– Dislocation in Junk Bonds is Bad for PE-Backed IPOs
– Goldman Fills a Vacuum in Leveraged Finance
– Politics is a Barrier to Investor Consolidation
– Trade Buyers Prefer to Buy from PE Firms, Not Peers
– Ten Predictions for Private Equity in 2016
– PE KeyTrends Quick Question Results
DISLOCATION IN JUNK BONDS IS “BAD” FOR PE-BACKED IPOs. “Languishing commodities prices and turmoil in emerging markets had already prompted a selloff in high-yield credit even before the markets could fully react to the impact of the U.S. Federal Reserve raising interest rates in mid-December.” Now investors are retreating “from stocks of companies with the lowest credit quality,” writes the Wall Street Journal. That’s “a bad sign” for PE-backed companies “with a lot of debt and ratings lower than investment grade that want to try for an initial public offering.” “Investors have already balked at offerings from PE-backed companies that were poised to be among the biggest [IPOs] of 2015. Supermarket chain Albertsons, owned by Cerberus Capital Management, postponed its plans indefinitely, while KKR-backed First Data., the payments company, priced its shares below the planned range.” The potential good news tied to the growing difficulty of IPOing companies could be falling prices for PE-backed acquisitions.
“GOLDMAN FILLS A VACUUM IN THE LEVERAGED BUYOUT MARKET” with its $8 billion GS Mezzanine Partners VI fund, the biggest ever “of its kind,” writes Reuters. “The emergence of new funds like Goldman Sachs’ ‘is one of the most important developments recently in the area of leveraged finance because they’re stepping into the void’ that has been created by the retrenchment in traditional bank lending,” says Kathie Brandt, a partner at law firm Thompson Hine. Over the last two years, banks “scaled back their supply of the riskiest junk-rated loans” because of tougher banking regulations. Since “the fund is not part of Goldman’s traditional lending operations, which rely solely on the firm’s balance sheet, it’s exempt” from many lending restrictions. Such private equity-style debt funds accounted for 18 percent of leveraged lending in the U.S. and Europe last year, up from just 10 percent in 2012. That market share to is likely to rise significantly this year.
POLITICS IS A BARRIER TO INVESTOR CONSOLIDATION. At least that is the implication of a PEI story on the Swedish government’s decision to abandon a merger between AP Fondon 6, the Sixth Swedish National Pension Fund – the only fund in the Swedish retirement system “dedicated” to unlisted investment like private equity – and its peer, AP Fondon 2. The merger proposal was abandoned in December following “criticism” from opposition parties. “We did believe in coordination and cooperation concerning unlisted investments and we still believe it would have been the best idea of asset allocation,” says AP6 spokesperson Ulf Lindquist. Unlisted investments like private equity benefit from scale: “You can lower costs and get better access to better deals and more interesting investment opportunities if you have enough financial weight,” Lindquist notes. Though the potential benefits of LP consolidation are well known, parochial interests have repeatedly blocked potential deals.
TRADE BUYERS PREFER TO BUY FROM PE FIRMS, NOT PEERS. Companies “find private equity-backed businesses attractive because their owners typically take a hands-on approach to managing their assets,” observes the Wall Street Journal. “We have great respect for the work they do with their portfolio companies to groom them and get them to the next phase of growth; usually they’re already profitable,” notes Nicola Morris, head of corporate development at Wex, a maker of payment technology for businesses. “By contrast, “corporate sellers kind of dress up the bride, but they don’t have much incentive to invest in a business unit after deciding it doesn’t fit into their portfolio,” says Thomas Sauermilch, a lawyer at McDermott Will & Emery who brokers deals between PE firms and corporate buyers. In the U.S. companies “spent a record $142 billion last year to buy 252 businesses from PE investors.”
HERE ARE “TEN PREDICTIONS FOR PRIVATE EQUITY IN 2016” from Palico founder Antoine Drean’s latest Forbes column. Among the forecasts: PE assets under management will double over the next five years, accounting for a significantly larger share of the globe’s investment assets than today’s 5.4 percent;” the secondary market for closed private equity funds “could easily see a record $45 billion in volume this year,” supported by “the emergence of mega funds as buyers;” “significantly cheaper valuations for startups than in Silicon Valley will be a major catalyst for European venture capital deal flow in 2016;” and the best startups “will continue to stay private for longer” using “increased funding to eliminate competition and dominate their sectors long before an initial public offering.”