Verus bearish on U.S. buyouts, per Fresno County report

  • High prices, larger equity checks could limit returns
  • Average deal multiple hits 10.26x for US buyouts
  • Firm advises institutions representing $341 bln of assets

Investment advisory firm Verus is less than optimistic in its outlook on the U.S. buyout market, deeming the sector “unattractive” in a recent report compiled for Fresno County Employees’ Retirement Association.

Verus, which advises the central-California county on its $3.9 billion investment portfolio, noted “downward pressure on buyout returns as managers are paying up for new deals and equity contributions are more on the rise. Debt was more expensive and less available in 2015.”

Average purchase-price multiples for new portfolio companies hit 10.26x last year as general partners committed more equity to deals, Verus says. GPs’ willingness to put capital into new deals reflected a more expensive deal market. Private equity firms drew down on more of their commitments, investing $255 billion compared with $189 billion in 2014.

Loan issuance for U.S. leveraged buyouts fell 15 percent between 2014 and 2015, according to Verus. Total leverage, measured as a ratio of debt to EBITDA, declined to 5.61x from 5.73x.

While this better positions portfolio companies to cover their interest payments, the combination of higher prices and less leverage is likely to hurt returns, according to Verus.

Though bearish on U.S. buyouts, the advisory firm was bullish on global distressed funds, noting the potential for attractive returns if defaults continue to climb and financial stress extends beyond the energy sector, which has been rocked by sustained basement-level oil and gas prices.

Verus advises on $341 billion of assets and counts several California public pensions like Alameda County Employees’ Retirement Association and Contra Costa County Employees’ Retirement Association among its clients.

Fresno County valued its PE portfolio at around $102 million as of June 30. The portfolio includes stakes in flagship funds raised by Blackstone Group, New Mountain Capital and Warburg Pincus.

Action Item: The Verus report is available through the Fresno County website: