Davidson Kempner Capital Management has warned that financial stress across the private capital industry is deeper than many on Wall Street recognise, with a “substantial portion” of private equity firms already under pressure, according to a report by the Financial Times.
Tony Yoseloff, managing partner and chief investment officer at the $38bn credit hedge fund, said traditional metrics are masking weaknesses in leveraged buyouts completed over the past decade.
In new research, Davidson Kempner argues that high leverage, weak cash flows and borrower-friendly debt structures have created conditions for a wave of corporate defaults. The firm estimates that around $768bn of debt in the US leveraged loan and direct lending markets is already stressed.
Private equity firms are also grappling with a record backlog of roughly $4tn in unsold portfolio companies as exit markets remain difficult, forcing some sponsors to rely on secondary fund sales and continuation vehicles to return capital.
Yoseloff said technology investments — particularly software deals struck between 2019 and 2022 — are especially vulnerable as valuation multiples have fallen and borrowing costs have risen, eroding equity cushions.
Stress is also building in private credit markets, where borrowers are increasingly turning to payment-in-kind (PIK) structures that allow interest to be added to loan balances rather than paid in cash, delaying potential defaults.
Suzanne Gibbons, partner and head of research at Davidson Kempner, said distressed investors are beginning to see opportunities emerge, although widespread forced selling has yet to materialise.
