– PE Dealmakers are in “Hibernation”
– Europe Exemplifies the Micro Nature of PE Opportunity
– African PE Deal Value HIts a 7-Year High
– The SEC wants More Fee and Expense Disclosure
– PE’s “Perfect Storm:” High Prices
PE DEALMAKERS ARE IN “HIBERNATION,” AMID A DEARTH OF BUYOUTS, writes the Wall Street Journal. Through last Wednesday, there were “just $19.9 billion worth” of private equity-backed acquisitions in 2015, down 53 percent from the same period last year “and the lowest amount on record since 2002.” In the U.S., PE’s largest market, “deal making has only reached $7 billion” this year, down a third compared with 2014. “Even more intriguing,” 34 percent of the year-to-date volume in the U.S. “is attributable to just one deal: Bain Capital’s $2.4 billion secondary buyout of Blue Coat Systems Inc,” announced earlier this month. The slow start is “likely attributable to rising valuations, spurred along by cash-rich corporate acquirers who can bid up assets.” Meanwhile, PE exits hit a thirteen-year high for the same period, climbing 42 percent over last year to $37.1 billion.
EUROPE EXEMPLIFIES THE MICRO NATURE OF PE OPPORTUNITIES, at least according to Blackstone’s chief executive, Steve Schwarzman. “Our baked-in assumption is that Europe never grows,” Bloomberg reports Schwarzman as saying at an industry breakfast earlier this month. “When buying an asset on the continent, ‘you have to improve it,’ rather than depend on growth.” Europe’s problems “are budgetary, structural reforms, a variety of other types of issues as well as the overall structure of the European Union, which is sort of a difficult thing to make work with as much effectiveness as a single country,” he notes. Blackstone, “the world’s biggest manager of alternative assets such as private equity,” is “benefitting from cheap credit available from U.S. banks” – particularly its real estate group. The group is buying up European properties, “making improvements” and then “increasing rents.” Blackstone’s fourth European real estate private equity fund is “generating a 19 percent annualized return after fees,” while its third pool “is producing 20 percent.” “Before you know it, you’re making 20 percent with no growth,” Schwarzman said at the breakfast.
“AFRICA PRIVATE EQUITY DEALS HIT A SEVEN-YEAR HIGH,” reports the Financial Times. “The value of PE deals in Africa reached their second-highest level on record in 2014 as population growth and an increasingly stable political climate helped drive international interest in the continent. The total value of deals in Africa last year was $8.1 billion, just short of the $8.3 billion high recorded in 2007,” and 88 percent higher than in 2013, according to figures from the African Private Equity and Venture Capital Association. Africa “offers investors less competitive investments in a diversified market where many countries show ongoing GDP growth of over 7 percent per annum,” says Marleen Groen, a senior advisor at private equity investment advisor Stepstone.
THE SEC WANTS MORE CONFLICT OF INTEREST DISCLOSURE FROM PE MANAGERS. Citing a speech made at the recent IA Compliance Forum by Julie Riewe, co-chief of the U.S. Securities and Exchange Commission’s Asset Management Unit, Private Equity International notes that the SEC “is stepping up its focus on conflicts of interest and, when it comes to private equity funds, ‘the inherent conflicts in fee and expense arrangements,’” as the regulator put it. Riewe, who “expects to see ‘more undisclosed and misallocated fee and expense cases,’” offered guidance to fund managers eager to stay out of the SEC’s crosshairs, urging firms to review their SEC registration (Form ADV), “private placement memoranda, limited partnership agreements, client agreements and prospectuses to ensure that all conflicts are disclosed, and disclosed in a way that allows investors to understand the conflict and the risk it presents.”
BAIN & COMPANY’S MACARTHUR SAYS PE IS GRAPPLING WITH “A PERFECT STORM,” as high asset prices challenge “return prospects.” Talking to LBO Wire about the findings of Bain’s just released and much anticipated annual Global Private Equity Report, Hugh MacArthur, head of the consultant’s PE practice, claims that high prices will make it “very difficult, if not impossible, to generate the level of return that” fund investors “want to see.” Bain’s exhaustive, 68-page annual report, chock full of statistics covering everything from deal-making to fundraising, notes that the biggest challenge facing PE going forward will be “chronically high” asset prices, as capital continues “to pile up and competition for deals remains feverish – including competition from large pools of ‘shadow capital’ in the hands of big institutional investors and sovereign wealth funds looking to co-invest, or even bypass PE funds entirely.” Says MacArthur, with “near-zero interest rates” it’s “hard to see prices” for private equity-backed corporate acquisitions “at less than nine to ten times” cash flow.