Depending on who you listen to, there's either doom ahead for private equity returns, or everything's just fine. And that's leaving institutional investors confounded.
One view foresees disaster in 2012, when the estimated $1 trillion in debt from the mass of buyouts in 2005 to 2008 and additional debt that has been extended come due.
Others say private equity fund managers are already handling the problem by refinancing early, issuing bonds with longer maturities and funneling cash into portfolio companies.
“We see the tsunami, but we won't know how bad the impact will be until six months in advance of the maturity dates,” said Ward McNally, managing partner, McNally Capital LLC., a Chicago-based private equity consulting and investment management firm.
Within the next five years, more than $1 trillion of debt is expected to come due, with that sum increasing to $1.4 trillion by 2016, said Michael J. Cerminaro, managing director and co-founder of New York-based Sound Harbor Partners LLC, an advisory firm that provides capital and guidance to private equity firms and their portfolio companies in need of debt refinancing.
“The real crest of the wave is hitting in 2014,” said Mr. Cerminaro, a former BlackRock Inc. managing partner who co-founded Sound Harbor last year with Michael Zupon, former head of Carlyle Group's U.S. leveraged-finance division.
Leverage from buyouts will not be the only wave of debt needing refinancing in 2014, Mr. Cerminaro said. There's a “risk contagion” that will crowd out companies in need of debt. Within the next two to three years, a total of at least $6 trillion in commercial real estate debt, investment grade credit and sovereign debt also will be due for refinancing.
“Where will the risk capital flow to?” Mr. Cerminaro queried.
“It's unknown how the market will continue to persist in the next 24 to 36 months. A lot of (lending) institutions are in rough shape ... It's hard to figure how they will manage their performing loans, let alone troubled loans,” Mr. McNally said.
How much lending banks and other financial institutions would be able to absorb at the beginning of 2014 — the peak in maturity dates from the 2005-2008 private equity heyday — is anyone's guess, he said. The banks' questionable ability to refinance existing loans and make new loans creates additional risk for current funds as well as new ones closed during the next two or three years, Mr. McNally said.
But other industry observers say the brewing storm could blow over.