August 19, 2015
– PE Firms are Priced Out of Costly Deals
– Dividend Recaps Soar with Summer Heat
– Oil Companies are More Receptive to PE
– Bellwether Pension Fund Favors Niches & Co-Investment
– PE Super Hero Era has Ended
HERE’S MORE EVIDENCE THAT PE FIRMS ARE BEING PRICED OUT of acquisitions. “Just 5 percent, or $139.5 billion, of the $2.6 trillion” of announced merger and acquisition deals this year through August 3 “were private equity backed,” reports the Wall Street Journal. “At their peak market share, PE-backed deals made up 19 percent of all announced deals for all of 2006 in terms of value.” The Financial Times notes: “Anyone looking for the shades of 2006 in this year’s sky-high, credit-infused markets will have noticed one big missing piece: the large buyout.” “Although they are flush with capital, PE groups are scrambling to avoid paying high prices for a shrinking pool of large investments.” Even so, LBO Wire points out that PE firms have paid “a record 10-plus times” cash flow this year for acquisitions, citing data from Standard & Poor’s. It’s the first-time ever that purchase price multiples have “reached, and exceeded, 10 times.” Buyout firms paid an average of 10.3 times cash flow in Q2.
DIVIDEND RECAPS SOAR WITH THE SUMMER HEAT. Reuters reports “nearly $8.3 billion of dividend recapitalization deals” have been announced since the beginning of July. This “is already higher than $7 billion in the second quarter and $3.35 billion in the first quarter and is the highest figure since $11.3 billion in the third quarter of 2013, when dividend recapitalization deals hit an annual record” of $50 billion. PE firms “have turned to dividend deals” as “high equity valuations” have kept “a lid” on buyouts. The prospect of a rise in U.S. interest rates this September may also be pushing firms to get dividend recaps done now.
“OIL COMPANIES ARE NOW RETURNING CALLS” FROM PE MANAGERS, writes Reuters. “Throughout much of the crude market rout that started in mid-2014 oil firms could rely on generous capital markets investors betting on a quick recovery in prices,” making “asset sales look unattractive.” But “a torrent of $44 billion in high-yield debt and share sales” in the first half of 2015 “has slowed to a trickle.” Oil prices have fallen some 30 percent since June, “after a partial three-month recovery,” and “oil firms have finally started to feel the squeeze.” That’s opening up “opportunities for deep-pocketed private equity firms to push for restructuring or buy assets.” And PE groups focused on natural resources are rapidly building their firepower, raising “$28 billion in the first half of the year, compared with $20 billion in all of 2014.”
BT’s BELLWETHER PENSION FUND FAVORS NICHES & CO-INVESTMENT. The telecom group’s pension fund, “the largest in the UK’s private sector, has handed £1 billion to Hermes to invest in private equity with a mandate that will seek to avoid pricey large buyouts.” Hermes has a ‘firm’ directive to invest half the capital in co-investment over a three-year period. Co-investing alongside managers rather than in their commingled pools appeals “as a way to cut fees.” Co-investment also permits “backers to be more picky about what deals they want to invest in.” “Hermes’ investments for BT will focus on nimbler strategies over ‘general’ leveraged buyouts,” according to Peter Gale the asset manager’s head of private equity and chief investment officer. “We think the risk-reward has shifted from that more plain vanilla investment to the niches of PE,” says Gale. Watch for growing numbers of investors to follow BT’s example.
THE “PE SUPER HERO” ERA HAS DRAWN TO A CLOSE, proclaims Financial News. “Who runs BC Partners? Who is the chairman of the British Private Equity & Venture Capital Association? And who is the top dog at Cinven? If you drew a blank with any of those questions you are not alone. The PE industry is full of curiously understated individuals these days.” The industry’s founders “got outsized returns” and “often had outsized personalities.” But they’ve been “replaced by committees and a generation of top executives with a lower profile.” Jim Strang, a managing director at Hamilton Lane tells Financial News “the change is a positive step for investors.” “As PE firms have evolved, they have become large, complex businesses” and the requisite skills to run them are “different,” says Strang. Today’s leaders “have got much better thinking about how to institutionalize their business to make it less risky.” That logic is unimpeachable, but we can’t keep in check the nagging thought that PE’s less fun that it once was.