What the LIBOR scandal means for PE

If you thought the Barclays LIBOR scandal wasn’t anything to worry about for private equity firms, you might want to reconsider. While true it may seem at first glance not to have any direct, immediate impacts, it’s worth remembering it occurs at a time when many governments are already writing new rules for private equity and other financial services firms; the Barclays saga creates yet another reason for policymakers to distrust financial types. 

The UK bank made headlines when it paid $450 million in fines and civil penalties following a multiyear investigation of in-house traders who tried to influence the bank’s interbank lending rate to benefit their own desks’ trading position. Barclays is one of 14 alleged banks to have taken part in interest rate manipulation. That level of collusion, if true, could strengthen the call for even greater financial services regulation and possibly even calls for a forced split between investment banks and deposit-taking institutions. That could potentially cause banks to (further) tighten lending in an attempt to shore up capital ahead of any new rulemaking. 

Loan arrangements are another risk to consider. Lenders have been slowly loosening the standards included in leveraged buyout packages following the tight covenants written after the credit crunch. If the LIBOR fallout reduces banks’ risk appetite – perhaps as a result of future chief executives embracing more conservative banking policies under the heat of scandal – covenants may tighten. That increases GPs’ vulnerability to banks when a portfolio company breaches a loan agreement. But an upside may come about in the form of increased policing of portfolio companies by GPs wanting to avoid being side-smacked by a lender enforcing a seldom enforced default provision. 

However the good news is that many industry sources believe the scandal to be “small potatoes” for GPs with respect to any financial losses. Sources say not many GPs would have experienced significant losses from an inflated LIBOR rate which for years now has hovered around zero. And those that do may refrain from joining any class action lawsuit to avoid damaging relationships with lenders.  

But GPs should still be bracing for any ripple effects from the scandal, particularly as many governments are busily adding new chapters to their private equity rulebooks.