At the conclusion of 2021 private equity controlled assets including dry powder valued at $2.6 trillion. Pitchbook reports that for 2021 the average leverage multiple for buyouts in the US was equal to 5.8 times EBITDA.
Per a recent issue of Grant’s Interest Rate Observer, B-rated bonds serve as a reasonable proxy for the average LBO credit rating, and the yield on these bonds has jumped to 9.04% in July of 2022 from 4.75% at the end of 2021.
If you apply the same EBITDA multiple cited by pitchbook and assume interest expense of 9.04%, the jump in yield suggests that interest consumes 52% of a buyout’s EBITDA (9.04% x 5.8).
Grant’s further cites the Tax Cuts and Jobs Act of 2017, which limited interest expense deductions to 30% of EBIT (the switch from EBITDA took place on January 1st.)
A lot of assumptions in the numbers above, but this concern would be severely compounded by a downturn in economic activity.