Leaving the bride at the altar Friday, November 16, 2007
Since the credit crunch, Dealogic have identified more than $200bn of failed corporate transactions, which is double the rate of 2006. Most deals were agreed in rosier times in the credit market.
Examples are Cerebus (a Northern Rock bidder) walked away from United Rentals ($7bn); JC Flowers walked away from Sallie Mae ($26bn); Cerebus left Affiliated Computer Sciences behind ($8bn)...........
That's a lot of cash remaining stashed under a mattress.
Labels: private equity
posted by John Wilson @ 9:19 AM Permanent Link
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Guy Hands to be ejected from the Magic Circle
Guy Hands, the boss of Terra Firma, the high profile private equity firm that counts EMI amongst its' stable of portfolio companies has just done the daftest thing.
No, I'm not referring to his outburst of describing bankers as "whimpering dogs", on the basis bankers were refusing to bankroll mega buy-outs for years, given that most bankers have heard themselves described in worse terms (of course, they may extract revenge from future deal pricing).
What I'm referring to is breaking the code of magical mystery that surrounds how private equity works, in the same way as a magician might reveal how a magic trick is done.
In his speech at the Super Investor Conference in Paris (is that "super", as in "I think they are super"?), he laid out in plain english what private equity does, namely
- buy stuff with cheap debt and arbitrage the difference with the equity markets
- buy stuff at one multiple and wait for the multiples to go up
- buy stuff and see earnings go up
Doesn't he realise that for the layman to understand such matters, or more importantly investors financing private equity funds, that they might challenge the high remuneration paid to prviate equity firms.
Evidently, Guy's fury at not being able to raise tons of cheap debt from the banks, to allow the gravy train to keep flowing, sent him over the edge. Moreover, as he went onto lament, the first two options are now gone and the third is in peril from the real economy going into recession.
There must have been a stary glint in his eye as he described the conditions before the credit crunch as a "bygone era" and private equity firms having entered a "challenging phase".
He did offer some good news though - new opportunities would come from distressed investors with over-leveraged buy-out facing debt repayments in a year or so!
Labels: private equity
posted by John Wilson @ 8:46 AM Permanent Link
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Never let facts get in the way of myth about a Public Enemy Sunday, September 30, 2007
Research Recap today highlights the findings from the Ernst & Young study on the Private Equity industry.
Key notables
- the annual rate of growth in enterprise value (EV) achieved last year by the largest PE-backed firms was 33% in the US and 23% in Europe, compared to public company equivalents of 11% and 15% respectively.
- employment levels remained the same, or higher, at exit versus entry in 80% of US deals and 60% of European deals. In Europe employment in businesses owned by PE grew by an average of 5% per annum across the UK, France and Germany, where two-thirds of the deals took place, compared to 3% for equivalent public company benchmarks.
- Average EBITDA growth rates that were 17% higher than equivalent public companies.
You can get a copy of the E&Y report for free here
Certainly Private Equity firms will find the climate tougher in an environment of higher interest rates and fewer deals will pass the necessary tests to qualify as a potentially profitable opportunities. But don't write them off quite yet.
Labels: private equity
posted by John Wilson @ 8:01 PM Permanent Link
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Smarter than the average bear Tuesday, September 11, 2007
Some while ago, I commented to a number of people that the IPOs of Fortress and Blackstone probably signalled the top of the market, given that the people running it were smart enough to know when was a good time to sell.
Sure enough Fortress Investment Group’s share price has plunged more than 50% from its $37 high reached after listing in February,whilst shares of The Blackstone Group tumbled to a record-low $21.30 on Friday, 31% below their offering price.
Labels: markets, private equity
posted by John Wilson @ 1:38 PM Permanent Link
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The lending squeeze begins Thursday, July 26, 2007
I wrote recently about how the a squeeze in debt markets could have profound effects on the leverage world of private equity. Well, The Times carried a story yesterday about the proposed EMI takeover launched by Terra Firma. They suggested that Citibank, the principle bank lender may be withholding support from extending the offer deadline to shareholders, only 26% of which have assented to the deal.
This deal is not alone, with the Boots financing deal also being reportedly renegotiated.
The sheer backlog of deals underwritten and waiting to be syndicated — about $250 billion (£121 billion) in America alone — has prompted several banks, including Citigroup, JPMorgan and Deutsche Bank to refuse to lend any more money to private equity until they have cleared their books of previous financing commitments.
Leaving aside the impact on EMI of yet another failure to secure a buyer, and the embarassment to Terra Firma, this backlog will have a material impact on the market. Notably, deals will become more expensive rendering some "marginal" ones unattractive. It will also introduce caution amongst sellers about whether buyers actually have the means to finance the deal. It also indicates that investors to whom banks sell on the debt are becoming more cautious with knock on effects for liquidity.
Labels: markets, private equity
posted by John Wilson @ 10:16 PM Permanent Link
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Get cheap money to fund your venture Wednesday, June 06, 2007
By cheap, I mean less than the interbank rate.
