– The Bid for Kraft is an Innovative Model for PE
– Average Leverage in PE Deals Falls to a Two-Year Low
– PE Purchases of Europe’s Troubled Assets to Pick-Up
– Medan Private Equity Fund Life Hits Record 13.2 Years
– Warburg Pincus’ Formula for Quick Deployment
THE KRAFT BID BY 3G AND BUFFET IS AN INNOVATIVE MODEL FOR PE. The Wall Street Journal observes that private equity firm 3G and Warren Buffett have partnered to own companies like Kraft “for longer than the traditional five-to-seven-year period” that PE traditionally targets. “That flexibility is the envy of rivals.” The New York Times DealBook notes the offer hinges on an “unusual” structure permitting the bidders’ vehicle Heinz, to positively arbitrage the value of its privately-owned assets against the potentially fuller-valued, listed assets of Kraft. The bid is a rare example of private shares offered in exchange for a public company, though the private shares will become public as part of the transaction. The fact that a deal would unite “two iconic brands under a single, powerful platform” – as Heinz’s CEO states in Bloomberg – may have permitted a higher bid than other PE-linked acquirers could reasonably offer. Watch for similar reverse takeovers of public companies by PE firms, more deals specifically engineered for longer hold periods and an uptick in buy-and-build strategies – all tactics that can deliver value despite historically high asset valuations.
AVERAGE LEVERAGE FALLS TO A TWO-YEAR LOW IN PRIVATE EQUITY DEALS. Leverage for large buyouts announced in the first quarter of 2015 averaged 5.91 times corporate cash flow, “below the six times levels that regulators” in the U.S., PE’s largest market, “are trying to get banks to avoid,” reports Reuters. The drop shows that lenders are finally heeding federal guidance – issued two years ago – after it became “clearer late last year” that regulators “have little tolerance for highly leveraged loans.” Leverage ratios “averaged 6.55 times last year and recently peaked at 6.96 times in the third quarter of 2014. The last time that leverage levels were below six times was the first quarter of 2013, after reaching a high of 7.4 times in the second quarter of 2007 before the financial crisis.” The lack of debt for highly leveraged deals may be contributing to a drop in private equity-backed transactions, which have so far been at a thirteen-year low through the second week in March.
PE PURCHASES OF TROUBLED EUROPEAN ASSETS ARE SET TO PICK-UP. “Government-owned ‘bad bank’ vehicles” in Austria, Ireland, Britain, Germany and the Netherlands “are looking at accelerating the sale of loan portfolios acquired from lenders hobbled by the financial crisis,” reports the Wall Street Journal. “Until recently, getting rid of those assets has been a slog. Now, though, the tide is turning thanks to stabilizing prices.” U.S. PE firms, including Blackstone, Cerberus and Lone Star have been among the active buyers. “Overall, U.S. PE firms were involved in 81 percent of distressed-loan transactions in Europe last year.” “It’s quite clear that market conditions have improved,” says U.K. Asset Resolution chief executive Richard Banks. “There is a lot of money washing around.”
MEDIAN PRIVATE EQUITY FUND LIFE IS AT A “RECORD 13.2 YEARS” across all sectors and geographies, reveals a Palico analysis of 200 funds dissolved in 2014. That’s up from a median of 11.5 years in 2008. “Only some 12 percent” of funds” are “wound up by their 10th year, which is the typical deadline for returning capital from classic, commingled PE vehicles. The most fundamental disadvantage for investors in funds with longer-than-expected lifespans are lower-than-expected annual returns.” Ironically, the same factors that are currently helping to mitigate the problem of longer PE fund lifespans may make average maturities even longer going forward. “The cheap credit and low interest rates supporting high asset prices and exit volumes, mean it’s harder than ever for the typical PE fund to deploy capital.” Without the benefit of lower asset prices, it will take fund managers “longer to find suitable targets, build value and realize investments.”
WARBURG PINCUS’ FORMULA FOR QUICK DEPLOYMENT. Reuters reports private equity firm Warburg Pincus is raising “a new $12 billion global fund, just two years after amassing an $11.2 billion fund.” The fundraising comes as other PE firms “take between four and six years on average to spend their investors’ money in global funds of similar size.” “Warburg differs from most of its rivals because, in addition to investing in leveraged buyouts, which use debt to boost returns in acquired companies, it also makes venture capital and growth equity investments. These investments, requiring little or no debt, help it deploy capital when leveraged buyouts are too expensive. Leveraged buyouts have become pricier in recent years, partly because of the strong equity and debt markets, but also because of competition from buyout firms to spend the capital they have raised.” Undeployed capital stands at a “record” $1.2 trillion.