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Golfers have a term for a shot that is well-struck, but still finishes out of bounds – a son-in-law. As a metaphor for disappointed expectations, one private equity partner thinks it is likely to be applied with increasing frequency in the coming months to buy-outs that go bad.

Gloom-mongers within the industry have been talking about the looming wave of distress for some months. Poorly thought-out deals are now getting squeezed from both ends. In the glory days of the first half of this year, such buy-outs were done on the basis of leverage at eight or nine times earnings before interest, tax, depreciation and amortisation, against the previous industry norm of four times. But those ratios are not comparable: in normal times, the ratio was based on debt to historic ebitda, but at the peak of the sellers’ market, debt was being raised at higher multiples against prospective, pro forma earnings and credulous buyers were also prepared to accept such innovations as “vendor due diligence” – the M&A equivalent of self-certified sub-prime mortgages.

When flimsily structured, highly leveraged deals, based on optimistic forecasts and self-interested risk assessments, collide with a downturn in the real economy, the risk of default – or at least disappointment – is bound to increase. In turn, such failures could widen the gap between that minority of private equity funds – in the top quartile, or even decile of performance – that justify high fees with substantial returns, and the majority that drag the mean return for the industry back to levels that are closer to benchmark equity indices. That is going to expose poor choices of fund by institutions that only recently started to increase their exposure to alternative assets.

How much damage is caused will depend to some extent on the tolerance level of lenders. The cushion of equity in most deals gives big banks some breathing space, and the loose terms applied to many bubble buy-outs may make it tough to call in loans until the situation is much worse. But at the very least, private equity investors should prepare for more trouble with the in-laws.