The maxim, “buy low, sell high”, was not widely practiced by the largest private equity firms during the bygone boom years, at least on a volume basis.
10 firms that were boomtime net sellers:
MatlinPatterson Global Advisers
Oaktree Capital Management
Welsh Carson Anderson & Stowe
WL Ross & Co.
From 1 January 2004 to 15 April 2009 – a roughly five-year period that included an historic M&A boom characterised by frenzied auctions and sky-high deal valuations – only 10 of the largest 50 private equity firms in the world were net sellers of assets, according to PEI Media and Dealogic*. In other words, these 10 firms entered into sales or IPOs of portfolio companies with a combined value greater than the combined value of companies acquired by these same firms over the same time period.
The firms that were net sellers during this five-year period are: 3i; Advent International; Bridgepoint; General Atlantic; Lindsay Goldberg; Marfin; MatlinPatterson Global Advisers; Oaktree Capital Management; Welsh Carson Anderson & Stowe; WL Ross & Co.
The study is based on the recently released PEI 50 Research Notes, which provide comparative information on the PEI 50, PEI Media’s proprietary ranking of the world’s largest private equity firms. (The PEI 50 is a subset of the broader PEI 300 ranking).
None of the firms within the top 11 of the PEI 300 were net sellers during the years specified. The PEI 300 is ranked based on amount of equity capital raised for direct-investment programmes over the most recent roughly five-year period.
The findings support a growing sense among some limited partners that too many GPs were focused on completing new deals and raising ever-larger funds when they should have also sought to take more money off the table in the form of exits.
During 2007, the height of the LBO boom during which deals of unprecedented size were completed, average purchase price multiples for buyouts greater than $500 million in value rose to 9.94 times EBITDA, according to Standard & Poor’s LCD. This compares to a multiple of 8.12 in 2005, 6.33 in 2003 and 7.6 in 1999. The average EBITDA multiple for $500 million-plus LBOs from 1999 to 2008 is 7.6 times EBITDA.
The imbalance between buying and selling was likely influenced heavily by fund size. In general, as deal sizes and values increased through 2007, so too did fund sizes. A firm with a new, much larger fund usually then entered into deals that were larger than the value of existing portfolio companies housed in prior funds.
*The PEI 50 Research Notes draw on Dealogic data to illustrate the transaction volume backed by each firm during the same five-year window. The Dealogic data, which could not be independently verified with the individual private equity firms, excludes real estate and infrastructure deals. In valuing acquisitions, Dealogic assigns credit to financial-sponsor buyers for the full enterprise value of a deal regardless of the proportion of equity invested, including equity invested in co-sponsored, or club, deals. In the case of M&A exits, financial sponsors similarly receive full credit for the value of the exit regardless of equity ownership. In the case of IPO exits, volumes do not represent the full enterprise value of the portfolio company. The data includes all IPOs regardless of whether the sponsor sold shares or not in the offering.
– Wanching Leong contributed to this report