The dot-com dream has turned to nightmare and some of the world's leading investment banks are being clobbered in the pocket by their under-performing private equity arms, But despite this gloomy backdrop, signs of confidence in the future of the asset class are evident. US state pension giant CalPERS stumps up $230 million for “significant” equity stakes in buyout shops Carlyle Group and Texas Pacific Group. Whether it's sign of confidence in the two firms or an attempt to win back some upside from skyrocketing management fees (or perhaps a little of both) is debated. What is unquestioned is that this represents a notable milestone in the evolution of an asset class casting off its cottage industry shackles.
Surely no single buyout house can swallow a deal worth over £2 billion? That's the question asked as debtbeleaguered British Telecom puts up for sale its directories arm, Yell Arguably, they can't and so Apax Partners and Hicks, Muse, Tate & Furst join forces to deliver a £2.14 billion deal backed up by &1.45 billion in debt from Merrill Lynch and CIBC. The deal is the largest buyout Europe has ever seen and media reports breathlessly note “the several millions of pounds in legal and accounting fees” that have been forked out in anticipation of the transaction going through. Yell went on to deliver spectacular profits to its backers in July 2003, when listing on the London Stock Exchange.
Just one month after Europe's largest buyout, its biggest private equity fund hits the record books in the form of CVC Capital Partners' €4.65 billion European Equity Partners III. The monumental fundraising by the pan-European big hitter led by Michael smith is viewed in the pages of Private Equity International as evidence of “a rising ocean of cash”. Speculation turns to the possibility of a European private equity fund breaching the €5 billion barrier before long.
“I felt that the growth strategy, which is TA's strategy, would be the best performer, and I think I was fundamentally right on that. But I did underestimate how good buying slow-growth assets would be. I knew it would be good for the general partners, but I didn't know it would be this good for the limited partners as well. I guess I just never visualised that debt would be this easy to get, and that the spread for taking risk would be as modest as it is. I expected that the level of big buyout deal activity would go up, but not like this.”
Kevin Landry, CEO, TA Associates, Boston
“I forest that deal sizes would increase immeasurably, that 2002-03 would be a vintage period for investment, that funds would become enormous and, indeed, there would be a €20 billion fund within five years. So far so good, but I was wrong in thinking that UK retail would weaken and that house prices would fall. Better I think to be too cautious than too bold.”
Guy Hands, CEO, Terra Firma Capital Partners, London
“Five years ago, in the depths of the US recession, I never could have predicted the scale of the aggregate private equity fundraising market, nor the size of individual deal currently. Five years ago I did believe that longer term rates of return for private equity would be in the 25 percent to 30 percent area, which turned out to be correct, if not a bit low.”
Stephen Schwarzman, chairman and CEO, The Blackstone Group, New York
A milestone in private equity transparency is passed as CalPERS splashes details of all its limited partnership interests, complete with vintage year and performance data, on its website. Limited partners are impressed at this sign of private equity's apparent openness, while general partners argue forcefully that presenting the data in this way will spread confusion rather than clarity. The media has a field day as private equity goes public in a big way.
The fundraising market gathers momentum as Warburg Pincus' $5.3 billion largest ever global fund is soon eclipsed by the $6.45 billion that Blackstone garners for Blackstone Capital Partners IV. It's not just the sheer size of the capital pools generating publicity; increasing misalignment of interest is also a talking point in light of the near-$100 million annual fee income that the latter vehicle is expected to generate. It is noted, however, that such concerns did not prevent 190 LPs from eagerly clambouring aboard the Blackstone bandwagon.
Private equity once again funds itself wriggling uncomfortably in the public glare as the University of Texas Investment Management Company (UTIMCO), led by Bob Boldt, publishes the performance data of individual funds. While this is concerning enough, what's really keeping GPs awake at night is the question “where next?” Could underlying portfolio companies now find themselves stripped naked, their intimate financial detials revealed to all? The price of the industry's burgeoning scale is being paid in the form of ever-greater exposure.
Five years back I predicted the $10 billion LBO fund: right. Five years back I predicted increasing leverage: right. Five years back I predicted this leverage would cause big problems: still waiting/wrong. Five years back I predicted hedge funds would become annoying competitors: right. Five years back I predicted I would age well: arguable.”
Jon Moulton, managing partner, Alchemy Partners, London
Scale speads to the fund of funds industryas, first, Goldman Sachs wraps up a new $1.25 billion global fund and then HarbourVest Partners almost doubles it with $2.8 billion. “Scary” says a small FoF manager in London. “Maybe it's time to do something else for a living”.
