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Private equity CFO performance weakens slightly, says Fitch

Private equity collateralised fund obligations (PE CFOs) rated by Fitch Ratings have exhibited weaker performance over the last six months, with five of six transactions generating lower cash flows than in the prior period.

In three of the transactions meanwhile, leverage increased from the prior distribution period. 

Private equity market exit activity in H1 2022 dropped to its lowest level since H1 2020. Nevertheless, Fitch expects that PE CFO ratings will remain broadly stable in 2023, as strong over-collateralisation levels, continued portfolio distributions and transaction amortisation schedules support performance.

Two PE CFO transactions came to market in 2022 – Astrea 7 Pte Ltd (rated ‘A+sf’/‘Asf’/‘BBBsf’ by Fitch) in May and Nassau (not rated by Fitch) in September. Fitch says it has seen recent increased interest in issuing PE CFOs from certain limited partners (LPs), in particular US pension funds, which have increased their allocations to private equity on the back of strong performance from private capital funds in recent quarters, combined with declines in market values of public equities. 

LPs in some cases have been exploring partial liquidity solutions, such as bank facilities, preferred equity and PE CFOs, instead of selling stakes outright on the secondary market, given worsening pricing dynamics in that market.

Global buyout fund exits increased in Q2 2022 relative to the first quartet of tech year, but remained below levels seen in 2021. Fitch expects slowing exit activity to continue in H2 2022, due to the less favourable market environment, resulting in lower distributions for PE CFOs. 

Capital calls on Fitch-rated PE CFOs remained low over the last six months after peaking in the periods shortly after the onset of the pandemic in 2Q20. Valuations declined in Q2 2022 across four of the six Fitch-rated PE CFOs. The level of excess distributions to equity holders varied in the latest distribution period, albeit with all deals generating distributions to equity holders. Liquidity remains strong for Fitch-rated PE CFOs, as distributions have been sufficient to cover capital calls, interest and expenses without drawing upon contingent liquidity facilities.

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