Leon Black, Jim Davidson,
and Thomas H Lee
Opportunities outside the traditional buyout market are piquing the interest of some of private equity's best known investors including Thomas H. Lee and Leon Black.
“The conventional buyout business, I think, is going to be pretty dead for the forseeable future because there really is no access to financing,” Black, co-founder of mega-firm Apollo Global Management, told delegates at the Milken Institute's annual conference in Los Angeles.
Black said general partners today should be most concerned about “playing defense” on both the left and right side of the balance sheet of existing portfolio companies — a theme his fellow co-founder Marc Rowan also discussed at length this week.
The fresh deals Apollo will pursue will take advantage of current market dislocation, particularly as regards credit. One example given was the firm's purchase of debt in satellite company Intelsat, which an Apollo-led consortium sold to BC Partners, Silver Lake and Unigestion for $16.5 billion, giving Apollo a return of roughly 11 times its original equity investment.
There are a lot of banks that have failed and many more banks that are going to fail.
Thomas H Lee
“It's a company we know well,” said Black. “We had a second bite at the apple through the debt, having done well with the equity before.”
Now there is also “a great opportunity to amass large positions of discounted debt in companies you wouldn't mind owning” should the company be forced to reorganise. Apollo has been targeting more senior debt in these cases because “often times the fulcrum security, the one that decides how the restructuring is going to go, may be the more senior” portion of the capital structure, he said.
Tangent to that, the firm is also looking into providing “just plain leveraged loans” as well as debtor-in-possession financing. “The traditional players there … are really out of the market,” Black said, noting DIP presents Apollo an opportunity to provide the highest level of debt in the capital structure and make outsize returns close to 20 percent. The firm is also looking at non-performing loans in Europe as well as commodities, he added.
Meanwhile, Thomas H Lee Capital has equity-only deals in its pipeline related to both “good” and “bad” regional and community banks, said president and chief executive Thomas H Lee.
“There are a lot of banks that have failed and many more banks that are going to fail,” he said, noting that building up platforms of bad banks back-stopped by the federal government is an appealing investment opportunity. “The community banking space we also think is ripe. We have another team that is looking at the 'good banks' space.”