“Fortress to Blackstone say now is time to sell”, writes Bloomberg in a piece on the rising numbers of private equity fund managers claiming it’s easier to sell than to buy companies, as high prices and an uncertain global economic outlook keep purchases on hold. The latest general partner to join the sell chorus is Fortress Investment Group: “This is a better time for selling our existing investments than making new investments,” Fortress senior executive Pete Briger said this month on an earnings call. Meanwhile, one of this year’s earliest and most aggressive proponents of selling, Apollo Global Management, is doing very well, notes the New York Times DealBook. Apollo reported that “second quarter earnings jumped nearly tenfold, to $197.8 million, from the period a year earlier,” powered by “$840.5 million worth of realized gains.” Apollo shares are “the best performing among the four big publicly traded PE firms this year,” up 65 percent.
LEVERAGED DEBT IS PLENTIFUL, REDUCING DEFAULT FEARS – IT’S ALSO CHEAP,
raising the prospect of an improving market for PE buyers, as stories from the Financial Times and Reuters illustrate. “Global investors are committing money to the leveraged loan market in record volumes,” with “more than $40 billion” flowing into leveraged loan funds this year, reports the FT. “Leveraged loans have marched onward in all weathers,” insulated by floating rates, despite signs of an end to U.S. monetary easing. “Approximately 66 percent” of leveraged loans issued over the past year have gone to refinancing, with “the biggest threat to the creditworthiness of highly leveraged companies ‘all but eliminated,’” the FT states, quoting credit rating agency Fitch. In the U.S., PE’s biggest market, Reuters says that general partner KKR “secured the cheapest borrowing rates it ever got to fund a leveraged buyout” for its $3.9 billion purchase of pump maker Gardner Denver. KKR achieved “an average blended interest rate of 4.8 percent, one of the lowest rates ever seen in leveraged buyouts. Favorable financing conditions, if sustained, could encourage more deal making,” particularly if there is growing clarity regarding the direction of global economies.
DIVIDEND RECAP ACTIVITY IS HITTING AN UNPRECEDENTED LEVEL, with “$47.4 billion of new loans and bonds” sold year-to-date “by companies to pay dividends to the private equity firms that own them,” reports The Wall Street Journal. “That is 62 percent more than the same period last year, the biggest year on record, with $64.2 billion” in dividend recaps. PE firms “are helping fuel the appetite for dividend deals as they sit on huge piles of their own cash and pursue relatively few buyouts. Fewer buyouts mean fewer new junk bonds to help absorb some of the demand for high yield investments” in an environment of generally low interest rates.
LP CASH IS GETTING A BIG BOOST FROM THE LACK OF PE PURCHASES this year, private equity advisory Triago says in its latest quarterly. “Declining PE purchases in recent quarters” – down about 20 percent in the first seven months of 2013 versus the year-earlier period – “mean rising estimates concerning the amount of commitments likely to reach term without being invested. Triago believes some $20 billion may expire this year without being invested, adding significantly to investor cash.” Aided by exits and dividend recaps, that should help global fundraising reach a post-financial crisis high this year of “$356 billion, 32 percent more than in 2012.” But growing LP liquidity means tighter pricing in the secondary market for PE fund stakes, where Triago reports that “July’s average discount to net asset value is 7 percent, narrowing from 9 percent at the end of 2012.” The firm also says that “a two-quarter fall” in the average PE purchase price multiple from 9.2 times EBITDA in December to 7.8 in June “is not representative of cheaper prices, but of failed negotiations in the large deal category,” where prices are highest and where fund managers are showing admirable discipline.
“A RECORD LEVEL OF UNINVESTED CAPITAL IS SET TO EXPIRE THIS YEAR” – some $145 billion – notes peHub, leading many GPs to seek extensions to their investment periods. The story names some of the biggest GPs who have recently requested investment period extensions, including TPG, Thomas H. Lee, and Irving Place Capital. One LP observes that “investors should support extensions so GPs ‘don’t feel the pressure of deploying capital willy nilly.’”
HERE’S A POTENTIAL TEMPLATE FOR PE PURCHASES OF ANNUITIES. Bloomberg reports that Guggenheim Partners “has won approval for a deal to buy a U.S. annuities business from Sun Life Financial,” after agreeing to set up “a trust account with $200 million to replenish capital at the unit if it falls below required levels. Guggenheim will also need prior approval from New York state’s Department of Financial Services,” with whom it struck the agreement, “for ‘material changes’ to operations, including dividends or reinsurance transactions. ‘These protections can and should serve as a model’” for “’addressing the emerging trend of private equity firms seeking to enter the annuity business,’” DFS Superintendent Benjamin Lawsky said. Worried about potentially risky investment strategies, “Lawsky began a probe this year into deals by PE firms to buy insurers.” PE firms are purchasing retirement annuity contracts at discounts from insurers and using the long-term capital flow to boost fundraising and fees. Sun Life’s annuities unit had $43.6 billion in assets under management at the end of March and analysts estimate there may be over $200 billion in variable-annuity assets available for sale.
EMERGING MARKETS ARE BECOMING A MAJOR SOURCE OF CAPITAL, at least for some private equity fund managers. That message was underlined by Private Equity International’s coverage of Carlyle Group’s second quarter earnings conference call. “’We are seeing a real pickup in the money that we’re raising from emerging markets, particularly Asia and the Middle East, and I don’t think that will abate anytime soon, even if emerging market growth rates should go down a bit,’” Carlyle Group co-chief executive David Rubenstein said. “The firm raised a total of $6.9 billion during Q2 and $19.7 billion during the past 12 months.” Rubenstein’s optimism regarding steadily rising commitments from emerging markets, as local investors accumulate wealth, and national investment restrictions are loosened, echoes the opinions of other industry professionals, who believe rising emerging market investment will offset a long-term fall in investment by U.S.-based defined contribution pension plans. The plans are an indispensable source of PE capital today, but their assets will shrink as the baby-boom generation retires in strength over the next decade.
FUNDRAISING FOR PE FUNDS INVESTING IN EMERGING MARKETS HALVED IN H1, compared with the same period last year, while dealmaking volume fell 11 percent, according to the latest statistics from the Emerging Markets Private Equity Association. The first half figures come at a time when growth is slowing in Brazil, China and India, the main destinations for private equity investment in emerging markets. Small, frequently niche-oriented funds, of less than $250 million – viewed as less correlated with the macro-economic environment than big funds – represented nearly 70 percent of emerging market funds closed in H1, well above the two-year average of 53 percent.