It turned out Cinven had borrowed against its stake in Synlab AG, a move that typically would boost everyone’s cash distributions. Now, though, shares of the company Cinven took public in 2021 were plunging as sales of Synlab’s Covid tests faded along with the pandemic.

The price drop was so bad in February 2023 that Cinven faced a margin call— an ultimatum from lenders to put up more money for collateral or risk seeing the stock seized. Cinven, with the help of clients, had to hand over 299 million euros, or about $320 million, said people familiar with the investment.

Private equity firms have used margin loans backed by shares in companies they’ve taken public to supercharge returns for more than a decade, and to return cash to clients frustrated by the recent drought in asset sales. Industry executives estimate up to $50 billion of the debt is now outstanding.

But the risk is more than just a falling stock price. On top of the margin loans, funds have adopted more novel forms of borrowing against their holdings to free up cash for investors, adding to the proliferation of debt across private equity. […]