Credit Crisis Spells Disaster for Private Equity Firms

Debt tightens as profits fall for many acquired companies
By Nick McMaster,  Newser Staff
Posted Nov 3, 2008 11:30 AM CST
A shopper walks from the Linens 'n Things store at the Woodbridge Crossing shopping center Friday, May 2, 2008, in Woodbridge, N.J.   (AP Photo/Mel Evans)
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(Newser) – After a nearly 3-year buyout spree, private equity firms are facing tightened credit conditions just as slumping consumer spending squeezes many of their acquisitions, the New York Times reports. The leveraged-buyout bubble that culminated in $796 billion in deals in 2007 is bursting, leading to a grim reckoning as firms saddled with the debt used to buy them are unable to secure fresh credit to weather the downturn.

Retailers like Linens 'n Things, Mervyn’s and Steve & Barry’s—all backed by private equity—have filed for bankruptcy this year. The private-equity bubble of the 1980s provides a grim precedent: 30% of leveraged buyout deals made from 1986 to 1989 defaulted. “The dangling other shoe is now about to drop,” a Yale expert says of the current situation.