“We are amazed today about how much the industry has grown and will again be amazed about the growth of the industry in ten years. We are in a structural growth market and private equity will become a mainstream investment technique and asset class, right next to stocks and bonds.”
Marcel Erni, CIO and executive vice chairman, Partners Group, Zurich
Scale has a limit, it seems. After rumours swirled that JP Morgan Partners would gather $13 billion for its Global Fund, the eventual announcement that it had closed on $6.5 billion – $5 billion of which was committed from the JP Morgan balance sheet – came as something of an anti-climax. That said, the industry has a new record fund to celebrate-and, in any case, a $13 billion capital pool would be absurd, right?
Private equity hits the headlines for the wrong reasons as Le Meridien, the hotel chain acquired for £1.9 billion in 2001 by Nomura and co-investors Alhemy Partners and Royal Bank Private Equity, goes to the wall. Poor trading in the wake of the 9/11 terror attack in the US is blamed for the company's fall from grace. Despite a rescue attempt by Nomura's star financier Guy Hands, who led the deal, Le Meridien ends up being fought over by the banks, and Lehman Brothers emerges with most of the company's debts. Le Meridien is eventually acquired by Starwood Hotels in 2005 for $225 million.
In a clear sign that private equity's relationship with public market investors will not always be a straight-forward one, shareholders in listed UK retail group Debenhams express dismay that the company's management team have assisted Permira and Blackstone Group in their efforts to conduct due diligence on the business. From here on, the public-to-private will struggle to cast off negative connotations as it comes to be viewed in some quarters as a means of buying assets on the cheap. The profile of private equity is further raised by such public encounters – but at what cost?
Fast forward to 2006 and the private equity club deal becomes a matter of concern for the US Department of Justice. Back in June 2003, it's only limited partners, Permira and Investitori Associati pool their resources to capture Seat Pagine Gialle, the Italian yellow pages business, for a European record €5.65 billion. Rival GPs lay themselves open to “sour grapes” accusations by describing the price as full. But LPs in the winning funds are not entirely happy either. With some having exposure to all four sponsors, the question is raised as to whether private equity's growing reach is achievable only at the expense of LP diversification.
A new mark in European fundraising as Permira's Europe III rakes in €5.1 billion after just six months of active marketing. More than half of the fund's 134 investors are backing Permira for the first time. As the buyout powerhouse envisages committing up to €500 million in equity to individual companies, thoughts turn once again to how high the bar will eventually be raised.
The spotlight falls on Japan as a group of investors in Shinesei, led by New York-based Ripplewood Holdings, take $2.1 billion off the table when the bank lists in Tokyo. Ripplewood's Tim Collins, the ex-Goldman banker who led the deal in 2000, is hailed as the architect of one the industry's finest ever investments. But in Japan, where $72 billion of shinsei's bad loans were mopped up by public money, the deal is controversial-and regulators begin to sharpen their knives.
US private equity goes public as Apollo Advisors, the New York investment group, raises $930 million on the stock market for a so-called business development company (BDC) – promising the average investor access to a slice of private equity and mezzanine deals. Other GPs are soon attracted to the idea and a steady flow of prospectuses follows. The window of enthusiasm closes just as fat, and most BDC efforts come to nought – but the concept of public private equity money will no doubt be revisited in future.
“Five years ago we anticipated the rapid growth of the local MBO market along the lines of the expansion in the UK and Europe in the 1990s. We have seen a sixfold jump in the level of equity committed to mid-cap deals and have staffed up our team to meet this jump in deal volume. The recent high level of enthusiasm of global funds to bid aggressively for major Australian assets has taken us by surprise; many of these firms have no local presence and limited or no past transactional experience here.
Julian Knights, managing partner, Ironbridge Capital, Sydney
Five years ago M Vision was set up with the belief that, an a relative basis, performance would be better in markets or investment styles where greater efficiencies can be brought to the ownership of investments. We did not expect the public markets to show over time so many inefficiencies in governance and management. This allowed private equity houses to step in and deliver strong corporate benefits through private ownership. This of course has led to fund sizes that look exceptional in size and which are likely to grow further.”
Mounir Guen, CEO, MVision, London
The California First Amendment Coalition (CFAC), an open government pressure group, scores a qualifies success when CalPERS offers a compromise in response to a series of demands issued by CFAC under the Freedom of Information Act (FOIA). CalPERS agrees to make available details on fees paid to, and profits generated by, private equity funds. The agreement stops short of meeting a request for data on how much carry CalPERS' GPs pay themselves. Surprisingly, CalPERS claims it doesn't even have that information.
