Interest Rates, Private Equity
With record-low interest rates, private equity has seen unparalleled activity in recent years. Though thriving, private equity firms have proved to be guilty of overleveraging their portfolio companies as general partners. The results of overleveraging have been varied. At one end, firms seem dedicated to a portfolio company’s restructuring, investing further and pledging more capital in hopes of future growth. At the other end, firms wishing to exit their investment, redeem debt previously given to a portfolio company at a premium and engage in a quick sale thereafter, leaving that company unable to satisfy its future obligations. Firms that engage in this behavior have exposed a hole in the legal framework of private equity. This Note addresses the varied results of overleveraging and advocates for enhanced fiduciary duties of the general partners and expanding the duties of the indenture trustee for pre-default behavior. These measures would prevent domestic firm general partners from engaging in improper redemptions that would prevent the portfolio company from paying its obligations.
Private Equity's Overleveraging of Portfolio Companies,
21 Fordham J. Corp. & Fin. L. 607
Available at: https://ir.lawnet.fordham.edu/jcfl/vol21/iss4/2