WATCH FOR BIG PE BUYOUTS, ESPECIALLY IN EUROPE. Reuters reports that “European leveraged debt financiers are lining up jumbo financing packages, including an $8.34 billion loan and bond deal backing the potential sale of U.K. chain Wm Morrison Supermarkets” and another for Britain’s biggest wireless operator, EE, while working “on two further financing packages of $5 billion and $9 billion” for un-named companies. Another Reuters story notes that U.S. private equity funds in particular “are heading to Spain and Italy as reforms take hold, fears of a crisis relapse fade, and equity prices remain cheap compared to the rest of Europe.” The Financial Times also reports on growing U.S. PE fund manager interest in Europe, but with a note of caution. Shawn Atkinson, a partner at Chicago-based international law firm Edwards Wildman, observing the exceptional European interest shown by U.S. managers at last week’s SuperReturn conference in Berlin, commented that their enthusiasm “is not that sophisticated. All of these guys are following each other around, there is a herd mentality.”
PE MANAGERS “SAY THEY NEED TO MOVE BEYOND TRADITIONAL BUYOUTS to avoid overpaying for companies,” writes Reuters. “Even after returning hundreds of billions to investors in the last two years through asset sales, the private equity industry is still sitting on $817.9 billion” in unspent commitments – a near-record sum. At SuperReturn in Berlin last week, “buyout bosses bemoaned that competition meant rising prices for companies in Europe and North America.” In addition to focusing on niche strategies to create value in the face of “frothy valuations,” PE managers are seeking to create new companies “through the carve-out of unloved divisions of conglomerates and taking over companies in distress through debt-for-equity swaps.” They are also seeking to avoid paying control premiums and trying to work together on operational improvement with existing owners. Examples of this from the last two weeks are Blackstone’s agreements to buy minority stakes in human resources firm Kronos and Italian fashion house Versace. The jury is out on the suitability of minority investments for PE, with 57 percent of KeyTrends respondents saying in a recent poll that fund managers should be compensated less for these stakes than for control investments.
PRIVATE EQUITY IS BETTING “$5 BILLION” ON A “SHIPPING REBOUND,” writes Bloomberg. “PE and hedge funds are accumulating shipping debt at the fastest pace since they began buying the risky loans from banks two years ago. The influx illustrates a broader shift as investors load up on debt being abandoned by banks amid regulations intended to prevent future taxpayer bailouts. Funds are betting ship prices that collapsed as much as 71 percent in five years will rebound from historic lows. And if a prolonged downturn drives borrowers to default, the funds are preparing to do something banks historically resisted: take over vessels themselves.” The big question though is whether too much money is chasing the shipping opportunity. Notes Basis Karatzas, a shipbroker in New York, “When there are 20 funds bidding on the same portfolio, and the consensus is ‘the markets have turned around and we better get on the wagon or we’ll miss this opportunity,’ that’s when people get too optimistic.”
YALE’S ENDOWMENT VIGOROUSLY DEFENDS PE IN ITS LATEST ANNUAL REPORT. In addition to revealing that it’s earned an annualized 14.4 percent from private equity over the past ten years and an “astounding 29.9 percent per annum” since 1973, when its PE program began, the Yale Endowment’s latest annual report mounts a spirited defense of the alternatives-heavy investment portfolio pioneered by its chief David Swensen. Widely copied by others, the Yale Model of investment relies heavily on private equity, which currently accounts for 32 percent of the endowment’s assets. An essay on page 35 discusses the challenges of identifying the best alternatives managers and states that while “Yale enjoys the opportunity to produce attractive returns for the endowment and to demonstrate that manager alpha (excess return) is alive and well,” the “opportunities to access it may not be available to all investors.” The report’s lengthy discussion of the skills and resources necessary to successfully invest in PE makes for enlightening reading.
PE INVESTORS MOVE INTO EMERGING MARKETS AS OTHERS PULL OUT. In his Forbes column, Palico founder Antoine Drean notes that some $21 billion has been withdrawn from emerging market stock and bond funds year-to-date, “exceeding the outflow for all of 2013.” Yet annual private equity fundraising for emerging markets in 2014 “is running 32 percent ahead of last year,” with slightly more than $6.5 billion raised. “Against a backdrop of slower economic growth in emerging markets, stock and bond investors are spooked by worries about the stability of local currencies as the Federal Reserve dials back on quantitative easing.” But “experienced PE investors” find short-term adversity and volatility appealing, “as the upsurge in PE emerging market fundraising shows.” In the same contrarian vein, Carlyle co-founder David Rubenstein says in a Bloomberg video that today’s “greatest opportunities are in the emerging markets,” citing Brazil, China, India, Indonesia, Nigeria, South Africa, South Korea and Tanzania as “countries with great potential.”
AN AFRICAN SUPPLY-DEMAND “MISMATCH” POINTS TO BIG PE “OPPORTUNITIES,” notes McKinsey Quarterly research. “Private equity is set to grow rapidly across Africa. Continent-wide demand of capital should increase by 8 percent a year between now and 2018. Annual growth could reach 20 percent in resource-rich Angola and nine other countries, and $50 billion in total investment is possible over the next decade.” But “the supply of capital doesn’t seem to match the growing demand.” That means “attractive – and growing – country and sector gems” may be overlooked. “Segments with rapidly growing opportunities, but relatively little money chasing them, include infrastructure funds, and small and midcap funds in East, West and Southern Africa” – excluding that “magnet for funding,” South Africa.