December 21, 2017
– In Leveraged Buyouts the Banks are Back
– SWFs Share of PE Fund Assets Rises
– The Coller Capital Global PE Barometer is Here
– A Record Number of First-Time Funds Seek Capital
– PE KeyTrends Quick Question Results
IN LEVERAGED BUYOUTS, THE BANKS ARE BACK, following the October decision by the U.S. Government Accountability Office to strike down regulatory guidance limiting bank-issued credit equal to six times or more of a targeted company’s cash flow. That’s the conclusion of a Bloomberg article parsing the significance of Thoma Bravo’s recent $1.6 billion buyout of cloud-based security and data solutions business Barracuda Networks. That deal, financed by banking trio Goldman Sachs, Credit Suisse and UBS, at an estimated 6 times or more of Barracuda’s cash flow, is seen as a harbinger of an immediate flood of highly levered, bank-supplied loans. This is likely to significantly reinforce the supply of cheap, plentiful credit for private equity in the core U.S. market, but means tough competition, and by extension lower returns, for the private credit funds that have thrived up until now.
SOVEREIGN WEALTH FUNDS INCREASE THEIR PE SHARE. The U.S. Securities and Exchange Commission’s quarterly, Private Funds Statistics, demonstrates that SWF influence in PE, in the words of Private Equity International, is only going in one direction, “up.” The SEC surveys show SWFs’ share of pools holding $2 billion or more in PE assets – smaller vehicles aren’t tracked in this way by the SEC – is 10.3 percent, second, among identifiable investor types, to public pension funds with a massive, but largely flatlining 24.5 percent. The SWF stake is up nearly a fifth over four years, a larger gain than any other single type of investor. PEI notes SWFs’ growing portion of PE funds comes despite a major push by many to invest directly. There’s plenty of long-term investment to go around, when it comes to the wealth of nations.
THE COLLER CAPITAL GLOBAL PE BAROMETER IS HERE. Highlights from latest edition of the bellwether bi-annual survey of 110 private equity investors from around the world show that over the next three years limited partners expect on balance to increase the number of managers they invest with, while increasing the average size of their commitments; some 52 percent of managers have the majority of their commitments today with “single-product” specialists as opposed to “multi-product platforms;” the ratio of women to men working in PE is expected to increase; 40 percent of LPs see the appeal of the UK buyout market diminishing, while 13 percent say it’s becoming more attractive; a majority of LPs now have co-investment programs; four in five LPs have PE exposure to China today; and four fifths of investors expect to register annual net PE returns in excess of 11 percent over three-to-five years.
A RECORD NUMBER OF FIRST-TIME FUNDS SEEK CAPITAL IN 2017, writes Real Deals, citing data from Palico. Some 770 first-time PE funds – their managers hope the inaugural iterations of a prosperous line of funds – are currently fundraising. That’s a 50 percent increase over the the 513 first-time funds seeking capital a year ago and 48 percent more than the previous all-time high of 520 in 2008. The mostly newly minted firms behind the first-timers – despite their inexperience as independent managers – are doing well, capturing 8 percent of total fundraising in 2017 through September. The renaissance is largely explained by the weakening of top quartile persistence (one study indicates that just 12 percent of top-performing private equity managers now have back-to-back top-quartile funds versus 28 percent prior to 2004) and evidence that the average first-time fund outperforms the average later-generation vehicle.