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Private Equity Firm in Spotlight Over Debt Restructuring
Objects in the rear-view mirror may appear larger than they really are, a saying that seems fitting in the context of a private equity-owned software company, Pluralsight. A pending balance sheet restructuring has attracted unusual attention, with some of the largest private asset managers in the world, including Blue Owl, Oaktree, and BlackRock, holding $1.7 billion in debt.
Background: A Complex Debt Situation
The company’s debt was reshuffled earlier this year by its owner, Vista Equity Partners, which executed a complex debt restructuring that hurt the seniority of the private lenders. This move was part of a trend where financial sponsors have played rough with creditors in widely held syndicated loans.
What’s at Stake: Information Vacuum
The small club of lenders at Pluralsight believed they were entitled to friendly treatment from Vista if there were bumps in the road for the company. However, an FT review showed that the lenders’ shared marks put the debt at between 84 and 97 cents. These high levels cannot be reconciled with the unfolding situation where Vista has already marked its equity at 0 and is expected to soon hand over the Pluralsight keys to the lender group.
A New Era in Private Credit: A Shift in Information Flow
Two prominent academics have recently written a paper arguing that the shift to private credit, where loans are held to maturity by asset managers and away from publicly traded securities, will represent a sea change in how information about businesses becomes widely known to all stakeholders in the economy. Specifically, without actively bought and sold term loans and high-yield bonds, there will be more situations like Pluralsight where financial distress suddenly pops up, with no credit ratings, regulatory filings, or secondary market prices to serve as warning shots.
Implications: Less Transparency, More Risk
Daily market trading can be criticized for representing more noise than signal. If a company is making its scheduled interest payments, its shifting enterprise value may not be so noteworthy. Managers can have the flexibility to make big operational and strategic changes without the pressure of marking to market spooking outsiders. However, owners and creditors will still have someone who is a client, and what and how they share information about the status of an investment remains important.
Regulatory Challenges: Limited Ability to Intervene
Regulators and policymakers, however, have limited ability to get involved in private credit transactions. The worry is that the informational voids in this system could lead to painful shocks or sudden accidents.
Conclusion
The Pluralsight case highlights the complexities and challenges of private credit transactions. As the industry continues to evolve, it is essential to understand the implications of this shift on information flow and stakeholder transparency.
FAQs
Q: What is private credit, and how does it differ from publicly traded securities?
A: Private credit refers to loans and other debt instruments held by asset managers, private equity firms, and other investors outside of publicly traded markets. This type of investment is typically held to maturity, with returns generated through interest payments and loan principal repayment.
Q: What are the potential implications of private credit on information flow and stakeholder transparency?
A: The shift to private credit may lead to less transparency, as there will be fewer public markets and regulatory filings to provide insights into a company’s financial health. This could result in more situations like Pluralsight, where financial distress may not be immediately apparent.
Q: Can regulators and policymakers intervene in private credit transactions?
A: While regulators and policymakers have limited ability to get involved in private credit transactions, they may still be able to influence the market through regulatory reforms and guidance.
Q: What are the potential risks and consequences of the informational voids in the private credit system?
A: The potential risks include painful shocks or sudden accidents, which could have significant consequences for investors, companies, and the broader economy.
Q: What steps can investors and companies take to mitigate the risks associated with private credit?
A: Investors and companies can take steps to improve transparency, such as providing regular updates on their financial performance and business operations. They can also consider using independent credit rating agencies and engage in open communication with stakeholders.
By understanding the complexities of private credit and its implications on information flow and stakeholder transparency, investors, companies, and policymakers can better navigate this evolving market and mitigate potential risks.
Author: www.ft.com
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