– Debt in the Secondary PE Fund Market Hits Record Levels
– Latin American Fundraising Seen Hitting a 3-Year High
– One Out of Five PE Investments Forecast to Lose Money
– A Blow-by-Blow Account of “The Best Leveraged Buyout Ever”
– The Dawn of a New Golden Age for First-Time Funds
RECORD DEBT LEVELS FINANCING SALES OF PE FUND STAKES IS SENSIBLE, industry experts tell Bloomberg. While some worry about the danger of loan default and losses, industry executives and academics say that the historically unprecedented, but increasingly common use of significant amounts of debt to finance the purchase of existing fund stakes is logical, given the risk profile of mature private equity fund portfolios. While debt-backed “structures are relatively new and have spread relatively fast, they are not the product of some form of irrational exuberance: enough have shown their resilience,” remarks Nicolas Lanel, managing director at Evercore. Debt-backed purchases are reasonable when applied to holdings that are diversified, that are generating cash and which include companies that have themselves reduced their borrowing, notes Lanel. Debt is “driving up prices” with many funds “changing hands at face value,” Bloomberg writes. Given that secondary portfolios hold assets that can be evaluated, unlike primary PE funds which are blind pools, plus prospects of rapid capital return, paying par is considered a good deal by many who once demanded discounts to fund net asset value.
LATIN AMERICAN FUNDRAISING IS ON PACE FOR A THREE-YEAR HIGH, writes Reuters, citing industry group LAVCA. “PE and VC firms in Latin America could raise $8 billion from investors this year, the most since 2011.” The Latin American Private Equity and Venture Capital Association’s estimate comes after 23 buyout firms collected $3.5 billion in the first half of 2014. “Last year, the private equity and venture capital industry raised $5.5 billion for their Latin American investments. Getting new money from investors could turbocharge the buyout industry’s ability to step-up acquisitions” in Latin America. Meanwhile, proceeds from exits grew 7 percent in the first half of 2014 versus the same period last year, with Latin America PE-backed purchases declining 10 percent year-on-year.
WONDERING HOW MANY PE-OWNED COMPANIES LOSE INVESTOR MONEY? The latest guidance comes from an EY study cited by Financial News. Based on 604 exits in Europe worth more than €150 million since 2005, the report estimates that “20 percent of current private equity portfolio companies will generate a loss for investors.” That would be an improvement on the 35 percent of companies that lost investor money between 2008 and 2009 and the 21 percent that generated losses on exit from 2010 to 2013. During the boom years of 2005 to 2007, just 4 percent of companies sold by PE firms lost money.
“THE BEST LEVERAGED BUYOUT EVER.” According to Bloomberg Businessweek’s blow-by-blow account, that’s Blackstone’s $26 billion, debt-fueled purchase of hotel group Hilton Worldwide Holdings. Hilton was purchased in the fall of 2007 with just $5.6 billion in equity. “As the financial crisis hit and the economy tanked, it appeared that Blackstone and its partners had paid too much, used too much debt, and couldn’t have picked a worse moment to close the deal.” But “the full story of the richest LBO in history is actually a story of private equity working as advertised. By persuading its lenders to exercise forbearance, restructuring its debt before it had to, and practicing smart management, as opposed to indiscriminate cost cuts and pink slips, Blackstone made Hilton perform better than most thought possible.” With a paper profit of about $12 billion today, up from slightly less than $9 billion when it listed in December, 2013, Hilton is “the most lucrative private equity deal ever.”
“THE DAWN OF A NEW GOLDEN AGE FOR FIRST-TIME FUNDS.” After five years of declining market share, private equity funds offered by new management teams are popular again, notes Palico founder Antoine Drean in Forbes. “More than half of PE investors intend to invest in first-time funds at some point in the next two years,” with the attitude shift “best explained by the surfeit of capital” PE investors have received in the last two years, as sales of PE companies have exceeded the pace of PE-backed acquisitions. Another catalyst behind the interest in first-time funds is evidence that top-quartile persistence has weakened. Today, only about 20 percent of top-quartile PE managers have two such funds in a row, down from 40 percent in 2002, before a mid-decade explosion in the number of fund managers. Meanwhile, some 30 percent of top-quartile funds are followed today by a bottom-quartile performer, versus less than 4 percent in 2002. Drean’s conclusion: “For those with good ideas and appropriate experience, this is the best time since before the financial crisis to launch a PE fund,” though choosing funds has never been more difficult for investors.