Shares in some of Europe’s largest private equity firms fell on Friday as anxiety over tightening credit conditions in the United States financial sector began to unsettle global markets.
Intermediate Capital Group (ICG), listed in London, saw its stock tumble 5.5%, while Jersey-based CVC Capital Partners experienced a 6.6% decline.
Switzerland’s Partners Group also slipped 3.4%, and Swedish investment firm EQT lost 4.6%.
These declines followed a major sell-off in U.S. regional banks earlier in the week, driven by mounting fears over bad loans lurking within Wall Street’s private credit sector and their potential to impact the broader banking system.
ICG, which oversees over $30 billion in private debt - roughly a quarter of its total assets under management as of late June - was among the largest casualties. Partners Group handles around $38 billion in private credit, while CVC’s direct lending arm manages approximately €17 billion ($19.9 billion).
What recently spooked Wall Street investors is a spate of corporate collapses in the U.S., with the credit quality across the private equity sector now under intense scrutiny.
Notably, First Brands, a U.S. auto parts supplier, recently failed due to a complex labyrinth of misleading financing arrangements.
Then there was subprime auto lender Tricolor, which recently filed for bankruptcy, while Jefferies, a major investment bank with exposure to First Brands, saw its shares shed 11% on Thursday before staging a partial recovery on Friday.
While First Brands' troubles stemmed from intricate supply-chain financing and invoice factoring structures, the situation has raised broader concerns about rising debt levels and lenient lending criteria across the sector.
While the company until very recently had a decent cash buffer, it was understood to be using private debt or “shadow banking” to borrow against invoices.
What this allowed it to do was keep debt off its balance-sheet disclosures, which helped the company morph into a finance company rather than the supplier of auto parts more with 26,000 employees.
Admittedly, the system known as factoring is far from unusual, but when the size of that debt, and who’s holding it, is allowed to be shadowy, problems as witnessed with First Brands can rapidly accumulate.
J.P. Morgan CEO Jamie Dimon used the bank’s third-quarter earnings call to warn the market that these issues may be more endemic across the private equity sector.
“When you see one cockroach, there’s probably more,” Dimon remarked. “Everyone should be cautious.”
Meanwhile, during the IMF and World Bank meetings in Washington last week, Joachim Nagel, president of Germany’s Bundesbank and a member of the European Central Bank’s governing council, labelled the private credit sector a “regulatory risk” and warned of potential contagion effects.
“I’m worried about the growth in private credit and lending,” Nagel said.
“This market has grown significantly — now over $1 trillion — and we’re seeing signs that less-regulated participants are impacting those who are more tightly regulated. Regulators need to pay close attention.”
Echoing similar sentiments, Tobias Adrian, head of the IMF’s Monetary and Capital Markets Department noted that the IMF is intensifying its monitoring of non-bank financial institutions, especially those in private credit.
“We believe the leverage in this sector may be durable,” Adrian said, “but we are watching underwriting standards very closely.”
