“When liquidity gets tight, innovate” – seems to be the credo for PE firms.
Imagine this new device. A Private Equity firm needs $300m to invest in a company but has decided to expose it to $100m only. It lures in a Bank with higher ROI bait and gets it to lend $200m on its behalf into say, 8% preferred stock/FCCB. The company is capitalized with $300m now. So the Bank gets $16m and the PE firms gets $8m. The PE firm turns over its return ($8m) to the Bank in return for stock appreciation / conversion benefits to which the Bank is not entitled. If the stock doubles, the investment is worth $600m which the PE firm sells and returns $200m to the Bank. PE firm nets a cool $400m upon its original investment of $100m and the interest turned over to the Bank. In the PE block, they call it “Asset Swap”.
Shishir Prasad has elaborated it in The Economic Times.