Debt and the importance of being in the know

Many industry professionals laud the innovative foresight 3i showed several years ago when they set up their in-house debt team - seeing the need even before it became so apparent to many other buyout houses. This autumn, two Swedish buyout houses have recruited debt professionals to their team. Altor appointed Anders Bierke, former local head of acquisition finance at SEB, to the role of head of financing. Two months later, Segulah has announced that Bierke's former colleague, Erik Thorell, will be joining the firm as head of banking. Andrew Lynn, director of Hawkpoint, a corporate finance advisory firm, is not surprised: "In a bull market, firms will use debt advisory expertise to ensure they get the best deals with the best covenants. In a bear market like now, they need the expertise to ensure they get debt financing at all."

Indeed, one GP predicted banks will become even more cautious and strict on lending in 2009, particularly those which have funded large buyouts of companies that are now struggling. Given the current economic outlook, a prediction of debt levels seen in 2003 and 2004 of 2x-3x EBITDA and 40/60 debt to equity ratios no longer seems unrealistic.

Moreover, the market is currently full of highly-skilled debt professionals looking for new opportunities, so it makes sense for PE firms to tap this resource now. "In Europe we have seen advisory firms taking on bankers, and bankers starting to set up boutique debt advisory shops," says Lynn, adding that in the current market, keeping up to speed with the debt markets by investing time and resources is particularly pertinent.

An appealing career prospect

Undoubtedly, joining a private equity firm can be appealing for a professional normally working in an acquisition finance team where activity levels are now lower. As private equity is currently still well-funded, it makes for an attractive career prospect. "For the bankers it is an entry into PE - an opportunity that might not be available again," believes Andrew Lynn, adding that "they will learn the skills and the industry for the next bull market."

An in-house debt team will not only advise on raising debt financing. For instance, Altor's third fund allows for debt investments, primarily with an aim to obtain equity control in its mandate. But probably equally important is the debt experts' role in negotiation re-financing. "You want the debt expertise on your side of the table when you are restructuring," Lynn states. "With in-house debt knowledge, a GP can understand how the banks think and react," he adds.

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