Side Letter: Brookfield, Silver Lake and the ‘flight to quality’

Two big signs, courtesy of Silver Lake and Brookfield, of investors' flight to quality in times of crisis. Plus: more worrying signs about defaults courtesy of Moody's. Here's today's brief, for our valued subscribers only.

He said it

“The structure itself seems engineered to attract fraud”

In a worthwhile Financial Times long read (paywall), short-selling hedge fund manager Gabriel Grebo, gets his knives out for Spacs: special purpose acquisition companies.

Just Happened

The restructuring road ahead

Almost 60 percent, or 22, of all defaulting US businesses outside the energy sector belonged to private equity firms, according to a Moody’s report released in July (press release here). Overall, defaults picked up in the first six months of 2020, exceeding the total tally of 2019. The default rate of US speculative-grade companies – those in the lower end of the spectrum – surged to 7.3 percent in June, the highest in a decade. And the outlook is no better, with defaults expected to reach 12.4 percent in the first quarter of next year. Given the growing prevalence of private equity investments in speculative-grade firms, Moody’s expects the upcoming default cycle to also be led by PE-owned rated companies.

“If you look at PE-ownership in our B3 negative and lower [investment] grade list, around 70 percent of companies are PE-owned,” Julia Chursin, assistant vice-president analyst at Moody’s, told sister title PE Hub’s Karishma Vanjani, referring to lower-rated companies. “Naturally, you’ll assume most of these companies will default,” she added. Back in 2009, only 45 percent of lower rated companies were PE-owned. The upshot? Restructuring professionals are in for a busy spell. PE Hub subscribers can read more here.

Why LPs want Brookfield

Brookfield Asset Management hauled in $23 billion of new capital across strategies – its “best fundraising period ever” – in the three months to June, according to its Q2 2020 earnings statement. That figure is higher than Q2 inflows of peers Blackstone ($20.3 billion) and KKR ($16 billion). Nearly half it came from its latest distressed vehicle Oaktree Opportunities Fund XI. Established franchises like theirs and the products they have on offer are “exactly what clients want” and “get all the money” in periods of disruption, said Bruce Flatt, chief executive of Brookfield, on an earnings call on Thursday. What’s more, private capital has become far more important today for governments and businesses straddled with high levels of debt. “They need our services more”, Flatt pointed out.

Silver Lake’s thunders past $18bn

Silver Lake has busted through the $18 billion barrier on its latest fund, raising $18.28 billion for Silver Lake Partners VI, per an SEC filing. The firm has yet to confirm whether this is a final close. Documents prepared for the New Jersey Division of Investment show the tech specialist is making a $500 million GP commitment to the fund, which will charge a 1.5 percent management fee during the investment period. Silver Lake has delivered a 19.2 percent net internal rate of return and a 1.8x net TVPI to date across its five flagship funds, the documents show.

The vehicle joins a raft of mega-funds either raised (CVC Capital PartnersArdian) or on the fundraising trail (Clayton, Dubilier & RiceThoma BravoEQT and others) this year as coronavirus prompts a flight to quality.

Read our latest on the covid-19 fundraising scene here and the latest on Silver Lake’s raise here.

Essentials

National treasures

PE sponsors are eyeing acquiring assets on the cheap amid the pandemic, while governments around the world are trying to protect assets they deem vital for national security. In the UK, the government is proposing a three-pronged approach for the assessment of national security risks for sectors including civil nuclear, defence, energy, telecommunications and even artificial intelligence. What do buyers need to know? This piece by lawyers at Akin Gump has the details.

Getting behind PE

Private equity-backed companies in the UK have been precluded from accessing emergency government loans because of EU law on state aid. The UK Government is currently working on how to get around this, reports the Financial Times (paywall).

What you’re reading

Here’s the content you spent most time with on Private Equity International last week:

Dig deeper

LP meetings. It’s Monday, so here are some LP meetings to watch out for this week.

17 August

18 August

19 August

20 August

21 August


Today’s letter was prepared by Toby Mitchenall with Isobel MarkhamAdam LeRod JamesCarmela Mendoza and Alex Lynn.

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