Soaking up the sunshine with the ‘junk bond king’

No matter what time of year you visit the iconic Beverly Hilton Hotel, you’re likely to come face to face with the rich and famous. The hotel is home to more than 175 red carpet events each year, arguably the most well known of which transports movie and television stars to the Golden Globe Awards.

Check in towards the end of April, and you’ll find celebrities as well as former presidents and financial luminaries all traipsing the marbled halls for the annual Milken Institute Global Conference. Many in the crowd – speakers and delegates frequently point out – can trace their success in some way to Michael Milken, the former “junk bond king” turned philanthropist.

Beverly Hilton: Home of bullish buyout pros

Leveraged buyout pros in attendance were chief among those with ties to Milken and his former firm, Drexel Burnham Lambert. Most of those private equity executives were in a fairly upbeat mood – and not just because of the California sunshine.

Private equity firms are generally seeing portfolio companies improve, fund valuations rally and activity increase, while limited partners – even if pushing for better terms – have also seen portfolios rebound and distributions increase, according to both GPs and LPs speaking at the conference.

“What a difference a year makes,” remarked Leon Black, the chief executive of Apollo Global Management, which he founded in 1990 after having spent 13 years at Drexel. “Our portfolio seems to be in much better shape, the world is off the edge of the precipice, our LPs are still talking to us.”

One of the positive indicators frequently cited by speakers was the robustness of high yield credit markets. The irony was not lost on some of the 3,000 delegates, many of whom would have attended the infamous “Predators Ball”: the annual high yield conference that Drexel began throwing in 1988 at the very same Beverly Hilton.

Black cautioned, however, that while things may be better than they were a year ago, the key ingredients for conventional leveraged buyouts – low prices, robust financing and a stable economic environment – remain elusive. “I think if your model is traditional buyouts in the US, it could be of grave concern,” he said, stressing that firms must be active in multiple regions or have various investment strategies to adapt to changed opportunities.

David Bonderman, co-founder of TPG, agreed that market conditions were different from region to region. “These days the world is like Gaul, divided in three parts,” he said, noting the US private equity market was once again leading with leverage, but that Asian and European opportunity sets were different. “In Asia, where there’s a mini-boom and edge of a bubble again, local lenders are opening up and there’s more activity,” Bonderman said. “Then you’ve got Europe, which is deader than a doornail in most cases,” he said, adding that sovereign issues were likely to impact market activity.

Exposure to 2005, 2006, and 2007 vintage years remains a concern for LPs, given the portfolio company debt that will need refinancing in the next few years. “About half the money ever invested in private equity was invested in ‘05, ‘06 and ‘07,” said Joseph Dear, chief investment officer of the California Public Employees’ Retirement System. “If those capital structures fail, then the consequences for investors in private equity are going to be catastrophic and presumably will have a lasting long term impact on private equity going forward.”

If the companies are able to refinance, in many cases, the returns may not be “spectacular” but should be adequate to beat LPs’ targets, he said, noting CalPERS expects its private equity programme to outperform public markets by 3 percent. While that may seem lacklustre, Dear stressed that regardless of how CalPERS retools its allocation mix – for it may cast aside traditional portfolio silos divided by securities and geographies – private equity will continue to have an important place in the portfolio. “I don’t know how we make our return objectives without investing in illiquid assets,” he said. That, as you may imagine, gave GPs in the crowd a reason to smile just a little bit wider.