PE DEAL PRICES HIT HIGHS IN THE U.S. AND EUROPE. Two Financial Times stories document the high prices private equity fund managers are paying for assets in the industry’s two largest markets. “In Europe, private equity groups have paid an average price equivalent to 10.4 times interest, tax, depreciation and amortisation for companies this year” versus 8.7 times last year, writes the FT. “U.S. deals have been valued at about 9.2 times on average this year, up from 8.8 times last year.” In 2007, “at the top of the credit boom,” European and U.S. prices hit a peak of 9.7 times EBITDA. Thomas von Koch, the new CEO of EQT Partners, Europe’s fourth largest private equity firm, says in an FT interview that “too much money is shifting to Europe too quickly, propelling asset prices to unsustainable highs.” He warns that “another bubble is looming.”
PE FIRMS “GOBBLE UP” DIVISIONS SHED BY CORPORATIONS. The Financial Times makes the case that the appeal of initial public offerings, which have allowed private equity funds to achieve their most handsome returns in recent months, are diminishing significantly. With a number of recent IPOs either pulled or priced at the bottom of estimated ranges, “we have moved from a market where there was broad-based buying of almost every deal to a market where investors are much more price sensitive and much more selective,” say Alasdair Warren, head of the European financial sponsors group at Goldman Sachs. A shift in sentiment in Europe in the last couple of weeks “follows a similar turning point in the U.S.” Investors are “focusing on the largest and the fastest-growing of the IPO hopefuls and turning away from small to medium sized companies.” A more selective IPO market may make it easier for private equity firms to acquire companies.
SIGNS OF IPO WEAKNESS IN THE U.S. AND EUROPE ARE INCREASING. Bloomberg writes “these carve-outs are giving private equity firms something to buy and clean up, at a time when leveraged buyouts of entire companies have all but stopped as U.S. stock indexes reach records. In the first four months of 2014, carve-out deals accounted for a quarter of all U.S. PE purchases, up from an average of 13 percent in the previous decade.” PE executives “say they can increase the value of discarded assets more easily than companies bought whole or from other buyout firms” but that it typically demands “more work.” Regarded as non-core by their former corporate parents, divisions that are subject to carve-outs have often been neglected, increasing both potential difficulties and rewards.
FUNDRAISING IS EASIER IN 2014. That’s a key finding of The Triago Quarterly, which contains a wealth of data on the current state of play in the global private equity market. “Windfalls” are providing a catalyst to fundraising, with more than $22 billion in net cash from private equity fund sales and dividend recapitalizations returned to private equity investors this year. Fund managers raised $99 billion in the first three months of 2014, “the highest first quarter total since 2008.” The publication also notes that 95 percent of U.S. funds that closed fundraising campaigns in the first quarter hit targeted amounts. That’s a high for the decade. Volume in the secondary market for existing private equity fund stakes registered a record $11 billion in the first four months of 2014, as discounts for large U.S buyout fund stakes sold on the secondary market narrowed to just 1 percent of net asset value from 7 percent at the end of 2012. High prices for assets have created an exit market “where mature funds bought via secondaries sell investments quickly, at prices above carrying values,” explaining the appeal of purchasing existing funds at a very narrow discount.
SECONDARY VOLUME IN ASIA IS FORECAST TO RISE SHARPLY THIS YEAR. There are “richer pickings” in the Asian secondary market for existing private equity fund stakes in 2014, “after years of lackluster deal flow,” reports Dow Jones’ Private Equity Analyst. Some $4 billion worth of Asian fund stakes traded hands last year and industry professionals say volume could increase 50 percent in 2014. Although private equity funds are having a relatively easy time selling assets in other regions, Asian fund managers are dealing with “a difficult exit environment.” From 2004 to 2007 Asian PE funds “attracted some $180 billion in capital,” much of which is now held in unrealized investments. “We have noted an increase in limited partners’ interests for sale,” says Alex Wilmerding, a principal at Pantheon Ventures, a major global buyer of secondary stakes. “As more time passes and as portfolios age, investors look for liquidity” via secondary sales.
WILL ASIA SEE A FLOOD OF PE-BACKED RESTRUCTURINGS? That’s the prediction from consulting firm AlixPartners. Citing a recent survey from the group, The Wall Street Journal writes: “Private equity is likely to see a flood of new deals from Asia’s growing number of companies seeking capital to restructure, as softening economies in many countries and ballooning corporate debt stunt business’ growth. At the same time, banks have become more cautious about lending.” Last year, “private equity topped other financial institutions including hedge funds, banks and sovereign wealth funds as the go-to provider of capital for restructuring. Now, with PE firms sitting on an ever-growing pile of unspent capital, it’s likely they will be more aggressively tapped as company restructurings become more commonplace.” China and India may provide some of the best PE investments. “For China, companies are under financial pressure amid the country’s slowing economic growth,” while India’s “recently unstable government has hindered business.”
AND NOW THE RESULTS OF SOME OF OUR RECENT KEYTRENDS QUICK QUESTIONS:
- 87 percent of poll respondents believe the quality of private equity-backed IPOs has fallen this year.
- 55 percent of poll respondents expect developed market private equity returns to be less than those from emerging markets over the next 10 years.
- 69 percent of GP poll respondents say they are taking additional steps to review practices, procedures and agreements as a result of the SEC’s heightened scrutiny of the industry.