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Private equity executives are increasingly trying to borrow against their future share of profits from successful deals as a deal drought delays payouts.
Buyout dealmakers across Europe made 459 inquiries between January and mid-June to London broker Enness Global about borrowing against their forecast carried interest payments, the firm told the FT, up from 134 for the same period last year.
Private equity executives have long been able to borrow against unpaid carried interest, or their cut of profits from successful deals, but the broker said it had never seen such high demand.
“People would just like some cash to do some other things, whether to meet capital contributions for [newer] funds or buy properties,” said Islay Robinson, founder and chief executive of Enness, which specialises in mortgages for high-net-worth people.
This year he had been closing two to three transactions per month, he added, “significantly more” than in previous years, which he put down to companies sitting in buyout portfolios for longer than previously.
The trend marks the latest fallout of private equity’s years-long downturn, initially triggered by interest rate hikes in 2022, in which firms have struggled to sell holdings at desired valuations.
Hold periods are now seven years on average, up from five to six historically, according to Bain & Company. This has hurt the sector’s fundraising and prompted many dealmakers to search elsewhere for employment with more predictable compensation.
Private equity firms tend to receive carried interest after realising holdings at a return above a preset minimum, or hurdle rate. The dealmakers usually share 20 per cent of the profits, with fund backers sharing the rest.
In the US carried interest is generally paid out on every deal that passes the hurdle, but European executives usually must wait until enough deals are realised to take the whole fund past the hurdle.
Executives can borrow against carried interest that they are forecast to receive based on a fund’s valuation, including unrealised holdings. Private banks to offer the service include UBS, Citi and Deutsche Bank, a person familiar with the matter said.
Enness said the loans could be secured against the so-called carry alone, meaning that a lender could not seize an executive’s personal assets if the forecast profit share never materialised.
One lender who provides the funding said, however, that they did not rely on future carry alone as collateral.
Another bank said its financing decisions were based on a client’s overall financial position including diversification of income. It said lenders typically applied conservative assumptions and examined historical fund performance and distributions among other factors.
UBS, Citi and Deutsche Bank declined to comment.
