In the wake of the latest pandemic, several American companies are facing a serious cash crunch. Many companies are struggling to raise cash and stay afloat. Private equity firms and hedge funds have found an opportunity here to lend cash to private companies at high-interests and even buy minority stakes in publicly listed companies.
Private equity firms are aiming for smaller companies that have been shunned by banks in the past and are distressed due to stalled operations. However, the relief to these distressed companies will come at a higher cost due to high-interest loans offered by the PE firms.
The pandemic has brought many economies to halt. Consequently, it has led to many big companies to look at their books and gather as much cash possible. Many big companies are looking up to large banks and Wall Street firms to raise capital, or issue bonds directly to investors, but the same can’t be said about smaller companies, which are struggling because of debt or deemed risky by investors. As these companies, these companies operated in the severely affected areas – retail, entertainment, energy, and tourism makes raising capital even more challenging for them.
Avenue, Fortress Investment Group, and Apollo are among the top private equity firms that have dedicated funds and offer loans to small companies. Smaller PE firms like Pennant Park and MGG are working with their existing borrowers to find distressed companies to offer loans.
Recently, Apollo bought a portion of the $2 billion loans arranged by a group of banks for United Airlines. The cash will help the airline revive the business after it was battered by the pandemic.
Similarly, in late February, PennantPark, Antares Capital, and Ares Management pumped together a $345 million loan in NSI Industries, an electrical products manufacturer.
Many private equity firms have had their best returns from the global financial crisis. The latest pandemic offers a similar opportunity for alternative lending firms. Art Pann, Founder of Pennant Park, which lends to 135 companies with $300 million and more in revenue, says “We had some of our best returns coming out of the global financial crisis.”
Hedge funds and private equity firms are thinking of ways to profit off the coronavirus-induced economy slowdown as much as they did during the 2008 global financial crisis. Back then, firms came up with PIPE, short for private investment in a public entity, where a public-listed company sells stocks or debt private equity firms.
Most firms are busy keeping their portfolio companies afloat at this time. However, soon, many firms will look to buy stakes in cash crunched companies, before taking over the company. Preqin, a private equity research firm suggests, alternative lending firms have $58 billion in untapped lending power in North America.
Amid the market turmoil, hedge funds are looking for opportunities to short the stocks of public companies. It means firms can buy shares with borrowed money and sell them, and buy the stocks back as soon as the price drops and profit from the difference.
Companies like Nevro are already in line to sell stock and debt to raise capital. A few weeks ago, the company announced to sell its shares priced at $84 each after the closing price of $89 a day before the announcement. Many companies will reach out to PE firms to save themselves from bankruptcy.
Buying a stake in a company going downhill doesn’t come without risk. The temptation for private equity firms to pounce will be irresistible. The industry is sitting on a $740 billion dry powder in the United States alone.