Buyout Deal trends / criticisms
Love ‘em or hate ‘em, dividend recaps were a hallmark of the recent buyout boom. Firms would buy companies in highly-levered transactions, and then pile on more debt post-close, in order to reimburse their (paltry) equity commitments. All fun and games until somebody can’t pay the Piper Jaffray.
Critics assailed the practice as short-term greed, and claimed it was rampant. Industry insiders called us ignorant alarmists, adding that it was rare, safe and legal.
Well, we finally have some behind-the-curtain clarity from Moody’s Investors Service, which yesterday released a report called “Private Equity: Tracking the Largest Sponsors.” It examines leveraged buyouts it rated between 2002 and 2007, and howequity sponsors differed in their post-close financial management.
Here’s the key paragraph, in regard to dividend recap frequency
Large private-equity sponsors took dividends in over 45% of the deals rated before September 2006, as seen in the table on page seven, with nearly 30% taking dividends large enough to remove all or nearly all of the equity that contributed to the initial transaction. In 10% of the deals, private-equity sponsors took a large dividend within the first year of the initial rating. A large dividend is defined as one that is equal to, or greater than, 80% of the equity contributed to the initial transaction.
Moody’s also learned that fast-cash lust varied from firm to firm. For example, six LBO shops did dividend recaps on more than 50% of their deals: Welsh Carson Anderson & Stowe, Cerberus Management, Providence Equity Partners, Carlyle Group, Madison Dearborn Partners and Thomas H. Lee Partners. You might notice Blackstone missing from this group, but it shows up when it comes to firms most likely to do take dividends of 50% or more (joining Cerberus and TH Lee).
On the flip side were KKR, Goldman Sachs and Bain Capital, which took dividends in only around one-third of their deals. KKR actually turns up repeatedly in the report for its lack of aggression, which is an surprising contrast to its purchase price behavior. For example, KKR only did add-on acquisitions for 21% of its portfolio companies.
The report also noted that only two of its tracked companies defaulted — or 1.1%, compared to 3.4% for high-yield. That’s pretty impressive, but would be more so if it holds through the economic slog of 2008.
read full report from PE Hub here....
Fundraising
Each asset class is funded by the same group of investors. Not just the same institutions (public pensions, universities, etc.), but also the same individual investment managers. Sometimes they are “private equity officers” and sometimes they’re “alternative asset officers.” At smaller shops they’re the CIOs.
What this means is that there buyout and VC firms are engaged in an ongoing competition for dollars and LP attention, even if neither side consciously realizes it. Buyout firms have obviously won the battle in recent years, with consecutive years of record hauls. Venture has risen steadily too, but not at nearly the same rate. In fact, it could be argued that venture fundraising has increased at a lower rate than have average LP allocations to venture. After all, why listen to pitches from a dozen VC firms looking for $20 million, when you can just plug the same $240 million into a mega-buyout fund?
What I’m hearing from LPs and placement agents now, however, is that 2008 could finally be the year in which VCs begin to even up this tug-of-war. Not in terms of total dollars, of course, but in terms of percentage change over the preceding year. The explanation for this (possible) shift is that the credit crunch has scared LPs silly, and they are worried that those giant checks could soon come back to haunt them. Venture, on the other hand, is being viewed as overlooked, and possibly offering more reward with less risk. Feel free to laugh at that last part – particularly if you’ve seen median VC returns since the Internet bubble – but it’s no sillier than stocking up on mega-funds that club up and charge outrageous transaction fees…
Btw: U.S.-based buyout firms raised $276.7 billion in fund capital last year, compared to $225.6 billion raised in 2006 (itself a record). Of this, $135.1 billion went to funds of $5 billion or more. U.S.-based venture capital firms raised $34.67 billion in 2007, compared to $31.7 billion in 2006.
See also:
Comments (0)
You don't have permission to comment on this page.