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 industry chiefs speaking at the Milken Institute's Global Conference in Los Angeles Tuesday.
At the height of 2007 your grandmother could have done an LBO by calling up a 'too big to fail' bank and getting a loan.
“What a difference a year makes,” remarked Leon Black, the chief executive of Apollo Global Management. “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.” After a moment he added, “and I'm glad I'm not Goldman Sachs today”, referencing Congressional testimony taking place Tuesday morning because of SEC allegations of fraud the bank has denied. The quip generated laughter from the delegates, many of whom were simultaneously monitoring the Goldman testimony during the panel via laptops and iPhones.
Scott Sperling, co-president of Thomas H Lee Partners, agreed that the business fundamentals across the firm's portfolio companies had improved from the uncertainties being universally experienced in the preceding 12-18 months.
MidOcean Partners' chief, Ted Virtue, noted that while “all our firms thrive on complexity and chaos … the reality is too much chaos creates paralysis”.
I think if your model is traditional buyouts in the US, it could be of grave concern.
David Bonderman, co-founder of TPG, later noted, however, that “difficulty overall does not necessarily make for bad investment times” and in fact separates the wheat from the chaff. It can also be good for the financial services industry to be scrutinised from time to time, he said, adding, “At the height of 2007 your grandmother could have done an LBO by calling up a 'too big to fail' bank and getting a loan.”
The panellists, which engaged in a broad “state of the industry” type discussion, also noted that distressed situations hadn't been as abundant as they would have assumed. The two years that have followed previous recessionary periods had been characterised by a slower recovery offering up bargains, with firms able to do deals at EBITDA multiples of 5x to 8x, said Sperling. “We've really zoomed past that … deals are being done at 8x.”
The markets have had an “unbelievably dramatic” snapback, with bargains hard to find, Black agreed. “The low hanging fruit is gone. Having said that, again with default rates where they are, with distressed real estate where it is, I think there is still a lot of good opportunity on a selective basis”.
A year ago, firms would have been looking at more distressed situations, Sperling said. “Today, we believe the mid- to large buyout sector is poised to a return to volume. Not anywhere near what we saw at the peak of '07, but to more normalised levels. The quantum of debt available from financing markets is not there to do very large transactions.” The focus for firms like THL, he said, is on finding deals in the $1 billion to $5 billion range, where sponsors can really work with companies to drive operating performance.
Black cautioned, however, that while things may be better than they were a year ago, the key ingredients for conventional 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.” It's important for firms to be global and have multiple products or strategies that allow them to capitalise on changing market conditions, he said, using Apollo's European non-performing loan fund and its foray into mezzanine as examples. “The world is constantly changing and you have to be able to navigate the challenges and opportunities,” he said.
Bonderman stressed that market conditions are different for private equity firms operating in different regions. “These days the world is like Gaul, divided in three parts,” he said, noting much of the panel's remarks referred to the US private equity market, which is 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.
In emerging markets like Asia, he said, deal opportunities are “not going to be plain vanilla LBOs in many of these countries”, but that shouldn't discourage private equity firms from pursuing opportunities there. In terms of differing regulatory regimes, he said, “Our own experience has been it's easier to deal with the Chinese than it is with Washington.”