Is Private Equity Losing Its Shine? - Analyst Blog
28 2월 2013 - 10:53PM
Zacks
Private equity has started 2013 with a home run. Technology czar
Michael Dell has joined with Silver Lake to take Dell
Inc. (DELL) private for $24.4 billion. This is the largest
leveraged buyout since the financial meltdown of 2008.
But the deal has already run into trouble -- most recently,
shareholder opposition. T. Rowe Price Group, Inc.
(TROW) and Southeastern Asset Management are of the view that the
deal to take the 25-year old public company private is undervalued.
T. Rowe Price and Southeastern are Dell’s two largest independent
shareholders and own around 13% of the tech major. Michael Dell
holds 14%; he is the only shareholder with a larger stake than
these two.
This development is symptomatic of the trends that have come to
define private equity activity in recent times. One of the major
factors pushing up the cost of deals is that private equity
companies are flush with funds. According to research firm Preqin,
private equity buyout funds focusing on North America collectively
held idle capital to the tune of $189.4 billion as of Jan
2013. This is just 12% lower than the amount in Dec 2011. So,
a large volume of capital has piled up, which private equity either
has to utilize optimally or return to investors.
The other factor pushing up deal values has been persistently low
interest rates. Speaking at the SuperReturn conference in
Berlin, Leon Black, Chief Executive of Apollo Global
Management, LLC (APO) said the average price for private
equity deals in the U.S. is 9 times EBITDA. One of the major
assumptions resulting from such high valuations is that interest
rates will continue to be soft over the next five years, he
said.
However, Apollo has managed to strike deals at lower valuations,
around 6 times EBITDA. This has primarily happened by acquiring
corporate "hive-offs" or businesses being offered for sale by a
parent company. Together with these two factors, the lack of growth
opportunities across the globe has meant private equity may never
generate the kind of returns it has in the past.
It would still be wrong to say that private equity has completely
lost its shine. Over time, private equity has consistently
outperformed other asset classes. The Cambridge Associates LLC U.S.
Private Equity Index has an internal rate of return (IRR) of 13.7%
for the ten years up to Sep 30, 2012. This is significantly higher
than the S&P 500’s return of 8% for the same period
However, returns are now comparatively lower. Data from Cambridge
Associates shows that the top performing 25% of U.S. funds managers
who launched funds in 2001 have to-date returned an IRR of 36.5%.
This is significantly higher than the IRR of 13.9% of the top
performing 25% of funds launched in 2004. By this time, the number
of funds had grown from 24 to 66, which shows that returns have
fallen since the number of funds increased.
The focus now seems to be on prudent financial transactions, a far
cry from the complicated financial engineering of the past. Fund
managers are now seeking out companies with a high intrinsic value,
before even attempting to turn them around. Such a strategy is
aimed at launching a second IPO, the most lucrative outcome of a
private equity deal.
Therefore, deals are evaluated with an increasing focus on
operational feasibility. This is why propositions such as
Best Buy Co., Inc. (BBY) are viewed with
skepticism by fund managers. The major concern in this case is that
the company operates in a dying industry and a turnaround would be
highly risky.
It’s not that the entire industry has reoriented itself towards a
low risk, conservative approach. Speaking at the SuperReturn
conference, Howard Marks, Chairman of Oaktree Capital, said the
slow recovery in both Europe and the U.S. has meant investors are
moving towards riskier propositions in the quest for higher
returns. Marks said the ratio of debt on leveraged buyouts is
moving towards “pre-crisis highs.”
However, even in such a scenario, the U.S. is being preferred over
Europe. This is primarily due to robust earnings growth from
companies, a shale gas-fueled boom and a higher number of deals.
But overall, it is the emphasis on bargain hunting and improving a
company’s operational efficiency which has made the U.S. a standout
destination for private equity. And the trend looks set to
continue.
APOLLO GLOBAL-A (APO): Free Stock Analysis Report
BEST BUY (BBY): Free Stock Analysis Report
DELL INC (DELL): Free Stock Analysis Report
T ROWE PRICE (TROW): Free Stock Analysis Report
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