THE EUROPEAN BANK LOAN SELL-OFF IS NOW IN FULL SWING, with private equity firms and hedge funds scooping up most of the credits, reports Reuters. Europe’s banks will likely sell a record $110 billion of loans this year as they increase sales from amongst $3.3 trillion in loans deemed ‘non-core,’ according to PricewaterhouseCoopers estimates. That would mark a nearly one third increase versus 2013 and a 74 percent rise over 2012 volume. Some $30 billion in loans have already been sold this year. “Banks in Britain, Ireland, Spain and elsewhere continue to sell commercial property loans, credit card portfolios, or more specialized loan books, such as shipping.” Observes PwC partner Richard Thompson: “Bank restructuring will continue over at least the next five years – with activity likely to be fuelled by the findings of the Eurozone wide asset quality reviews and stress tests currently underway.” The pace of the sell-off of troubled and non-core loans is likely to accelerate over the next several years, Reuters implies.
LEVERAGE & CO-INVESTMENT ARE INCREASINGLY COMMON IN PE SECONDARIES. Bloomberg writes that Ardian, a highly experienced buyer of existing private equity fund stakes, or “secondares,” is negotiating to purchase a fund portfolio worth roughly $1 billion from Singapore state-owned investment company, Temasek. According to Bloomberg, Ardian “will part-finance the purchase with debt and plans to sell some of the holdings to its own investors.” The use of leverage to boost returns and co-investment to lower overall investment fees for limited partners are strategies secondary market leaders are employing to heighten gains and keep deal flow going at a time when buying existing private equity funds at big discounts to net asset value is much harder than it once was. Secondary market volume is much larger than it was at the height of the financial crisis in ’08 and ’09. Distressed investors willing to take big discounts make up a much smaller portion of the market than they did just five years ago.
ONCE A BONANZA FOR PE, SHALE IS NOW A TOUGHER PROPOSITION, says Bloomberg’s David Carey. Today there are significant “challenges for private equity managers as they seek to invest a record amount in the decade-old shale revolution. Firms that made billions in the early stage of the boom by buying exploration rights for gas fields and then flipping them are increasingly forced to move into the more costly business of extracting oil, natural gas and gas liquids like propane and butane,” after a “2012 crash” that saw the most commonly quoted gas price unit drop 62 percent below the previous year’s peak. The tough climate continues today and could “end a 10-year run in which energy-dedicated buyout funds have beaten average PE returns by 2.4 percentage points and topped the Standard & Poor’s 500 Index by 9 percentage points annually.” Says David Foley, who works in energy investments at Blackstone, “there will be more development drilling that will require more capital, and it will take longer.”
SLOWING GDP NUMBERS CAN HIDE STRONG CONSUMER GROWTH in emerging markets, spelling promise for PE. In China for example, where overall gross domestic product has been slowing, Jack Ma, the founder of online commerce giant Alibaba Group, is raising his second private equity fund with a target – $1 billion – that is three times the size of his previous fund, as he “bets big that there will be continued growth in China’s consumer sector in the face of a broader economic slowdown,” writes The Wall Street Journal. “In the last few years Chinese consumerism has taken off on the back of a growing middle class with greater access to capital, and a growing penchant for spending.” In another Wall Street Journal story, David Rubinstein, co-founder of the Carlyle Group, says “the single most attractive market to invest in outside of the U.S. is China. The things we’re most interested in are not export businesses but rather consumer-oriented industries like health-care services, financial services and food.”
DELOITTE’S ANNUAL EAST AFRICA PRIVATE EQUITY CONFIDENCE SURVEY IS OUT. The publication’s name is a bit of a misnomer, since it contains information on all of sub-Saharan Africa, including data and poll results from GPs. Among the report’s highlights: PE funds invested more than $3.7 billion in sub-Saharan Africa in 2013 – over three times as much as in 2012; some $3.6 billion was raised for sub-Saharan-focused funds last year; there is likely to be more investing than exiting in sub-Saharan Africa this year; and purchase multiples are likely to rise everywhere except in the southern countries, where they are likely to remain static. After expanding an estimated 4.9 percent in in 2013, sub-Saharan GDP is projected to rise 5.3 percent this year and 5.5 percent in 2015, making it one of the fastest growing regions in the world.
PRIVATE EQUITY MANAGERS ARE TAPPING “INTO NEW INVESTOR SOURCES,” writes Financial News. “Just 13 percent of capital committed to funds that closed between 2011 and 2013 came from public pension funds” – less than half the 27 percent share they held in 2008 to 2010 fundraisings. That doesn’t indicate distaste for PE among public pension funds; their average allocation to private equity “has barely moved.” Instead, “private sector pension funds, high-net-worth-individuals, insurance firms, government agencies, corporate investors and family offices all make up a greater proportion of capital in a normal PE fund in 2011 to 2013 than they did in 2008 to 2010.” On the fund manager side, the trend towards greater investor diversity “is driven by a relatively new priority to create uncorrelated investor bases that can withstand localized financial crises,” Palico’s founder, Antoine Drean tells Financial News. “On the investor side, the principal catalysts are concentration of capital in emerging markets and a relative dearth of investment options, other than PE, that can credibly offer double-digit annual returns.”