Private Equity Funds Face Crisis Over Defaulting on Financial Covenants
Private equity funds (PEFs) that acquired corporate management rights through leveraged buyouts (LBOs) are facing a crisis due to unexpected economic downturns that have severely impacted their performance. Numerous violations of financial covenants stipulated in agreements with lenders have emerged as a significant issue.
According to data obtained by a member of the Democratic Party, various leading domestic PEFs, including Medit (MBK Partners & UCK Partners), Solus Advanced Materials (SkyLake), Hanssem (IMM PE), Jubis Diet (Stick), Majesty Golf (VIG Partners), and GSITM (IMM Investment & JKL), are experiencing a wave of financial covenant breaches in the companies they acquired via LBOs. If a financial covenant is violated, lenders can demand loan repayment and gain the right to dispose of collateral. However, as the value of the collateral has dropped below the principal loan amount, lenders find themselves in a helpless situation.
An investment banking industry insider commented, "While it is not problematic for PEFs to acquire management rights through the LBO method, excessive borrowing that leads to a sharp decline in corporate value can result in substantial losses due to acquisition financing failures."
The performance deterioration of acquired companies has left private equity funds struggling under a mountain of debt, signaling an impending disaster in acquisition financing. A prime example is Hanssem, a home interior specialized company, which has become a notable sore thumb for the domestic PEF IMM Private Equity (PE). In 2022, IMM PE invested approximately 1.5 trillion won to acquire management rights in Hanssem, borrowing around 740 billion won in acquisition financing from Korea Investment & Securities and Industrial Bank of Korea. However, since IMM PEs acquisition, Hanssems stock price plummeted, and considering Hanssems market capitalization (1.04 trillion won), the value of IMM PEs stake (approximately 35%) in Hanssem is now only about 370 billion won. Even if the lenders were to sell off their shares in Hanssem, they would face significant losses.
This situation highlights the precarious nature of leveraged acquisitions, where high debt levels and declining company valuations can lead to severe financial repercussions for both the acquiring funds and the lenders involved. As the economic landscape continues to shift, the ability of these PEFs to navigate their financial obligations will be put to the test, raising concerns about the sustainability of their leveraged strategies.
According to data obtained by a member of the Democratic Party, various leading domestic PEFs, including Medit (MBK Partners & UCK Partners), Solus Advanced Materials (SkyLake), Hanssem (IMM PE), Jubis Diet (Stick), Majesty Golf (VIG Partners), and GSITM (IMM Investment & JKL), are experiencing a wave of financial covenant breaches in the companies they acquired via LBOs. If a financial covenant is violated, lenders can demand loan repayment and gain the right to dispose of collateral. However, as the value of the collateral has dropped below the principal loan amount, lenders find themselves in a helpless situation.
An investment banking industry insider commented, "While it is not problematic for PEFs to acquire management rights through the LBO method, excessive borrowing that leads to a sharp decline in corporate value can result in substantial losses due to acquisition financing failures."
The performance deterioration of acquired companies has left private equity funds struggling under a mountain of debt, signaling an impending disaster in acquisition financing. A prime example is Hanssem, a home interior specialized company, which has become a notable sore thumb for the domestic PEF IMM Private Equity (PE). In 2022, IMM PE invested approximately 1.5 trillion won to acquire management rights in Hanssem, borrowing around 740 billion won in acquisition financing from Korea Investment & Securities and Industrial Bank of Korea. However, since IMM PEs acquisition, Hanssems stock price plummeted, and considering Hanssems market capitalization (1.04 trillion won), the value of IMM PEs stake (approximately 35%) in Hanssem is now only about 370 billion won. Even if the lenders were to sell off their shares in Hanssem, they would face significant losses.
This situation highlights the precarious nature of leveraged acquisitions, where high debt levels and declining company valuations can lead to severe financial repercussions for both the acquiring funds and the lenders involved. As the economic landscape continues to shift, the ability of these PEFs to navigate their financial obligations will be put to the test, raising concerns about the sustainability of their leveraged strategies.
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