– Dividend Recaps Rise, While Leveraged Loan Volume Falls
– IPO Boom is No Dot-Com Bubble
– Co-Investment Opportunities Soar
– A Novel Effort to Consolidate LP Firepower
– Bain & Co. Annual Report Shows Record Dry Powder
– PE Picks Off Banks’ Best & Brightest
– KeyTrends Quick Question Results
LOANS BACKING DIVIDEND RECAPS ARE RUNNING AHEAD OF 2013 VOLUME for the first two months of the year, despite a drop in overall leveraged loan volume. Through February, $9.3 billion in leveraged loans backing dividends were issued, “topping the pace seen” in the same period last year, notes a Forbes story. The step-up “comes as overall leveraged loan volume has declined 18 percent” versus the first two months of 2013 as the U.S. Federal Reserve slowly rolls back its quantitative easing program and lenders and borrowers factor in the possibility of higher global interest rates later this year. What bodes well for continued strong dividend recapitalization volume in 2014: after 89 straight weeks of inflows, a total of $65 billion has been committed to leveraged loan funds. The Forbes story also notes that “PE shops account for all leveraged loan dividend volume so far this year, after comprising 77 percent of such activity” in all of 2013. Last year there was a record $70 billion in dividend loans.
THE IPO BOOM IS NO DOT-COM BUBBLE. That’s what the data indicates. With debuts from Twitter and Zulily helping to send U.S. IPOs in 2013 “to their biggest first-day gains since 2000, warnings of another asset bubble are again echoing across Silicon Valley,” writes Bloomberg. Yet companies doing initial public offerings “these days are older, larger and are offering shares at more reasonable valuations” than during the dot-com bubble. “Businesses backed by venture capital or private equity firms were on average 12 years old in 2013 when they went public, compared with four years during the dot-com era.” Moreover, “the median revenue for companies going public in 2000 was $17 million compared with $109 million in 2013, adjusted for inflation.” Perhaps the most crucial difference: “IPOs were priced at a median of 30 times sales in 2000, compared with 5.2 times last year.”
PRIVATE EQUITY CO-INVESTMENT OPPORTUNITIES ARE RISING SHARPLY. In his Forbes column, Palico founder Antoine Drean notes that while evidence suggests private equity co-investments have often failed to outperform PE fund investments, there is “no reason” why co-investment “can’t be as lucrative – or perform even better than funds – in the future.” Co-investment “has changed radically, with the supply of opportunity much more abundant today than it was just five years ago.” Since the beginning of 2009, a fifth of buyouts in the U.S., the world’s largest PE market, involved co-investment. That’s up from less than five percent annually in the previous five years. “The quality of co-investments has also improved, in large measure thanks to a difficult fundraising market where managers must offer more in order to stand out from the crowd.” With a “better and deeper range of choice, co-investment will live up to its promise for a larger number” of investors, writes Drean. But “to properly take advantage of today’s co-investment-friendly environment,” investors “have to bulk up” on investment expertise.
PENSION FUNDS EXPLORE A NOVEL WAY TO CONSOLIDATE PE FIREPOWER. “These days, much chatter in the limited partner world revolves around a mid-sized pension system in California” that some say is “attempting to change the private equity world,” reports Chris Witkowsky of peHUB. Led by the $11 billion-in-assets Orange County Employees’ Retirement System, a grouping of 38 smallish public pension plans is trying to close the advantage gap between large and small PE investors. According to a Request for Proposal from the group – the California Association of Public Retirement Systems – the aim is to bundle together their PE investments in an effort to improve access to top GPs and lower fees. According to peHUB, among the finalists for the management mandate are Abbott Capital, Pantheon Ventures and Capital Dynamics. “I’ve seen this effort described as a potential ‘game changer’ for the private equity industry – a way to help small plans get the kinds of economic and access benefits only enjoyed by the big investors,” writes Witkowsky. In a private equity world where many investors are looking for ways to overcome limited resources, CALAPRS’ initiative is worth watching.
BAIN & CO.’S MUCH ANTICIPATED ANNUAL REPORT ON PRIVATE EQUITY IS OUT. Amid a wealth of statistics and commentary, the 68-page document reveals that strong private equity fundraising in 2013 has pushed the industry’s supply of committed but unspent capital to an all time high of $1.07 trillion, edging out the previous record of $1.06 billion from 2008. While competition to spend that money will put upward pressure on PE acquisition prices, the good news is that PE buyer rivalry should be relatively muted, at least in 2014. Bain notes that among private equity’s core categories of buyout and growth funds, 80 percent of committed, unspent capital dates from post-2010 fundraising vintages, with more than a third from 2013. Given the standard five-year commitment period – not to mention extension options – fund managers have some breathing room before they either must invest this dry powder, or lose the commitments and associated annual management fees.
THE APPEAL OF WORKING IN PE VERSUS AT A BANK IS MORE $$, SHORTER HOURS. As the annual recruiting season for private equity general partner firms kicks off this month, “the best and brightest” of young investment bank analysts are being poached, notes Bloomberg. Working for private equity and hedge funds “means earning more and logging slightly less than the 80-hour weeks the banks demand.” The analysts, “who typically graduated less than a year ago” from college “and already earn at least $100,000 annually, are being lured by offers that can double their salaries.” Adam Zoia, a New York recruiter tells Bloomberg, “the banks can’t compete.” PE firms can offer more lucrative employment “because they can generate profits buying and selling companies without many employees, while banks need staff for providing advice and handling trades. New-York based Apollo, the third-largest U.S. private equity firm, had about $6 million of revenue for each of its 710 workers last year, while Goldman Sachs’ 32,600 employees generated about $1 million on average.”