That prediction comes from Jon Moulton, the boss of private equity firm Alchemy Partners, who has been critical of the excesses of his industry over the past two years. He says: 'Covenants are in danger of being breached because operating profit will be insufficient to cover interest payments. Firms will go bankrupt or will need to be rescued by the banks via debt-for-equity swaps.'
He says the most vulnerable companies are those that were the targets of highly leveraged bids, sealed at the height of the credit boom between 2006 and 2007. Deals were struck under which private-equity predators borrowed at least 10 times the amount of equity they invested. They hoped to refinance deals on more favourable terms, once acquisitions were bedded down, but this has become impossible because banks are now so reluctant to lend.
Some analysts fear a bloodbath in the private equity-owned industry, which employs about one quarter of all employees in the private sector. As revealed by The Observer two weeks ago, Permira, headed by Damon Buffini - a key business adviser to Gordon Brown - has seen the value of its stakes in several big companies plummet in value, in particular its holdings in German television broadcaster ProSiebenSat.1 and Freescale, the US semiconductor and technology company that has an operation in East Kilbride. Although there is no suggestion that these businesses are in distress, others may not be so lucky.
A City source says: 'A lot of private equity deals were done when the idea was to load them up with debt, sweat the assets and flip them quickly via a trade sale or flotation on the stock market for a huge profit. But those days are gone and if you borrowed too much, you are between a rock and a very hard place.'"