Brookfield’s private equity push draws scrutiny as lenders question the health of key portfolio firms
Lenders are intensifying their scrutiny of CDK Global, BrandSafway, and DexKo Global, raising fresh questions about the equity value of these companies and the risks individual investors may face in private equity’s expanding retail market, according to people familiar with the matter as reported by Bloomberg.
Brookfield Asset Management’s new private equity fund for wealthy individuals seeded its initial portfolio with stakes in these three companies, all acquired from its own listed vehicle.
The transaction, described by Brookfield as creating “an immediate diversified seed portfolio,” also gave Brookfield Business Partners shares in the wealth fund to align interests, according to a July statement.
Brookfield has issued a statement more recently on the matter as well.
“Brookfield’s Private equity business is our longest standing strategy, delivering 27% gross IRR (21% net) over 25 years," the statement reads. "As we expand into the private wealth channel, we remain focused on investing in essential, market-leading businesses where our deep operating expertise drives long-term value creation. These are three such businesses, well-positioned as part of a diversified and immediate seed portfolio. Each of these companies are owned and managed by Brookfield. We have maintained our investments in these companies through our funds, which was an important consideration to ensure continued alignment with our investors.”
Within weeks of the fund’s October launch, lenders to CDK and BrandSafway sought legal advice amid concerns about the companies’ financial strength, while DexKo’s debt holders requested more information following the collapse of First Brands Group, Bloomberg reported.
CDK’s US$4bn loan recently traded at about 82 cents on the dollar and has not exceeded 90 cents since March, reflecting ongoing challenges after last year’s cyberattack forced a complete system shutdown.
In the third quarter, CDK’s earnings before interest, taxes, depreciation and amortization fell by 18 percent year-over-year, as per sources cited by Bloomberg.
BrandSafway’s loan traded as low as 84.25 cents in August, and Moody’s Ratings downgraded its credit grade to Caa1 in June, citing “weak operating results, negative free cash flow and weak credit metrics.”
DexKo’s debt has performed better, trading at around 98 cents, but Moody’s noted the company’s high financial leverage and declining North American volumes.
Brookfield’s new vehicle stated in a regulatory filing that it does “intend to invest” in companies “in weak financial condition, experiencing poor operating results, having substantial financial needs or negative net worth.”
The firm remains invested in the three companies through Brookfield Business Partners, which has partly eased lender concerns, according to people familiar with the matter.
As institutional fundraising slows, private equity firms have been targeting individual investors with evergreen vehicles like Brookfield’s, offering lower capital requirements and periodic liquidity.
However, investors in these funds generally wait longer for returns, and the sector is facing mounting challenges in exiting old investments and achieving historical returns.
