What is coming to the surface is that Renovo's acquisition strategies were overly aggressive and unrealistic. Renovo is proving to have been a bad investment bet all around.
What is making Renovo noteworthy is how they kept the operation afloat and how Blackrock in particular failed to spot the problems while funneling them loans upon loans without any real questioning or due diligence.
Wow. The first half of this post literally put chills down my back. I just knew that the monstrous growth and power of the big private equity firms such as Blackrock would result in some kind of financial disaster. Not being a finance professional, I didn’t know how. But you’re putting the pieces of the picture together in ways that make sense - really scary sense!
Here in Minneapolis, there has been a local building and renovation firm, Rusco, in business for 70 years. Their TV commercials have been ubiquitous since I was a little kid. Well, a few years ago, they were acquired by a private equity firm, which in turn was acquired by Blackrock, and - long story short - Russo had to file for bankruptcy a few weeks ago. After 70 years! Everyone was stunned, the local media had to explain the financial shenanigans. I was left with a foreboding of bad economic effects - which you have just illuminated, and thank you for that, Peter. I think you’re onto something big!
Unlike the subprime mortgage crisis in 2007-2008, this is not a pure breakdown in financial and risk management controls. There are elements of Enron and WorldCom flavors of fraud and corruption as well--factored receivables of dubious legitimacy, among other things. The bankruptcies are not triggered by interest rate rises the way Bernanke's rate hikes in 2005 catalyzed subprime mortgage defaults, but by genuine flaws in business models and business management.
Thus the real question in private credit is whether there is sufficient liquidity in the right places within the financial system to absorb the shock of bankruptcies—a shock magnified by NDFI reluctance to write down loan assets as the related businesses deteriorate—while adequate risk controls are belatedly put in place (presuming, of course, that the likes of Blackrock and Apollo Global Management are willing to implement such controls).
The 2007 subprime mortgage crisis and the 2008 Great Financial Crisis were foregone conclusions the moment Bernanke pushed interest rates too high to maintain the viability of subprime mortgages. The popularity of adjustable rate mortgages and the inevitability of balloon payments made the meltdown inevitable.
Private credit does not appear to be an inevitable crisis driven by interest rates, but a potential crisis driven solely by lack of due diligence with a generous dollop of run-of-the-mill corruption. The potential contagion effects that were a given in 2008 are not that clear-cut on private credit, at least not yet.
That being said, where the private credit situation parallels the subprime mortgage debacle is in the recklessness and lack of adherence to principles of due diligence and risk management by both banks and the NDFI lenders they are supporting. When banks get careless with money something bad is bound to happen.
https://www.startribune.com/how-a-private-equity-roll-up-sank-minnesota-rusco/601522505?utm_source=gift
Rusco is a part of the Renovo collapse.
What is coming to the surface is that Renovo's acquisition strategies were overly aggressive and unrealistic. Renovo is proving to have been a bad investment bet all around.
What is making Renovo noteworthy is how they kept the operation afloat and how Blackrock in particular failed to spot the problems while funneling them loans upon loans without any real questioning or due diligence.
Yes! And how widespread is this practice? Is Renovo an outlier or a big, fat warning sign?
Its happened before. Private Equity "investment" sunk Cabela's and Sidney, NE with it.
https://www.google.com/amp/s/www.foxnews.com/us/paul-singer-sidney-nebraska-cabelas-bass-pro-shops-merger.amp
Renovo was the third private credit-related bankruptcy in the past two months.
Do the math.
Laughing out loud - in a “oh oh” sort of way…
Wow. The first half of this post literally put chills down my back. I just knew that the monstrous growth and power of the big private equity firms such as Blackrock would result in some kind of financial disaster. Not being a finance professional, I didn’t know how. But you’re putting the pieces of the picture together in ways that make sense - really scary sense!
Here in Minneapolis, there has been a local building and renovation firm, Rusco, in business for 70 years. Their TV commercials have been ubiquitous since I was a little kid. Well, a few years ago, they were acquired by a private equity firm, which in turn was acquired by Blackrock, and - long story short - Russo had to file for bankruptcy a few weeks ago. After 70 years! Everyone was stunned, the local media had to explain the financial shenanigans. I was left with a foreboding of bad economic effects - which you have just illuminated, and thank you for that, Peter. I think you’re onto something big!
Private credit is a dicey situation.
Unlike the subprime mortgage crisis in 2007-2008, this is not a pure breakdown in financial and risk management controls. There are elements of Enron and WorldCom flavors of fraud and corruption as well--factored receivables of dubious legitimacy, among other things. The bankruptcies are not triggered by interest rate rises the way Bernanke's rate hikes in 2005 catalyzed subprime mortgage defaults, but by genuine flaws in business models and business management.
Thus the real question in private credit is whether there is sufficient liquidity in the right places within the financial system to absorb the shock of bankruptcies—a shock magnified by NDFI reluctance to write down loan assets as the related businesses deteriorate—while adequate risk controls are belatedly put in place (presuming, of course, that the likes of Blackrock and Apollo Global Management are willing to implement such controls).
The 2007 subprime mortgage crisis and the 2008 Great Financial Crisis were foregone conclusions the moment Bernanke pushed interest rates too high to maintain the viability of subprime mortgages. The popularity of adjustable rate mortgages and the inevitability of balloon payments made the meltdown inevitable.
Private credit does not appear to be an inevitable crisis driven by interest rates, but a potential crisis driven solely by lack of due diligence with a generous dollop of run-of-the-mill corruption. The potential contagion effects that were a given in 2008 are not that clear-cut on private credit, at least not yet.
That being said, where the private credit situation parallels the subprime mortgage debacle is in the recklessness and lack of adherence to principles of due diligence and risk management by both banks and the NDFI lenders they are supporting. When banks get careless with money something bad is bound to happen.