Banks are getting more comfortable lending for buyouts, and at higher multiples, said
Banks are certainly not lending “with all the bells and whistles… that we saw in 2007 and before,” said Black at one of the private equity industry’s largest conferences, Super Return International. He was referring to the little or no covenant features seen in past deals.
Banks are getting more comfortable with leverage levels of about 5 to 6 times earnings, he said.
“I wouldn’t call it robust, but it is opening up,” Black said.
Banks’ increasing willingness to offer debt at these multiples signals an ongoing improvement in the financing markets. Prior to the credit crunch, it was common to finance private equity deals with large amounts of debt. But in recent months, many deals were being financed with a higher proportion of equity.
Still, Black does not forecast a significant return to traditional leveraged buyouts until there is more certainty about the economy.
Conditions to do traditional LBO deals—reasonable pricing, attractive financing and a stable economy—still aren’t optimal, Black said.
“Presently, I don’t think we have any of those three on a very attractive basis, so I don’t think you’ll see an abundance of conventional buyouts, certainly not the big public to privates so prevalent in 2006 and 2007,” he said.
New York-based Apollo in December struck a classic leveraged buyout, agreeing to a $2.4 billion deal to buy theme park operator Cedar Fair. Still, Black said it was unclear if that deal will close. While Apollo has financing for the deal, it is being challenged by some shareholders who argue that the deal undervalues the stock.
Black said he is also doing more “idiosyncratic” deals such as Apollo’s recent deal to take control of Parallel Petroleum Corp., through a deal that de-leveraged the company.
He sees opportunity for M&A in general, and said private equity firms could also find deals if they have strategic expertise through their existing portfolio companies.
“A lot of balance sheets in corporate America got clean and lean and I think you’ll see a good deal of M&A activity over the next couple of years,” he said. —Megan Davies and Simon Meads, Reuters