KUHN CAPITAL Monday, March 19, 2018
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The press is starting to bash PE firms that load their targets up with debt in order to recoup acquisition costs.

The latest piece -- appearing on AP’s August 25 wire and headlined “Things can get ugly for private-equity deals” -- delved into the bankruptcies of KB Toys (bought by Bain Capital in 2000) and Nellson Nutraceutical (bought by Fremont Partners in 2002).

In both cases, the acquirers used their targets’ debt capacity to raise lots of cash, a big chunk of which was not applied to company operations but instead directed back into PE firm pockets by way of dividends.

Critics claim the KB Toys and Nellson bankruptcies were triggered by these PE firm machinations. But Bain and Fremont are hardly unique in such behavior. According to Dealogic, the money going to PE firm acquirers in the form of “dividend recaps” has increased from $7B in 2004 to $38B+ so far in 2006.

While we don’t consider any of this “news”, we have been surprised that the press hasn’t attempted to pin more bankruptcies on PE firms. After all, the dividend recap phenomenon has been underway for at least five years and only two deals have gone bad?

On the other hand, the cost of debt has been rising and -- coupled with an economic slowdown -- there may be a lot more bankruptcies waiting in the wings. Let’s hope that, over the last few years, the PE firms doing these deals struck the right balance between greed and fear.

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