Warnings from Xilinx CEO Wim Roelandts that some of the private equity buy-outs could look ‘very foolish’, has been backed by Jon Moulton, founder of Alchemy, the UK venture capital firm, by Standard and Poor’s, the credit rating agency, and by a deputy governor of the Bank of England.
Roelandts' warning came iafter the recent private equity takeovers of NXP Semiconductors and Freescale Semiconductor, Roelandts said: “If you have a down-cycle in the semiconductor industry, these investments are going to look very foolish.”
Alchemy's Jon Moulton says there is a general consensus that there will be an increase in private equity-owned companies defaulting on their debts.
Standard and Poor’s has come up with a warning that the average debt being loaded onto firms being bought out by private equity companies is currently four times above safe levels.
Moulton points out that, in the last six years, the borrowing ratio used by private equity funds to acquire companies has gone from four times operating profit to seven times.
The semiconductor industry has been particularly concerned at the very high price, $17.6bn, which a consortium led by Blackstone paid for Feescale, of which over $11bn is to be funded by debt.
The industry is less concerned about the $11.6bn paid for NXP, a firm of about the same size as Freescale, but there is still a worry that NXP’s all-important R&D budget could come under pressure from its backers if the industry turns down.
Moulton says he expects the number of private equity-owned companies which are forced to default on their debts will increase between three times and to over twelve times from the current default level of Euros3bn to between Euros10bn and Euros40bn.
Moulton pointed out that private equity funds own European companies with a collective debt of over Euros600bn.
Sir John Gieve, deputy governor of the Bank of England has recently warned that the private equity groups are over-borrowing.
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