Private-equity tricks mask mounting debt: ‘I’m 5 feet 8 inches, but I change the scale and make myself 6 feet 2 inches on a pro forma basis’

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  • Jonathan Lavine, a co-managing partner at Bain Capital, warned in an interview with the Financial Times that massive debt piles in the private-equity industry were raising the risk of a crash.
  • Lavine said that parts of the private-equity space were being “increasingly aggressive” in their calculations.
  • Higher prices for deals are leading to firms taking on greater amounts of debt to pay for transactions.

Jonathan Lavine, a co-managing partner at Bain Capital, is warning that massive debt piles in the private-equity industry are raising the risk of a crash.

In an interview with the Financial Times published Sunday, Lavine said some in the industry were being “increasingly aggressive” in their calculations of future sales growth when analyzing client deals, meaning debt levels are based on increasingly exaggerated financial projections.

He used a colorful analogy.

“I’m 5 feet 8 inches, but I change the scale and make myself 6 feet 2 inches on a pro forma basis,” the Bain boss told the Financial Times. “I’m not actually 6 feet 2 inches on a pro forma basis, but I can make adjustments like standing on a box, maybe trying to stretch.”

The FT said that private-equity firms were “paying record high prices” for deals and that investors were piling money into funds, potentially creating a bubble that Lavine said an economic downturn could pop.

The industry is rife with overestimates, a worrying sign that in some cases has seen credit as a percentage of the transaction ramp up to more than 30%, Lavine told the FT.

“If you start seeing people not generating cash flow and not deleveraging, particularly in their first two years, I’d start worrying,” he told the newspaper.

He added: “Even in the absence of a recession, if growth slows down a lot, people will treat it like a recession and it could have some of the self-fulfilling negative effects that an actual recession does have.”