Even after returning hundreds of billions of dollars to their fund investors in the last two years through asset sales, the private equity industry is still sitting on $817.9 billion of investor money it can invest, the highest amount of “dry powder” since 2008, according to market research firm Preqin.
This is despite dealmaking having picked up, with leveraged buyout volumes, including the debt of the companies acquired, reaching $174.2 billion in 2013, up from $136 billion in 2012 and the most since 2007, according to Thomson Reuters data.
At the industry’s main annual gathering in Berlin this week, the SuperReturn International conference, buyout bosses bemoaned that competition meant rising prices for companies in Europe and North America. But they expressed confidence that niche strategies and a focus on increasing the value of companies by improving them could overcome frothy valuations.
Leon Black, who told the Milken Institute conference last year that his firm, Apollo Global Management LLC, was “selling everything not nailed down”, conceded that Apollo’s investment pace had not kept up with its asset sales but said his firm was still busy working on new deals.
“That (phrase) was not to imply there were no good investment opportunities, it was really meant to say it was a very good period for realizations,” Black told the SuperReturn International conference, arguing out that his firm’s affinity for complex deals helped it avoid competitive auctions.
“What I’m so proud of about our last fund is not so much the high returns but the fact that the whole $15 billion fund was put together at 6.2 times average EBITDA (of acquired companies) when the average deal size for $500 million equity checks was at nine times,” Black said.
Black pointed to strategies such as creating new companies through the carve-out of unloved divisions of conglomerates and taking over companies in distress through debt-for-equity swaps as some of the ways Apollo has tried not to overpay.
Black said Apollo had invested $5.7 billion over the last two years versus the $24 billion it generated from selling companies. The firm said last month it had amassed $18.4 billion for its latest flagship fund, the largest private equity fund to be raised since the financial crisis.
PRESSURE TO INVEST
As deal values rose, private equity firms have increasingly sought to partner with companies rather than paying a premium to buy them outright. Last week for example, Blackstone Group LP agreed to buy a minority stake in human resources software firm Kronos Inc after bidding for the whole company.
KKR & Co LP co-founder Henry Kravis argued at the conference that private equity should not just be seen as the traditional leveraged buyout of a company.
“If you have flexible capital and can invest up and down the capital structure, all of that is called private equity,” Kravis said.
TPG Capital LP co-founder David Bonderman, whose buyout firm was among those hardest hit from some mega-deals that preceded the 2008 financial crisis, said it was important to focus on the strengths of individual companies.
“To some extent, it is inevitable that people will chase the market up. There is always pressure to invest and the best investors are able to resist that pressure from time to time,” Bonderman told the conference.
TPG invested $10 billion a year in 2007, 2008 and 2010 but only a quarter of that last year because it did not like deal prices, Bonderman said. By contrast, it returned $10 billion last year to its fund investors, he added.
“Pricing is not cheap anymore but it’s not out of sight,” he added.
TPG is raising a $2 billion bridge fund while it works on improving the value of its last two funds and prepares to raise its next flagship fund. It had to grapple with huge bets that went sour, including Texas power utility Energy Future Holdings Corp, casino operator Caesars Entertainment Corp and floundering bank Washington Mutual Inc.
KKR was a co-investor in Energy Future Holdings with TPG and only recently completed raising its first North American private equity fund since the financial crisis, amassing $9 billion after three years of fundraising.
Kravis said his firm was mindful of the pitfalls of cheap debt, not just with regards to overpaying but also overleveraging a company.
“Banks in the U.S. have started to move the leverage ratios back up again… We look at it and say let’s make sure a company can survive. There is going to be a downturn, there is going to be times where everything doesn’t work out like you think it’s going to,” Kravis said.
Greg Roumeliotis is a reporter for Reuters News in New York