28 March 2012

Is private equity getting its second wind?

It may be early days, but the private equity industry is definitely showing encouraging signs of a resurgence which, if not quite how it was a few years ago, when it bestrode the world like a colossus, is at least something approaching a return to form following the 2009 nadir in its history. 

After a rather downbeat end to 2011, when the value of deal making by the sector amounted to a less than impressive USD 13,147 million, as against the year’s high of USD 32,237 million chalked up in July, and an even more worrying start to 2012, with a paltry USD 8,544 million recorded in January, the green shoots are putting in an appearance, as figures soared to a very healthy USD 20,569 million last month, according to data from Zephyr.

It’s a far cry from the heady days of multi-billion dollar buyouts, when the good times were rolling and the sky was the limit as far as borrowing was concerned. Interestingly, but perhaps not surprisingly, the biggest deals came just before the crash in 2008/9, with the largest of these occurring in 2007 when heavyweights KKR, TPG and Goldman Sachs teamed to buy Energy Future Holdings for a staggering USD 44,430 million.  KKR took the lead in another 2007 mega-deal, when it and TPG bought First Data for USD 29,000 million.  Not to be outdone, another giant lumbered onto the year’s dealmaking landscape in the form of Blackstone, which made its own super-buy in a USD 38,900 million take-private of Equity Office Properties, when the investment firm upped its original offer to shareholders from USD 49 to USD 54 per share in cash, a sign of the confidence of the times.
Then, seemingly overnight, it all changed.  The global credit crunch hit in 2008, deepening still further in 2009, and it looked as though leveraged buyouts would be a thing of the past as banks pulled up the drawbridge on lending, and private equity firms did likewise with their own spending. Fingers had been burnt, and buyout houses seemed unwilling to take any more risks.

But gradually, confidence started to return. The industry appeared to regain some perspective and learn a few lessons from its former life of excess.  Caution certainly seemed to be the new watchword, but the fear factor looked to have subsided.

According to Zephyr, the value of private equity deals in 2010 in both the US and Europe jumped 57 per cent on 2009 figures, which had marked an all-time low with just USD 69,225 million of dealmaking recorded in the US, and USD 57,614 million in Western Europe.  The largest deal with a US target in 2010 was the USD 5,300 million buyout of Del Monte Foods by KKR, Vestar Capital Partners and Centerview Partners, which, while not quite in the same league as the blockbusting deals of 2007, was an impressive amount nonetheless.

Data for 2011 showed an even greater improvement, with global figures up 5 per cent on the previous year, at USD 259,619 million. Again, compared to the eye-watering USD 900,704 million recorded in 2007 this may seem like peanuts, but given the USD 151,004 million of 2009, it started to look more respectable.

It’s hard to know whether the industry will see a return to its past extravagance, particularly given the wariness of banks to lend at the levels they did a few years ago.  Despite the fact that private equity firms have billions in “dry powder” – nearly USD 1 trillion according to a recent report by Bain and Company – buyout houses seem to be reluctant to splash out with the same gay abandon that they did in the boom of 2006/7.

But the last couple of years have shown promising signs of a pick-up in high-value deals, and, after all, perhaps a bit of caution and restraint is no bad thing in the long run.

© Zephus Ltd