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Investors in the secondary leveraged buy-out fund market are using further leverage to finance such purchases, adding another layer of risk and stirring up memories of the debt-fuelled private equity boom ahead of the financial crisis.

While private equity groups in Europe and the US are finding it harder to raise capital, the market for stakes in their pre-crisis funds has become so hot that some investors have taken on loans to be able to pay higher prices for such assets.

France’s Axa Private Equity has been one of the most aggressive buyers in a fast-growing market, snapping up scores of large portfolios from banks such as Citigroup in the US and HSH Nordbank in Germany, in both cases with the help of debt.

Benot Verbrugghe, head of Axa PE’s US unit, said the French investor was cautious in its use of leverage: “Based on the quality and maturity of these assets, we sometimes use only 10 per cent debt, sometimes 20 per cent and sometimes none. We would only go up to a maximum of 40-45 per cent.”

Some of Axa’s competitors are warier. “We are hesitant to do it because you already have one layer of leverage and, if you are not in a bull market you are adding risk. You are putting debt on top of debt,” said one.

Mr Verbrugghe said Axa only leveraged diversified fund interests with a strong cash flow where it had great in-depth knowledge of the portfolio companies.

Buy-out groups take a mixture of debt and equity to finance deals. They push the loans on to the balance sheet of the acquired companies, which often owe debt that equals three to five times their annual earnings before interest, tax, appreciation and amortisation.

The sleepy market for secondary private equity transactions has been boosted in the past two years as banks and other institutional investors seek to reshuffle assets in the wake of the financial crisis. The transaction volume has doubled in 2010 and is on track to reach a record of $25bn this year, according to research by UBS.

Bankers said Axa’s rivals might have to think about using leverage if they wanted to stay competitive in auctions.

Insiders said only a handful of banks – such as Macquarie, Deutsche Bank and Investec – provided loans for such deals.

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