The buy-out business may struggle in the coming downturn. Who will suffer most? Not the private-equity firms themselves
, particularly the risky “high-yield” corners where private-equity funds gather ammunition for deals. Junk-bond yields have reached 9%.
Now a crunch is coming, in two ways. First, the deals done at sky-high valuations look a lot less clever. Higher costs and slowing economic growth will squeeze the profits of private-equity-owned firms. With share prices lower it becomes harder to sell or float firms at attractive valuations. In contrast with the last boom, buy-out funds have loaded up on tech firms that are facing a bigger valuation hit than the market overall.
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