Buyout deals increase amid investor, tax pressures

NEW YORK Tue Jul 20, 2010 7:12am EDT

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NEW YORK (Reuters) - Private equity deals have spiked in recent months with a spate of assets changing hands as funds face pressure to spend capital raised in the boom and are nervous about the threat of higher taxes.

Private equity firms have incentives both to buy and sell right now. Pressure is on to invest billions of dollars raised in 2006-2008 as the end of those funds' investment periods approach, while funds are also keen to sell or take public existing investments to reward under-pressure investors.

This year so far, there have been $194 billion of private equity deals done worldwide, nearly three times the amount over the same period last year, according to Thomson Reuters data.

Secondary buyouts -- when private equity firms sell assets to rival buyout firms -- made up 13.6 percent of that, nearly double the percentage a year ago.

"(There is) a very large overhang of capital among the private equity firms -- they raised a lot of money in 2008 -- and they need to put it to work," said Steven Kaplan, a finance professor at the University of Chicago.

Among recent transactions are BC Partners BCPRT.UL and Silver Lake Partners' SILAK.UL $3.1 billion deal to buy healthcare services firm MultiPlan from two other buyout shops and Carlyle's CYL.UL $3.8 billion deal to buy nutritional supplements maker NBTY Inc NTY.N.

There has also been a spurt of assets put on the block by private equity firms combing through their portfolios.

McKechnie Aerospace, owned by New York-based JLL, is being marketed for sale and could be worth around $1 billion, sources familiar with the matter told Reuters last week.

Morgan Stanley (MS.N) is advising on the sale, the sources said. JLL was not immediately available for comment and Morgan Stanley declined to comment.

Leslie's Poolmart Inc LESLPL.UL, a swimming-pool supplier majority-owned by Leonard Green & Partners, is being marketed for sale, sources previously told Reuters. That auction is in the second round, and a number of large private equity firms are interested, a source familiar with the matter said.

MLM Information Services LLC, a corporate tax software provider majority owned by Warburg Pincus, is also considering either a sale or an initial public offering, a source previously told Reuters.

Private equity firms raise capital from investors such as pension and endowment funds, and commit to investing that capital in a certain period of time, typically five years.

Finding places to invest money has been a challenge as the credit crisis restricted access to cheap financing for deals and the economic outlook was grim.

Buyout firms typically buy companies using a high level of debt, meaning that when financing dries up, it is hard for them to strike deals.

A number of private equity funds are nearing the end of their investment period with significant capital -- or 'dry powder' as it is known in the industry -- to invest. That puts them under pressure to either spend the cash or try and negotiate extensions with their existing investors.

"They... are sitting on so much dry powder and are clearly getting uncomfortable questions from their (investors) in terms of -- why didn't they invest in the beginning of 2009, when things were so cheap?" said Josh Lerner, a Harvard Business School professor specializing in private equity. "If I were in that situation, I might be anxious to deploy capital as well."

London-based private equity research firm Preqin estimates that 314 buyout funds are within one year of the end of their investment periods.

Funds raised in 2005 collectively have $20 billion yet to invest, a June report from Preqin said, while those raised in 2006 are sitting on $70 billion and funds raised in 2007 have nearly $150 billion.

TAX WORRY

Some observers have said that the threat that taxes on profits may rise has also been an encouragement for some deals.

In June, a Democratic bill, which would have raised the taxes on how much private equity executives pay on their share of their funds' profits, failed a key vote in the U.S. Senate. Still, there is a possibility it could be revived later this year.

In addition, the Obama Administration has proposed boosting the capital gains tax from 15 percent to 20 percent in 2011 for individuals making more than $200,000.

"(They) have an incentive to sell this year because capital gains tax rates are likely to go up," Kaplan said.

(Reporting by Megan Davies and Paritosh Bansal; Editing by Tim Dobbyn)

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