Who on earth would lend risky ventures money at such a rate? The BANKS.
According to the Daily Telegraph.
The data shows that average lending by UK banks to non-banking institutions in April dropped to 5.24%, against the then-base rate of 5.25%. The rate was even further under LIBOR, the wholesale cost of money between the banks themselves and traditionally a good deal cheaper than any corporate borrower would get, a full 34 basis points below, as it happens.
The paper attributes most of this lending to involve lending to Private Equity firms. This is a major reason why Private Equity firms can be aggressive bidders for listed companies - their cost of capital is so cheap relative to others. The banks seem to be literally throwing money at such companies. Odder, is that it's not just those that are benefitting from adviser fees eg Terra Firma are reportedly racking up £150m of fees on the EMI deal.
Assuming you are a corporate buyer e.g. Warner looking to buy EMI. You face a sizeable problem when the opposition can borrow much cheaper than you can and hence afford to up their offer on their higher anticipated returns post interest.
One has to question how much longer the banks can afford to be offering such rates to such ventures when factoring in matters of profitability / return on regulated capital.
Anyway, if you are looking to raise cheap money to fund your venture you may want to call yourself a private equity fund and go to a bank - calling yourself an entrepreneur and approaching a VC is way too expensive by comparison.
Labels: private equity
posted by John Wilson @ 9:10 AM Permanent Link
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The mob is baying for Private Equity blood Thursday, March 08, 2007
As "testament" to its' listening credentials especially when it's from their core financial supporters, not to mention sniffing a tax raising opportunity, Ed Balls, the Economic Secretary to the UK Treasury, has announced a review into the tax treatment applied to private equity funds, a move which could add billions to Government coffers, at a time when corporate tax revenues are falling.
It is to investigate the growing use of so-called "shareholder loans" in highly leveraged structures normally put in place by private equity funds. In essence, Private Equity Funds usually invest only a small amount as direct equity in a company (5% or so of the total finance), with the vast majority provided as debt. The financing cost of the debt incurred by the company is tax deductible, unlike dividend payments.
Whilst the structures are complex, in essence a Private Equity fund will direct 95% of the total investment as equity in offshore Special Purpose Vehicle ("SPV") and this will then recycled back as debt to the company. The interest payments made will be reduce the companies profits and hence their corporate tax bill in the UK, but the interest income earned by the SPV will not be taxed in the UK - a tax efficiency which is a key reason for the fall in corporation tax revenues.
For the Private Equity industry it may kick the whole issue into the "long grass" for many months by which time the Trade Unions may have found a new victim for their rants. However, this is more likely to be a deferral of the matter rather than an end, since the tax take opportunity will be too juicy for the Government to ignore, particularly as it will be perceived as a victimless tax i.e. no votes lost.
However, if these loans are taxed differently, then private equity returns will fall and the attraction of moving offshore increased. Moreover, the beneficiaries of private equity investments such as pension funds will once again be clobbered, having already seen the Labour Government plunder £100bn from pension funds on changing the treatment of dividend tax credits in 1997 - an ironic situation given that the Trade Unions also bemoan the perilous state of pension funds and the impact on their members.
Balls has apparently confirmed that there are no plans to change the principle of the tax-deductibility of interest, as this is something open to all investors, not simply private equity.
Labels: private equity, tax, VC
posted by John Wilson @ 8:45 AM Permanent Link
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EU declares hedge funds and private equity are good Tuesday, February 20, 2007
Charlie McCreevy, the EU internal market commissioner, has dismissed recent attacks on private equity firms and hedge funds, insisting there was no reason to tighten the rules governing their activities.
In an interview with the FT he said "They are good for the market. They have given greater liquidity, have added shareholder value and have helped the rationalisation and innovation of companies."
He did add that the sector is woeful at PR and only gets bad press, in part because of the massive fortunes reportedly made by a select few.
Politicians in France and Germany have been particular vocal in their attacks, but even Labour MPs in the UK who are jostling for position in the Deputy PM contest have attacked them in an attempt to play to their trade union constituencies.
Private Equity firms are especially targeted for being the bogey men at present, given that their involvement often involves restructuring firms and shedding unprofitable components that can't be turned around; or more commonly as a consequence of envy in simply appearing to get massive windfalls from holding investment for a short period, which implies that the seller was somehow defrauded, despite them being a willing seller.
The GMB union this week even went so far as to suggest taxing profits after interest has been deducted gives private equity firms an unfair advantage. Duh? This tax break is available to everybody, and the only unfairness is that it discriminates between debt and equity (dividends not being tax deductable).
Interesting then that US academics have identified that when hedge funds agitate for change, it is usually beneficial for investors - company managers obviously get a rougher time. And who are these horrid investors? Why, they are the pension funds of millions of employees (and union members) who presently face massively underfunded pensions and could do with something to generate investment performance to make up the gap!
Labels: private equity, VC
posted by John Wilson @ 5:16 PM Permanent Link
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