“We predicted that Asian IPOs on overseas markets would be popular, including NASDAQ. This has turned out to be a big wave and major trend, particularly after SARS. NASDAQ and NYSE exits have proven to be viable for Chinese companies, both technology firms and those in traditional sectors. Some Korean and Taiwanese businesses have also chosen to follow this route, mainly with a technology angle. I did not foresee that US VCs would come to Asia in a big way. I was pessimistic that they would support first time funds and first time investors in China.”
Vincent Chan, managing director (North Asia), JAFCO, Hong Kong
European private equity sees out 2004 with a bang as Clayton Dubilier & Rice, Eurazeo and Merrill Lynch Global Private Equity agree to acquire electrical distributor Rexel for €3.7 billion in France's largest buyout. The deal helps to reinforce a November cover story in The Economist whose headline crowns private equity professionals “the kings of capitalism”. How quickly they've moved from the cottage to the castle.
The largest US buyout since RJR Nabisco is completed as a consortium led by Silver Lake Partners snaps up SunGard, a financial services data systems company, for $11.3 billion. The deal represents an impressive flexing of private equity muscle: not only in terms of sheer size, but also in Silver Lake's demand that potential co-investors have just 48 hours to consider whether they want to come to the big boys' table. Bain Capital, Blackstone Group, Goldman Sachs Capital Partners, KKR, Providence Equity Partners and Texas Pacific Group say “count us in”. The club deal enters a whole new dimension in the process.
In private equity's battle to project itself as a force for good rather than evil, the asset class increasingly finds itself duelling with European politicians. In a notable outburst, Franz Müntefering, the chairman of Germany's Social Democrats, caricatures “Anglo-Saxon” investors as “locusts” intent on consuming Germany's economic assets while destroying jobs. As public awareness of the asset class continues to grow, this is not quite the image it wants sown in peoples' minds.
CVC Capital Partners edges past Permira as Europe's largest proprietor of LBO capital by closing (and capping) its latest fund on €6 billion. The amount raised seems sufficient to keep CVC up with the world's leading purveyors of mega-deals. But times – and expectations – are changing fast. Before long, CVC are-opens the fundraising in an attempt to shovel an extra €4billion into a side vehicle.
Leverage is very much in fashion as Hertz is swallowed by Clayton Dubilier & Rice, Carlyle Group and Merrill Lynch Global Private Equity for &15 billion. Whilst a $2.3 billion equity cheque is clearly substantial, most attention focuses on the $5.6 billion of corporate debt and $6.9 billion of financing against the firm's fleet of vehicles. An accommodating debt market is acting as the catalyst of the LBO boom. Did someone say “bubble”?
An iconic deal is eclipsed as KKR's famous (or should that be “infamous”? $31.8 billion acquisition of RJR Nabisco in 1989 loses its long-held status as the world's largest-ever buyout). KKR is once again t the helm, this time alongside Bain Capital and Merrill Lynch Global Private Equity, as US hospital chain HCA changes hands for $33 billion. The deal includes the assumption of $11.7 billion in debt.
Scale in private equity gets yet another new definition. Having already “closed” on a record $15.6 billion earlier in the year, Blackstone Group decides to reopen its fundraising and sets its sights on $20 billion. In a type of rights issue, existing investors are given the opportunity to increase the size of their commitments. Until June 2005, the formal target for the fund was, at $9 billion, less than half the amount now being sought. Investors, it seems, just can't get enough of private equity.
Records don't last long these days. Just four months after the $33 billion buyout of HCA elicited sharp intakes of breath, fundraising pacesetter Blackstone Group also puts itself at the top of the biggest deal chart. The firm's Real Estate Partners affiliate forks out $36 billion, including $17 billion of debt, to buy Equity Office, a real estate investment trust owned by property guru Sam Zell.
Meanwhile, regulators and lawmakers cast a discerning eye over proceedings. In the US, the Department of Justice investigates shareholder claims that some of the world's largest buyout firms have conspired through club deals to fix prices. Among those under scrutiny are Bain Capital, Blackstone Group, Carlyle Group, Clayton Dubilier & Rice, KKR and Texas Pacific Group. In the UK, financial watchdog the FSA says the collapse of a large buyout is “inevitable” and identifies “excessive leverage” as a major concern.
Make no mistake about it: as it prepares to enter 2007, the private equity industry has never been more public.