When Blackstone piled €400m of additional debt into casino operator Cirsa last autumn so it could pay its investors a dividend, rating agency S&P promptly downgraded the Spanish company's debt and criticised the "aggressive strategy" of its private equity owner.
Six months later, a global health emergency that has inflicted damage on hospitality companies with even the most robust balance sheets forced Cirsa to shut sites. It is now tapping a Spanish government support scheme to pay its workers' wages.
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Meanwhile, executives at Blackstone may be breathing a small sigh of relief. They used the refinancing to claw back about half of the equity that the firm had originally spent on the hospitality group. This dramatically reduced their exposure to a company that is now on the front line of an economic contraction that economists predict will be the worst since the Great Depression of the 1930s.
Cirsa's site closures are for public health reasons and have "nothing to do with a dividend from last year," said Blackstone. The company will also benefit from loose bond terms that allow it to delay repaying the interest.
But the casino operator's predicament illustrates how the coronavirus pandemic is reviving a dilemma last confronted at the height of the 2008 financial crisis. Back then, Washington wrestled with a government bailout of Detroit carmakers including Chrysler, which was owned by private equity group Cerberus Capital Management.
Once again, politicians are facing a tough decision. Should they use government money to support companies whose deep-pocketed private equity owners have often thinned out their balance sheets and left the slimmest financial cushion?
"We cannot have a world in which one can borrow to earn more and pay little taxes if things go up and when things go down then the taxpayer comes to the rescue," said Ludovic Phalippou, a professor at Oxford university's Saïd Business School. Private equity firms were not the only culprits, he added.
The expansion of the private capital industry over the past decade has left it particularly exposed to an economic downturn. Buyout firms have been on a spree, snapping up companies in sectors such as hospitality, travel and retail that are among the worst affected by the global lockdown.
They have diversified into real estate, buying up everything from office buildings to the space under British railway arches where, until the lockdown, local caterers and car mechanics plied their trade.
Meanwhile, the biggest Wall Street credit arms such as Apollo Global Management, KKR and Carlyle Group have taken over from banks as major lenders to the midsize businesses that are now bearing the brunt of the crisis.
All of that is on top of the $478bn that traditional buyout funds spent last year on deals, the highest figure since the financial crisis.
The industry has used more and more debt to fuel growth. It is sitting on a record $2.5tn in dry powder that is waiting to be deployed.
While some firms are using this money to help the companies they own, executives say they cannot always divert capital to rescue missions at their existing investments because this could dilute investors' returns. So, with portfolio companies facing an immediate cash crunch, the industry is turning to government support.
In the US, where private equity has come under fire from Democratic politicians such as Elizabeth Warren who accuses it of "looting" companies and enriching Wall Street executives, the industry's model — of loading debts on to the companies it buys, leaving them highly-leveraged — threatens to hamper its attempts to access bailout cash.
A Federal Reserve lending facility for medium-sized companies will not lend to those deemed too highly indebted.
The buyout industry's most senior figures have "been using their connections in Washington to pressure the government on a multitude of matters," according to a person who discussed the matter with the billionaire founders of two private equity firms. Blackstone said its executives had had no such discussions.
The industry is also drawing on an army of lobbyists to push its agenda. These pressure groups proved highly effective at defending controversial laws such as the carried interest "loophole", which means private equity executives collectively receive billions of dollars worth of performance-related income each year, while paying lower tax rates on that money than most middle-class families. Now they have taxpayers' money in their sights.
Private equity firms employ "people who can look at the best ways to use the availability of finance from governments to mitigate against what's happening with the virus," said one UK-based dealmaker. "The same scale comes into play in mitigating against the payment of maximum taxes."
The lobbying efforts go beyond securing access to employee support programmes, such as the UK's subsidised furlough scheme that has been tapped by private equity-backed restaurant chains such as Prezzo and Bella Italia. Buyout firms want their companies to be able to access state-backed loans, too.
"Why should we be in a situation where our companies are looked at in terms of their ownership structure?" said Eric de Montgolfier, chief executive of industry trade body Invest Europe. "All companies should be treated the same."
The lobbying has already started to pay off. In the UK, buyout groups' companies will now have access to a new emergency loans programme in which 80 per cent of the debt is guaranteed by the state.
Officials tweaked the programme's rules so that private equity-owned companies could apply, after lobbyists said the sheer breadth of the industry and a need to safeguard jobs meant that support should be extended.
One London-based banker said "all of" his private equity clients were "trying to secure as much government funding as possible" for their portfolio companies, because they expect this to be cheaper than other options.
In the US, the private equity industry scored a victory in early April, when the Federal Reserve said it would not only expand its purchases of investment grade corporate debt, but begin buying junk-rated securities as well. This has revived the market for risky corporate debt — the bread and butter of the private equity industry — helping financial institutions to avoid mark-to-market losses.
"This is the time for a bazooka," said Art Penn, managing partner at PennantPark, a credit firm. "If you had the time and energy the Fed could be more tactical, but right now a big chunk of the economy is shut down, and millions of people are becoming unemployed."
Not everyone is celebrating. Hedge fund manager Dan Loeb said he was "dismayed" by the move, which would "perhaps offer a reprieve to market participants who profited handsomely for years by using excessive debt to give the illusion of high returns".
Others fear the political costs of being seen to accept government support. Already, Ms Warren has sounded a note of alarm.
"I am concerned that, in establishing this new program to bail out thousands of medium-sized companies, you did not use your authority to appropriately protect workers and taxpayers," she wrote in a letter to Jay Powell, Fed chair, and Steven Mnuchin, US Treasury secretary.
The two US officials in charge of the various rescue packages worked for years on Wall Street. Mr Powell held senior positions at investment bank Dillon, Read & Company and at private equity group Carlyle. Mr Mnuchin spent nearly two decades at Goldman Sachs and later worked at several hedge funds.
To some veterans of the 2008 crisis, Ms Warren's remarks are reminiscent of the backlash against banking bailouts that prompted politicians to impose onerous regulatory restraints on the world's leading financial institutions.
Several advisers said they feared government restrictions on dividends and limits on future debts incurred by companies that chose to tap the public purse.
"Taking aid is not neutral, just like the banks found [after the 2008 crisis]," said James Collis, a banking and finance lawyer at Squire Patton Boggs in London. "The support that the government is providing is going to come with strings."
- Additional reporting by James Fontanella-Khan and Sujeet Indap in New York and Robert Smith in London.
Written by: Kaye Wiggins in London, Mark Vandevelde in New York and Robin Wigglesworth in Oslo
© Financial Times 2020