Who Pays for 2021
Kipp deVeer was asked about software companies bought at peak multiples and did the arithmetic out loud. Take one bought at 20 times. "Is that worth 12 times? Is it worth 14 times? Is it worth 16 times? I don't know. But I think the question is more for the equity than it is for the debt."
That is the co-president of Ares explaining why the negative headlines on private credit miss, in his view. Those deals were levered six or seven times, so the lender sits well below the damage. "I think it's more of a problem for the owners of some of these assets than it is for the lenders to these assets." A lender talking his own book. The arithmetic still holds. The write-down lands on the equity.
Which puts the question on the marks. Young Lee, a managing director at the fund-of-funds manager Abbott Capital, says some managers are still carrying 2021 marks. Jack Purcell of Ridgemont Equity Partners stakes out the other end. His firm scores itself on DPI because "cash doesn't lie," and he would rather err low: "I would much rather explain why we were 30 or 40% undermarked in terms of the profit sitting in our PNL in a given quarter before an exit occurs than 10 or 20% overmarked." At Ridgemont, he says, "we've had as high as 45% of the dollar weighted gain has not existed in our financial statements 2 quarters prior to exit." Lee's answer: conservative, yes, but close enough to the mark that LPs can see the portfolio.
The last person to learn what a deal really cost is often the CEO. Ryan Milligan, a partner at ParkerGale, walked executives through management equity, and the risk is structural. Preferred equity accrues ahead of common, often at 8%, so a CEO can build real value under an overpriced deal and share in none of it. His advice to an executive walking into a deal is to arrive "coming into this assuming it's worse than you're telling me," and to ask outright: "did you pay too much?" A sponsor who won't show the waterfall has made a choice. "I know the answers to all these questions. I can do the math in my head. If I'm not willing to offer it up, it's because I'm trying not to, not because I can't."
Last week's operating-partner thread got the LP's verdict. Lee wants operating help, but "from our vantage point, some of it is smoke and mirrors." The failure he sees most: operators who "sit on the CEO's shoulder as if they were the CEO and will not let that CEO operate."
The lender has room. The LP wants cash. The CEO should ask the price first.
Sources: Interviews from Dry Powder (Bain) (Sep 9, Kipp deVeer of Ares), Private Equity Spotlight (Sep 10, Young Lee of Abbott Capital and Jack Purcell of Ridgemont Equity Partners), and Private Equity Funcast (Sep 9, Ryan Milligan of ParkerGale).
Private equity investors say peak-era valuations hit equity before debt, LPs want realistic marks and cash back, and CEOs should ask what the sponsor paid.