[probablypower]

This is great, thank you (not OP).

Is it more reasonable to understand this as:

a. Private Equity is running out of cheap sources of money, so it is resorting to risky high interest sources.

b. Private Equity sees a lot of present opportunity and are willing to take on even high interest debt because there are clear opportunities for higher interest returns.

c. Private Equity got into the pantry and their risk appetite is all messed up and self-destructive

?

[nocoiner]

My guess is mostly b, though some of a - see below. One thing that I didn’t really get into is that this isn’t really indicative of a shortage of third party investor capital and a necessity to raise third-party capital on punitive terms.

To oversimplify slightly, assume that every investment is funded by 60% debt, 39% equity from limited partners and 1% from the private equity sponsor - that 1% representing their common equity participation in the deal (which they’re putting up both because they presumably think it is a good opportunity to invest their personal money as well as to demonstrate alignment with their limited partners). This article is describing how that 1% is getting funded. So instead of coming out of their personal checking accounts, the private equity investment professionals are getting a private capital provider to lend it instead at credit card rates.

So this article probably indicates that deals are in a bit of a lull right now (no exit proceeds from prior investments to fund new investments) and traditional banks have tightened up lending. A few years ago, traditional banks were making similar loans to sponsors at low, low single-digit interest rates (think SVB and their personal loan product portfolio), so now instead the sponsors are having to tap private credit providers, who are going to insist on a much higher rate of return.