AUS
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Highlights
- Bond markets experienced a record-breaking surge in September with over $600 billion raised.
- Private equity firms are borrowing heavily to manage investor expectations amidst slow exits.
- Concerns rise over increasing leverage and potential future market shakeouts.
While attention has been focused on stock market highs in China, the U.S., and Australia, bond markets experienced an extraordinary surge in September. A record 1,226 issuers, including governments and corporations, raised over $600 billion globally, breaking previous debt issuance records for the month. A significant portion of this borrowing came from U.S. private equity firms, which tapped the leveraged loan market for $18.3 billion, surpassing the previous peak of $13.4 billion set in July 2021.
This new wave of borrowing is not being funneled into companies owned by these private equity firms but is being used to pay dividends and meet investor expectations. As private equity exits have slowed to their lowest in a decade, firms are increasingly relying on debt to maintain cash returns for their clients.
David Hunt, CEO of investment giant PGIM, voiced concerns about the growing leverage in the private equity sector. He noted that pressure is mounting for private equity firms to generate exits and return capital to investors. If exits remain sluggish, firms may continue to rely on borrowing, which could lead to future complications.
According to data from Preqin, the distributions of paid-in capital for global private equity fund vintages from 2015 to 2021 are averaging 80¢ on the dollar. More recent funds, from 2019 to 2022, have returned less than 20¢ on the dollar, creating further pressure for exits.
Hunt highlighted that if private equity firms cannot successfully exit their investments, the industry may see an increase in financial stress due to the rising leverage at both the asset and fund levels. He predicted that many firms could struggle to raise new capital and might face consolidation or simply wind down operations.
The private credit market is also facing challenges. PGIM, with $103 billion under management in its private credit business, is still seeing opportunities in asset-backed finance, particularly in sectors like heavy machinery and equipment. However, Hunt warned that newer private credit firms lacking a track record in managing distressed loans or "workout" situations may face difficulties in securing investor confidence.
The bond and private equity markets are experiencing significant shifts, with rising debt issuance and growing concerns over leverage. As firms navigate these challenges, the potential for industry shakeouts looms large.
