BERLIN Feb 26 Private equity fund managers, who
have taken advantage of favorable Western capital markets to
sell companies for top dollar, say they need to move beyond
traditional buyouts to avoid overpaying for companies.
Even after returning hundreds of billions of dollars to
their fund investors in the last two years through asset sales,
the private equity industry is still sitting on $817.9 billion
of investor money it can invest, the highest amount of "dry
powder" since 2008, according to market research firm Preqin.
This is despite dealmaking having picked up, with leveraged
buyout volumes, including the debt of the companies acquired,
reaching $174.2 billion in 2013, up from $136 billion in 2012
and the most since 2007, according to Thomson Reuters data.
At the industry's main annual gathering in Berlin this week,
the SuperReturn International conference, buyout bosses bemoaned
that competition meant rising prices for companies in Europe and
North America. But they expressed confidence that niche
strategies and a focus on increasing the value of companies by
improving them could overcome frothy valuations.
Leon Black, who told the Milken Institute conference last
year that his firm, Apollo Global Management LLC, was
"selling everything not nailed down", conceded on Tuesday that
Apollo's investment pace had not kept up with its asset sales
but said his firm was still busy working on new deals.
"That (phrase) was not to imply there were no good
investment opportunities, it was really meant to say it was a
very good period for realizations," Black told the SuperReturn
International conference, arguing out that his firm's affinity
for complex deals helped it avoid competitive auctions.
"What I'm so proud of about our last fund is not so much the
high returns but the fact that the whole $15 billion fund was
put together at 6.2 times average earnings before interest, tax,
depreciation and amortization (of acquired companies) when the
average deal size for $500 million equity checks was at nine
times," Black said.
Black pointed to strategies such as creating new companies
through the carve-out of unloved divisions of conglomerates and
taking over companies in distress through debt-for-equity swaps
as some of the ways Apollo strived not to overpay.
Black said Apollo had invested $5.7 billion over the last
two years versus the $24 billion it generated from selling
companies. The firm said last month it had amassed $18.4 billion
for its latest flagship fund, the largest private equity fund to
be raised since the financial crisis.
PRESSURE TO INVEST
As deal values rose, private equity firms have increasingly
sought to partner with companies rather than paying a premium to
buy them outright. Last week for example, Blackstone Group LP
agreed to buy a minority stake in human resources
software firm Kronos Inc after bidding for the whole company.
KKR & Co LP co-founder Henry Kravis argued at the
conference that private equity should not just be seen as the
traditional leveraged buyout of a company.
"If you have flexible capital and can invest up and down the
capital structure, all of that is called private equity," Kravis
TPG Capital LP co-founder David Bonderman, whose buyout firm
was among those hardest hit from some mega-deals that preceded
the 2008 financial crisis, said it was important to focus on the
strengths of individual companies.
"To some extent, it is inevitable that people will chase the
market up. There is always pressure to invest and the best
investors are able to resist that pressure from time to time,"
Bonderman told the conference.
TPG invested $10 billion a year in 2007, 2008 and 2010 but
only a quarter of that last year because it did not like deal
prices, Bonderman said. By contrast, it returned $10 billion
last year to its fund investors, he added.
"Pricing is not cheap anymore but it's not out of sight," he
TPG is raising a $2 billion bridge fund while it works on
improving the value of its last two funds and prepares to raise
its next flagship fund. It had to grapple with huge bets that
went sour, including Texas power utility Energy Future Holdings
Corp, casino operator Caesars Entertainment Corp and
floundering bank Washington Mutual Inc.
KKR was a co-investor in Energy Future Holdings with TPG and
only recently completed raising its first North American private
equity fund since the financial crisis, amassing $9 billion
after three years of fundraising.
Kravis said his firm was mindful of the pitfalls of cheap
debt, not just with regards to overpaying but also
overleveraging a company.
"Banks in the U.S. have started to move the leverage ratios
back up again... We look at it and say let's make sure a company
can survive. There is going to be a downturn, there is going to
be times where everything doesn't work out like you think it's
going to," Kravis said.