November 2, 2017
– PE Purchases Hit Highest Level Since 2007
– Cov-Lite at Record as U.S. Leverage Constraint is Eliminated
– PE-Backed Firms do Better in Downturns
– The Sweet Spot for PE’s Secondary Fund Market
– If You’re Stumped by The Vision Fund’s Strategy, Read This
– PE KeyTrends Quick Question Results
PRIVATE EQUITY PURCHASES HIT THE HIGHEST LEVEL SINCE 2007 in the first 9 months of 2017, reports the Financial Times. “Record sums of unspent capital, cheap debt and highly favorable borrowing terms” explain the boom in purchases, with the value of global PE-backed deals standing at $212 billion through the end of September. That’s up 25 percent compared with the first nine months of 2016, but still considerably behind the record $526 billion achieved in the same period in 2007. “There is a wall of capital looking to [be deployed] in a low return, low risk environment,” says Mark Redman, global head of private equity at Canadian pension fund Omers. “We could have two to three years of relatively buoyant growth and high levels” of acquisitions. “It will continue to be a seller’s market until there is some shock.”
COVENANT-LITE AT RECORD, AS U.S. LEVERAGE GUIDANCE IS ELIMINATED. Issuance of covenant-lite leveraged loans, which place few restrictions on borrowers and are used to finance private equity purchases, achieved a record as a percentage of leveraged credit in the bellwether U.S. market in the first nine months of the year. Covenant-lite accounted for an unprecedented 72.9 percent of all U.S. leveraged loans, or $690 billion out of outstanding issuance of $947 billion, also a record amount, according to Leveraged Commentary and Data. Just days after these milestones were hit, the Wall Street Journal reported that the U.S. Government Accountability Office struck down regulatory guidance limiting bank-issued leveraged loans equal to six times or more of a targeted company’s cash flow. The reason: Congressional approval had never been sought for the measure. Don’t be surprised if leveraged loan volumes, particularly covenant-lite, continues to rise, or if private equity-backed takeovers get bigger, fueled by oodles of plentiful, cheap debt.
PRIVATE EQUITY-OWNED FIRMS DO BETTER IN DOWNTURNS THAN PEERS. That’s the implication of “Private Equity and Financial Fragility During the Crisis,” a fascinating 47-page report by three professors, Stanford’s Shai Bernstein, Harvard’s Josh Lerner and Northwestern’s Filippo Mezzanotti. The three analysed the performance of nearly 500 PE-backed companies in the UK during the 2008 financial crisis and found that such firms withstood the downturn better than non-PE-backed firms. The study notes that “GPs provided companies with capacity for investment and growth during the financial crisis” by offering more equity and debt financing – the latter with fewer restraints on borrowers – than was generally available to peers with different ownership structures. A Private Equity International story summarizing the study notes that only 2.8 percent of PE-backed companies defaulted during the financial crisis compared with 6.2 percent of “comparable businesses.”
SIX YEARS IS TODAY’S SWEET SPOT FOR PREMIUM SECONDARY PRICING, reports Real Deals. In a story on Palico’s latest survey of prices paid for specific private equity funds in the secondary market, Real Deals notes that the lion’s share of funds selling at a premium to their net asset value over the six months through October 9 began investing in 2011. The survey covers 25 funds in total and shows strong pricing, with 13 funds selling at par or better. The typical fund changed hands at 98 percent of the most recently reported net asset value. The average sale price for funds sold at par or better was 4.7 percent above net asset value. For funds selling for less than par, the average transaction was 91 percent of net asset value. The typical fund was 7.4 years old when sold. The most highly valued vehicle sold as a secondary was BC Partners IX, a 2011 fund which sold at a 16 percent premium to net asset value.
IF YOU’RE STUMPED BY MASAYOSHI SON’S AMBITIONS, READ THIS New York Times story – it attempts to explain his grand plan for the $93 billion Vision Fund, the largest private equity fund ever raised. While the NYT notes that the Vision Fund has “invested billions of dollars in a seemingly random sample of more than two dozen companies,” stretching from robotics to business software to indoor farming, they all have “something in common: they are involved in collecting enormous amounts of data…crucial to creating the brains for the machines that, in the future, will do more of our jobs.” Investing in these firms is apparently going to cost a lot more money than even the Vision Fund can muster. A Recode article notes that “$100 billion is not enough” – Son is in talks to “raise a second giant tech fund.”