Private Equity KeyTrends
March 12, 2013
A concise fortnightly distillation of key private equity news, with links to noteworthy PE articles and studies, edited by Palico – The Online Marketplace for Private Equity LPs, GPs and Advisers
$12 BILLION IN PRIVATE EQUITY-BACKED SHARE SALES is the strongest annual start this century for PE-backed stock offers, Henny Sender and Arash Massoudi report in the Financial Times. Likely to help 2013 to a record level of share sales are seductively priced PE-backed initial public offerings. “Private equity groups are preparing to launch about a dozen IPOs with the promise of pricing discounts of as much as 25 percent, compared to a more typical 15 percent.” One of the biggest upcoming IPOs is likely to be the sale of industrial distribution firm, HD Supplies, Reuters writes, citing three people familiar with HD and its PE owners: Bain Capital, Carlyle Group and Clayton Dubilier & Rice. Meanwhile, the Wall Street Journal notes that this month’s $1.3 billion IPO of Chinese real estate investment trust, Mapletree Greater China Commercial Trust, by Temasek Holdings was the largest Singapore listing in two years. It may clear a path to Singapore-listed IPOs for other companies with Chinese revenues. Burdened by poor performance and a slow economy, the IPO market within China has been dormant for months.
“HOW FAIR ARE THE VALUATIONS OF PRIVATE EQUITY FUNDS?” That is the title of a 28-page paper by three University of Oxford professors who reviewed all 761 private equity fund investments – worth nearly $1 trillion – made by the California Public Employees Retirement System since it launched its PE program in 1990. While “valuations understate subsequent distributions by around 35 percent on average, the exception to this general conservatism is the period when follow-on funds are being raised. We find that valuations are inflated during fundraising, with a gradual reversal once the follow-on fund has been closed. This is clearly relevant to recent regulatory concerns about conflicts of interest facing PE fund managers,” the academics write, alluding to an on-going Securities and Exchange Commission investigation into private equity fund valuations.
THE BEST BANK PLAY MAY BE OFFERING CREDIT, NOT BUYING DISTRESSED ASSETS. In Europe, “the ratio of hype to substance about banks deleveraging their balance sheets has been exceptionally high,” Nathaniel Zilkha, global co-head of special situations at KKR & Co., says in the New York Times DealBook. Supported by “more than $1 trillion of cheap, short-term loans from the European Central Bank,” Europe’s banks are avoiding distressed asset sales. Yet they are pulling back from financing companies and buyouts, leaving an “immense” opportunity for private equity firms to provide high yielding debt and structured finance, says Blair Jacobson, managing director in the private debt group of Ares Management.
WONDERING WHAT YOUR PEERS THINK ABOUT THE NEXT PE CYCLE’S TIMING? With 1,400 industry professionals recently in attendance at SuperReturn International in Berlin, a poll, conducted by organizers and reported in Fortune magazine, reveals a dominant number of attendees think the industry’s next correction will be in 2016 and that the best place to invest today is North America. Nearly 50 percent predict that private equity will produce an annual return of 5-10 percent over the next few years, if the comparable return from public equity markets is 5 percent. One implication: limited partners should seek managers who can beat the averages.
LEVERAGED LOAN ISSUANCE HIT A MONTHY RECORD IN FEBRUARY. While Thomson Reuters LPC data shows that “February volume spiked to about $156 billion, versus $118 billion” for the previous record in March, 2007, “refinancings and repricings accounted for 80 percent” of the new peak, “in stark contrast to six years back,” when the lion’s share of issuance was for leveraged buyout acquisitions. Steve Miller, managing director of Standard & Poor’s Capital IQ Leveraged Commentary & Data observes in Forbes that “private equity firms are tapping leveraged loans at a record pace,” but that only 14 percent of those credits have been for leveraged buyouts. Both stories reassure regarding private equity’s steadily diminishing debt wall, but imply that LBO purchases still face considerable challenges.
PRIVATE EQUITY FIRMS TAKE A LOOK AT GREECE, attracted by cheap price tags on companies that can offer lucrative opportunities for those brave enough to take the risk,” writes Reuters’ Greg Roumeliotis. Among those “scouting for deals” are BC Partners, Fortress Investment Group, Rhone Capital and TPG Capital. In Greece, “there are liquidity needs that a private equity fund could cover, there are now willing sellers, there are banks that have to lighten their balance sheets” and “crucially there is light at the end of the tunnel for the economy,” says Theodore Kiakidis, a partner at local PE firm Global Finance.
AS GPs THREATEN TO LOWER HURDLE RATES, HERE’S ONE HIKING THE STANDARD RATE that serves as the threshold for fund managers’ share of capital gains. Bloomberg reports that MC Shipping Opportunities Fund, an inaugural private equity vehicle, seeking $750 million “to acquire and manage 25 to 35 container ships,” has set its hurdle rate at 10 percent. Moreover, in a new twist on early bird specials, MC’s hurdle rate rises to 12 percent for investors who commit before the fund’s first close. The fund’s managers believe a 25-year low in container ship prices “offers significant capital gains potential.” Among GPs leading the campaign to actually lower hurdle rates, is Jeremy Coller, famed founder and chief investment officer of private equities secondaries specialist, Coller Capital. Fortune’s Dan Primack quotes Coller saying that the standard hurdle rate of 8 percent poses “a potential crisis for the industry” in a period of low average returns. Primack notes “there certainly is a case to be made that if a PE fund manager can’t generate in excess of 15-20 percent, then they really aren’t doing their job.” The debate over appropriate hurdle rates for different PE strategies may just be starting.
THE PROMISE AND LIMITS OF JOSH LERNER’S DATABASE PROJECT are discussed in a Pensions & Investments Q&A with Lerner. Lerner is the Harvard professor who founded Boston’s widely respected, non-profit Private Capital Research Institute. Says Lerner: “Even in a perfect world, we will still find it more challenging to understand private capital than public equity markets. We do not plan to enter the benchmark business. Nonetheless, the database should allow researchers to say much more about what drives private equity performance.”
VIDEO – GUY HANDS REFLECTS ON HIS PAST AND SHARES HIS REGRETS, as he schmoozes over a beer with Bloomberg TV’s Cristina Alesci. During a wide-ranging discussion, covering everything from his failed investment in EMI Group, to the contrasting nature of private equity as it’s practiced in the U.S. and Europe, to Britain’s proposed referendum on European Union membership, Guy Hands reveals that he continues to spend personal millions funding bonuses at his private equity firm, Terra Firma Capital Partners. Terra Firma’s $7.5 billion, 2007 fund – it’s most recent – is returning a negative 19 percent annually as a result of EMI’s failure. Of his EMI experience, Hands says that his two principle takeaways are: “Calm yourself down with regards to the amount of debt you put on a transaction; just because people offer it, doesn’t necessarily mean you should take it,” and “get diversification; an issue we got completely wrong.” Hands details recent investments and says Terra Firma’s returns since 2009 “are spectacular.”
VIDEO – PRIVCAP ASKS “HOW ARE THE 2006 LBO FUNDS LOOKING? The year 2006 is one of the most important ever for the buyout industry because so much capital was formed and put to work in a frothy environment. Discussed: why 2006 LBO funds are such an important group, how the various size groupings are faring against each other (small is handily beating mega, but large isn’t doing so bad) and how significant debt investing from the large LBO funds of that vintage is affecting performance.”
PALICO FOUNDER ANTOINE DREAN DISCUSSES PALICO’S CHINA MEMBERSHIP, the outlook for the country’s fundraising and its secondary PE fund market with China Money Podcast.