Investing in debt could cause legal problems for private equity
A private equity industry leader has warned buy-out groups that their preference for acquiring debt could put them into legal trouble. Jon Moulton, the founder of Alchemy Partners, has suggested that there could be a conflict of interests when private equity firms acquire the debt of businesses for which they already own equity.
Moulton said that by buying blocking interests in their own companies’ debts, private equity houses could hinder restructuring when their company is struggling. Private equity groups, however, maintain that there are significant Chinese walls in place between credit and buy-out teams to ensure there is no conflict of interest.
The issue has attracted attention as the popularity of investing in debt increases due to the credit crunch making it both harder for banks to sell debt and for private equity to secure buy-out loans. According to Private Equity Intelligence almost $33 billion in funding has already been raised for debt investments this year. This compares to $39.7 billion raised in the entirety of 2007.
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