Private Equity’s Debt-Fueled European Conquest Leaves Firms Weak as Slump Looms

The surge in private equity activity in Europe in recent years has loaded hundreds of companies up with debt, eroded their credit ratings, and left many of them vulnerable to bankruptcy as an economic recession approaches, Bloomberg News reported. There were 762 private equity buyouts last year in Western Europe for a total of $336 billion, according to data compiled by Bloomberg, the highest since 2007. Higher borrowing costs will put pressure on firms, according to Moody’s Investors Service, especially since those backed by private-equity tend to be funded with floating-rate debt, with only partial hedging at best. Around 70% of European junk-rated companies are at risk of default, the ratings agency said. This is a turnaround from recent years, in which accommodative monetary policy and low interest rates flooded buyout companies with capital and gave them access to cheap acquisition funding, fueling a record run of dealmaking. Activity peaked in 2020 and 2021, as central banks poured money into the global economy to cushion the impact of the Covid-19 pandemic. Now, as the European Central Bank begins to unwind this policy to relieve decades-high inflation, investors worry that a private equity-heavy corporate sector is not equipped to deal with economic stresses. Read more.