High multiples have stopped some fund managers from agreeing traditional private equity buyouts, delegates heard from numerous speakers at the Milken Institute's Global Conference in Los Angeles this week.
Over the last 15 months we've been selling everything that's not nailed down in our portfolio – and if it is nailed down we're refinancing at great rates.
“We've never seen [interest] rates like this so of course if there is a deal in an industry you know well, it can be attractive from the financing point of view. But you have to be able to get it at the right multiple or believe you have secret sauce to transform it or grow it to really add value,” said Leon Black, co-founder of Apollo Global Management. “Our view right now is the market is pricey for doing conventional buyouts.”
He added, however, that it was “a fabulous environment to be selling. Over the last 15 months we've been selling everything that's not nailed down in our portfolio – and if it is nailed down we're refinancing it at great rates.” The firm has had $13 billion in realisations over the past 15 months, he said.
David Bonderman, co-founder of TPG, agreed during the same panel discussion that it was a good time to be a seller. “But it's not a terrible time to be a buyer either. You have to be cautious on the financing.”
Even though fixed income spreads have come down and there's not a lot of defaults, there continues to be a hangover of some of the large buyouts that need to be restructured.
While panellists were generally keen to keep specific investment ideas under wraps, one area that Apollo in particular has been targeting is distressed deals. “You don't have to have a global economic collapse to find good distressed deals,” Black said. “A lot of industries are inherently cyclical and clearly when a lot of people are paying 10x for companies, that may be the next group of companies [ripe for distressed investment].”
Fellow co-founder Joshua Harris noted on a separate panel Apollo had been targeting distressed debt in leveraged buyout deals agreed during the previous boom cycle. “Even though fixed income spreads have come down and there's not a lot of defaults, there continues to be a hangover of some of the large buyouts that need to be restructured.”
The restructuring of European banks' balance sheets is a big opportunity, Harris said, noting the firm had purchased some $12 billion in loans over the past 36 months from European banks that need to deleverage. Often those assets relate to consumer and real estate debt, Black said.
US natural gas plays are also of great interest, Harris said. “What's driving that is the shale technology that's opened up. There are hundreds of millions of dollars of ROI capital projects right here in North America and there's not enough people to take advantage of those opportunities. If you have special expertise … you can invest and develop oil reserves right here in the US at a third to 50 percent off the futures curve.”
Harris noted that top quartile private equity managers able to find and exploit good opportunities have “trounced” other asset classes. Using Apollo as an example he said the firm had generated “about a 26 percent net return over our history. During that same time period, the S&P500 was up 9 percent — so that's 15 percent outperformance.”