– PE-Backed Acquisitions Hit a Six-Year Low
– Minority Deals Surge as a Proportion of PE Activity
– Activist Investors Are Once Again an LBO Catalyst
– Private Equity’s Ten Largest Firms
– U.S.’ Biggest Pension Fund Remains Cautious About PE
“THE BIG LEVERAGED BUYOUT LOOKS LIKE AN ENDANGERED SPECIES after the flow of deals hit a six-year low” in the first quarter of 2015, writes the Financial Times. For the first three months of 2015, “the volume of private equity takeovers announced was $29 billion, half its level of a year ago and the lowest since 2009.” Another FT story notes famine amid feast: Global dealmaking, supported by bulging corporate treasuries, “is off to its fastest start since 2007, with the value of mergers and acquisitions” in Q1 totaling $811 billion, up 21 percent on the same period in 2014. Robin Rankin, co-head of global M&A at Credit Suisse tells the FT that “large-scale traditional leveraged buyout activity is less likely to materialize given [high] valuations and reduced interest” in club deals in which several PE firms band together to bid on assets. Bloomberg blames the dearth of PE-backed acquisitions on a combination of high prices and a leveraged loan market “slump” that began last year as regulators, led by the U.S. Federal Reserve, “increased scrutiny on what they deemed excessive risk taking” by lenders in highly leveraged PE deals.
“MINORITY DEALS HAVE SURGED AS A PROPORTION OF PE ACTIVITY since the financial crisis and look set to grow further in coming years amid a shortage of traditional buyouts,” writes Financial News. Minority stakes account for 27 percent of private equity acquisitions since 2008, versus just 13 percent from 2004 to 2007, according to a study from Boston Consulting Group on which the FN story is based. BCG partner Anton Schneider tells FN “he expects minority deals to grow because traditional PE deals are failing to keep pace with the amount of money available” for private equity investment. In its own report, BCG contends that because sellers of minority stakes “do not choose buyers on the basis of price alone, PE firms are more likely to avoid the ‘winner’s curse’ of overpaying.” BCG “finds no significant performance differential between majority and minority deals” done from 2008 to 2013, concluding that “the payoffs” of minority deals “could convince even the most skeptical observers that less can, indeed, be more.”
ACTIVIST STOCK INVESTORS ARE ONCE AGAIN THE CATALYST BEHIND A BIG BUYOUT. Permira Funds and Canada Pension Plan Investment Board will pay $5.3 billion for business software maker Informatica Corp in what Reuters reports “is the biggest U.S. leveraged buyout so far this year.” It appears that the door to success was pried open by an activist investor, in this case hedge fund Elliott Management, “which disclosed an 8 percent stake in Informatica in January and said it was speaking to the company about ways to maximize shareholder value.” At a time when it’s difficult to find public-to-private deals priced to offer real value to buyers, the transactions that do successfully close increasingly involve activist investment firms buying minority stakes in undervalued companies. The activists wear down management resistance to a sale. Activists were behind two December transactions, the $8.7 billion sale of pet supply company Pet Smart to a BC Partners-led group and the $3.6 billion sale of Riverbed Technology to Thoma Bravo and the Ontario Teachers’ Pension Plan. Activists also played a key role in the sale of grocery store chain Safeway to Cerberus Capital Management for some $9 billion last March.
PENSIONS & INVESTMENTS LISTS PRIVATE EQUITY’S TEN LARGEST MANAGERS. The industry’s top ten accounted for 55 percent of total private equity assets, P&I notes. “As fundraising has gotten easier, the largest PE firms are taking in billions of dollars in commitments,” often for less traditional strategies, “including credit and growth investments” and for new places including “Africa, Mexico, Japan and the Middle East.” According to P&I, the biggest firms by PE assets under management are: Apollo ($149.5 billion); Blackstone ($146 billion); Carlyle ($123.8 billion); KKR ($98.6 billion); Ares ($75.2 billion); Oaktree ($70.4 billion); Fortress ($67.5 billion); Bain ($65 billion); TPG ($62.2 billion); and France-based Ardian ($45 billion), the only non-U.S. firm among the top ten.
CALPERS IS STILL WORRIED ABOUT PE’s ABILITY TO FIND GOOD DEALS. The California Public Employees’ Retirement System, the largest pension fund in the U.S., continues to target an underweight position in private equity, concerned about “the slow pace” at which capital is being deployed in an environment of historically high prices for assets, reports the Wall Street Journal. Last May, “CalPERS’ investment committee set an interim portfolio allocation target of 10 percent for PE, taking pressure off the pension fund to rush to meet a 12 percent long-term target.” Earlier in 2014 the pension fund cut its long-term PE allocation target for from 14 percent.