Higher interest rates spell trouble for private equity investors, an expert has said.
Mahesh Bhimalingam, European credit strategist at Barclays Capital, said the Bank of England's decision yesterday to raise the base rate by a quarter-point to 5.75 per cent made it more difficult for takeover consortiums to secure the loan part of their financing.
"If rates rise typically when the risk-free rate goes up the risky asset classes would also generally re-price," he explained on BBC Radio 5 Live.
"That's one facet of what is happening right now. The other important aspect is that we are seeing problems from the sub-prime market in the United States."
Mr Bhimalingam said one knock-on effect of the current crisis in housing prices across many parts of the US would be bank debt managers becoming more reluctant to make major loans.
John Cole, UK private equity partner at Ernst & Young, insisted that higher interest rates did not herald doomsday for private equity, however.
"I don't think it's a crunch when everything stops. I think it's perhaps a bit of indigestion as people adjust to a new order of things. There's certainly still not a real shortage of liquidity in the market in that deals are still being financed," he said.
The private equity industry has come under fire recently for the large tax advantages it enjoys. Critics also claim private equity firms are damaging the companies they take over because they strip assets and do not respect workers' rights.