Private Equity's Clock is Ticking, Warns Verdad Advisers
Via CNBC
Summary
Research firm Verdad Advisers published an analysis in 2023 warning that a cohort of highly leveraged private equity portfolio companies face a reckoning as debt assumptions built on near-zero interest rates collide with a substantially higher-rate environment. The firm found that the median analyzed PE-backed company carried leverage ratios nearly five times higher than comparable S&P 500 companies, with interest costs consuming 43% of EBITDA and the majority of companies operating at a cash flow loss.
Verdad founder Dan Rasmussen described the situation as "pretty scary," noting that floating-rate debt costing nearly 12% had transformed manageable obligations into existential pressures for overleveraged companies with deteriorating margins and no clear path to a sale. The report argued that the private equity model's structural dependence on cheap leverage means that a prolonged period of historically poor returns may be unavoidable as firms attempt to exit assets in a fundamentally changed capital markets environment.
