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Private equity firms turning to riskier funding tool for Australia deals

Australia is becoming a testing ground in Asia-Pacific for a relatively new private equity funding tool that provides more flexible terms, Bloomberg News reported Oct. 13.

Private equity firms, including KKR & Co. LP, TPG Capital Asia and Carlyle Group LP have used unitranche loans, which combine senior and subordinated parts of leveraged transactions, to finance acquisitions. This allows deals to be done faster as nonbank lenders put up the funds for unitranche debt and there is no need to negotiate separate senior and junior facilities.

However, this lack of separation could complicate matters should disputes arise in a bankruptcy situation.

There have been at least four deals in Australia financed this way in 2017, the news outlet noted, adding that the unitranche structure is already popular in the U.S. and Europe. There is growing interest in Australia for such debt as it provides more gearing and longer tenors, said Simon Beissel, head of corporate and acquisition finance at Investec Australia Ltd.

Australia is drawing investors after having gone 26 years without a recession, Bloomberg reported. At the same time, with banks everywhere facing stricter capital requirements, private equity firms are increasingly looking to institutional investors for leveraged funding.