis and shortage of capital. From what I understand, as much as one-third of the return from private equity transactions stems from the use of leverage, and I wonder what that'll imply for the returns going forward.
As a first step, PE funds aren't able to raise as much debt for the new transactions. In past, 70% debt has been typical, and 80% wasn't uncommon either. I wonder what is this ratio going to settle down at. I heard a ratio of 40-50% somewhere - please don't quote me on that.
But as a second (and a bigger) step, what I realized today is that a number of PE funds now need to infuse additional equity in their portfolio firms. This is because banks aren't able to provide enough capital. In exact words of Guy Hands from Terra Firma - "Buyout firms will have to recapitalise their current portfolio companies by infusing fresh equity worth €450bn ($607bn) between 2013 and 2015, due to a dearth of financing from banks and limited partners."
The industry is clearly at a stage where it needs to fundamentally redefine itself.
