Friday letter changing colours

Fundamentals remain challenging, but the private equity industry is determined to turn a new leaf.

Are spirits slowly rising among private equity professionals and affiliates? Some would argue there are good reasons why they should.

In the last month or so, activity levels have markedly increased. Portfolio companies big and small have been lining up to exit via IPO or trade sale (or both, as the dual track sale approach remains common).  In just the last week, Thomas H Lee and Quadrangle filed a $500 million IPO registration for call centre operator West Corp, which would net an estimated 3x exit multiple. TA Associates’ $200 million investment in a Czech software company – the region’s largest private equity deal this year – represented a substantial exit for Enterprise Investors. Doughty Hanson’s venture arm scored a 5x multiple on the $295 million sale of a web service provider. The reported $4bn sale in the works of Kosmos Energy to ExxonMobil, would return 400 percent of the cash invested by Blackstone and Warburg Pincus. The list goes on.

Meanwhile, fresh deals abound, as evidenced by the many transaction stories PEO published this week.

Even secondary buyouts seem back on the block – like the auction for Montagu-backed Survitec, which may fetch up to £300 million from bidders said to include Carlyle, Permira and General Atlantic.

“A lot of people – both at private equity houses and within banks – have cranked up activity,” said one senior private equity deal lawyer. “I think there’s quite a lot of excitement in the market and things are happening.” But, he cautioned, such excitement is easily aroused given how little was happening four to six months ago. In the UK, for example, third quarter deal volume hit a 25-year low, according to CMBOR.

Despite some of the financing packages put together for transactions agreed this week – Blackstone lined up 8 different lending groups for a $2.7 billion deal, while Clayton Dublier & Rice signed up 11 banks for $1.9 billion in financing – debt remains hard to come by and is expensive and time-consuming to negotiate, given the number of lenders needed to make a transaction happen, market sources say.

“Regular sources of debt still remain cautious in the LBO debt arena,” said one leveraged loan finance specialist. “Underwriting more than £25 million is a stretch unless it’s a ‘gold-plated’ deal.” Still, he said, “the frequency of encouraging signs is increasing” even if it was still “early days to think that the permafrost is thawing”.

Indeed, many portfolio companies continue to struggle to meet debt obligations and are seeing their private equity owners lose control to lenders. This week’s victims include Candover’s Alcontrol and Bain’s Bavaria Yachtbau (the respective lending beneficiaries being GSO Capital, Oaktree and Ancorage).

And fundraising remains a mixed bag. Recently one fundraiser excitedly alerted PEO that “liquidity is coming back!”; shortly afterwards one of his rivals lamented that fundraising was still “like pulling teeth”.

But the overriding market outlook, all agree, is one of building momentum. Even if that is more sentiment- than reality-driven, as one source told PEO, a change in attitude among market practitioners is extraordinarily important. It’s a crucial element in helping secure the health of the private equity industry, that is, a return to sustainable deal flow, dependable exits and fundraising success.