Private equity tricks mask mounting debt: 'I'm 5 foot 8 inches, but I change the scale and make myself 6 foot 2 inches on a pro forma basis'

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• Jonathan Lavine, co-managing partner at Bain Capital, warned that massive debt piles in the private equity industry are raising the risk of a crash, in an interview with the Financial Times.
• Lavine said that parts of the private equity space were being "increasingly aggressive" in their calculations.
• Higher prices for deals are leading to firms taking on greater amounts of debt to pay for transactions.

Jonathan Lavine, co-managing partner at Bain Capital, is warning that massive debt piles in the private equity industry are raising the risk of a crash.

Speaking in an interview with the Financial Times, Lavine said some in the industry are being "increasingly aggressive" in their calculations of future sales growth when analyzing client deals. That means debt levels are based on increasingly exaggerated financial projections.

He colorfully used the below analogy:

"I'm 5 foot 8 inches, but I change the scale and make myself 6 foot 2 inches on a pro-forma basis," the Bain boss told the Financial Times. "I'm not actually 6 foot 2 inches on a pro-forma basis, but I can make adjustments like standing on a box, maybe trying to stretch."

The FT says private equity firms are paying "record high prices" for deals and investors are piling money into funds, which may have created a bubble that Lavine says an economic downturn could pop.

The industry is rife with overestimated estimates, a worrying sign that in some cases has seen credit as a percentage of the transaction ramp up to more than 30%, Lavine told the FT.

"If you start seeing people not generating cash flow and not deleveraging, particularly in their first two years, I'd start worrying," he said, according to the newspaper.

"Even in the absence of a recession, if growth slows down a lot, people will treat it like a recession and it could have some of the self-fulfilling negative effects that an actual recession does have," he told the FT.