FT News Briefing Private equity’s mystery boxes
Nov 30, 2022
China is ramping up its tech game, teaming up with giants like Alibaba and Tencent to overcome U.S. chip sanctions. Meanwhile, the Federal Reserve is in hot water, grappling with conflicting opinions on interest rate hikes. The podcast delves into the rise of collateralized fund obligations in private equity, stirring up concerns of a repeat financial crisis. These investment products carry inherent risks and lack clear regulatory oversight, leaving investors in a fog about safety and risk.
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Private Equity's New CDOs
- Private equity firms created Collateralized Fund Obligations (CFOs), similar to CDOs from 2008.
- CFOs bundle stakes in private equity funds, which own various companies, some with junk credit ratings.
Envision Healthcare Example
- One CFO included Envision Healthcare, a hospital staffing company owned by KKR, which is at risk of bankruptcy.
- Despite this, the CFO received a high rating due to the diversification of its holdings.
A-plus Ratings for Junk Bundles
- Bundles of junk-rated companies within CFOs can still achieve A-plus ratings.
- Rating agencies assess the fund's performance, not individual companies, leading to this discrepancy.