Buyouts are finally returning for the deal-hungry private equity industry, which is looking at 2010 to deploy huge cash reserves into deals that buyers hope could get back up to double-digit billions.
Private equity firms are pursing public-to-private deals more aggressively as the cost of debt has fallen. Dividend recapitalizations have returned and even looser structures such as “covenant lite” are creeping back into agreements.
“We are going into 2010 with a lot of wind in the sails,” said Steven Smith, global head of leveraged finance and restructuring at UBS AG. “Sponsors are feeling more confident about going after assets. They are more certain of having a look at public-to-privates because they feel the financing will be there for them.”
Buyout firms are anxious to start investing after a dire couple of years. Deal flow slumped to a seven year low this year, Thomson Reuters data shows, as the crisis locked out access to financing; existing investments suffered and fund-raising slowed to a snails’ pace.
Now, private equity houses are assessing more and more targets, encouraged by a return of financing and an improving economic outlook. Sellers are also more willing to strike deals as multiples have improved in many sectors and competition among buyers is supporting prices.
Still, bankers caution that LBO deals remain hard to clinch, because typical sellers’ expectations are still higher than the price buyers are willing to pay.
While deals are a fraction of their size during the boom, the value has been creeping back.
Buyout giant TPG struck the year’s biggest LBO, buying IMS Health Inc for $4 billion. Sweden’s EQT secured last week the €2.3 billion ($3.6 billion) secondary buyout of Springer Science, while deal juggernaut Blackstone Group bought Anheuser-Busch InBev NV’s U.S. theme parks for up to $2.7 billion.
Apollo Management LP agreed on Dec. 16 to buy theme-park company Cedar Fair LP for $635 million.
The deal pipeline is across all sectors, even those seen as riskier, bankers said.
UBS’s Smith highlighted industrials, healthcare, financials and consumer products as sectors where deal flow is returning.
Technology, outsourced business services and defense industries also present attractive deals, said Scott Dunfrund, managing director at Houlihan Lokey.
The industry is again viewing deals of up to $10 billion or higher as not impossible, but such transactions could only be achieved if companies clubbed up and there is still limited appetite on the behalf of equity check writers, and banks lending the money, said one private equity executive, who declined to be named.
“Sponsor activity is back again,” said Peter Toal, head of the leveraged loan syndicate for the Americas at Barclays Capital. “Perhaps not to the level of activity it had been and I don’t think we will see the volumes quite as large — $50 billion LBOs are still a long way off — but there is a dramatic improvement in activity nevertheless.”
But new deals means capital calls for investors and not all welcome the prospect with open arms. That is increasing the pressure on some companies to make distributions.
A number of firms have taken portfolio companies public, partly to pay down debt and partly to distribute cash back. There has also been an increase in dividend recapitalizations. Bankers are expecting that trend to continue.
Some pension funds and endowments are awaiting distributions before they will invest in new funds, prompting buyout firms such as BC Partners to prepare a raft of portfolio companies for IPOs ahead of an anticipated fund-raising in 2010.
For those firms that are fund-raising, or preparing to go back into the market, it remains tough.
“I think we’re likely to see the level of fund-raising remain pretty depressed next year,” said Josh Lerner, a Harvard Business School professor specializing in private equity.
Some of the biggest brand names are in the market, or expected to launch new funds soon. Blackstone is raising its latest buyout fund, BCP VI, and has so far attracted about $8 billion to $9 billion.
KKR is also expected to launch a new fund, but the firm is reserving judgment on the timing of when it begins to market the next fund, a source close to KKR said. That decision will depend on the pace of future investment. It has about $5 billion in un-called capital from its 2006 fund.
Anticipating a fall in contributions from many existing investors, big private equity firms have also been warming up powerful sovereign wealth funds, who they hope have deep enough pockets to take up any slack.
In sovereign wealth, once touted as a competitor to private equity for deals, firms also see a willing co-investor whose firepower will help them pursue those larger acquisitions.
(Reporting by Megan Davies and Simon Meads)