Tuesday, April 17, 2012

Private Equity Funding an Economic Revival?

Adele Ferguson of Australia's The Age reports, Private equity funding a real estate revival:

Glenn Rufrano may have jetted into Australia to give evidence in the Centro Properties court case, but his main worry as current global head of Cushman & Wakefield is monitoring the outlook of the global property market.

When he was boss of Centro, Rufrano learned a lot about debt refinancing as he had to refinance more than $5 billion of bank debt within weeks. Private equity turned out to be a godsend. It replaced an Australian syndicate of 23 banks and life companies.

It is a similar story in the United States, where debt of hundreds of billions of dollars is due to mature this year. Cushman & Wakefield is making a killing helping broker the refinancing, and private equity is a key player. ''We go to the banks and offer to bring in private equity partners, which will provide 10 to 15 per cent in additional capital, and if they say 'no, they don't want to refinance', we find someone else,'' he said.

Figures from US consulting group Trepp estimate that more than $US360 billion ($A347 billion) in debt is due to mature in the property sector this year and the total for the five-year period 2012-16 is nearly $US1.73 trillion. In New York City alone, nearly $US70 billion worth of commercial mortgages that were bundled together and issued as collateral for bonds mature this year. It is expected to result in a rise in recapitalisations, refinancings and building sales.

But what is interesting is that 2012 was previously expected to be one of the most challenging years for property. But now much commercial real estate debt due to mature has been pushed out to 2016.

Property is at an interesting inflexion point in the skittish global recovery. According to the latest figures from Cushman & Wakefield, if there was any doubt that global real estate was climbing out of the abyss of the global financial crisis (GFC), just look at the figures.

Global commercial sales - including office, retail, industrial and commercial property - reached $US808 billion in 2011, with the Asia-Pacific region accounting for nearly half that, Europe recovering to 2006 transaction levels and the US reaching $US200 billion. It is still a far cry from the global pre-GFC peak of $US1.2 trillion - and the situation in Europe is still fragile - but it is a long way from the dark days of 2009 when global commercial sales hit $US398 billion.

Sitting in his office in New York's Avenue of the Americas, Rufrano is in the box seat to get a feel for the commercial property market.

For him, the property economy will pick up in the second half of the year as the US economy continues to rebound. ''Unemployment is falling, GDP is about 2 per cent and forecast to grow at a 2.6 per cent rate, retail sales have been pretty good for the past six months, and the US sharemarket is up. You can safely say all stats are better and, while the three regions are linked in the long term, in the short term there is a delinkage,'' he said.

His company forecasts investment sales in the US will increase by about 25 per cent this year. The reason is simple: improving fundamentals and a rebound in confidence will increase the appetite for risk, which will filter down into the property markets. For instance, as retail sales continue to increase, the demand for manufacturing facilities, warehouses and distribution space will rise. At the end of 2011, US retail sales adjusted for inflation hit record levels, according to Cushman & Wakefield. As this trend accelerates in 2012, retail markets will see rising demand for space.

It is a similar story for industrial and office markets in the US, which are increasing due to rising demand and limited supply. During the GFC banks stopped lending to property developers, and that has not changed. The upshot is low vacancy rates, which will continue to lift property prices and property sales.

In keeping with the trend, eight of the top 20 most active investors were Asian and four were American. Private equity giant Blackstone ranked number one, with $US9 billion of acquisitions. According to the figures, New York topped the list, with $US35 billion in sales, followed by London, with $US29 billion.

Rufrano expects strong economic conditions will continue to fuel the real estate sector in Jakarta, Melbourne, Sydney and Taipei, where grade-A office rents are expected to reach a high in 2012. And Europe will remain uncertain as the various countries continue to grapple with the sovereign debt crisis.

Most of Europe now faces the threat of weaker growth and a credit squeeze. While the immediate outlook remains poor, how long it will take to rebound will depend on several factors, not least of which will be the mix of measures adopted and the balance between stimulus, austerity and reform. For European companies, pressure will mount to start selling assets to increase capital. Real estate is the low-hanging fruit.

But it was too much debt that got the global economy into the GFC mess and, while private equity, hedge funds, banks and governments are playing a key role passing the parcels of debt around, there is still a long way to go until the music stops. When it does, the hope is that the parcel of debt has shrunk to a size where the holder isn't a loser.

True, there is still tons of debt, but the music hasn't stopped yet, and with hundreds of billions of pension dollars being shoved into private equity and real estate funds, it won't stop anytime soon.

In fact, Maureen Farell of CNNMoney reports that private equity kicked off its best year since 2007:

The private equity industry is on pace for a record year for sales and initial public offerings of its companies.

In the first quarter of 2012, private equity firms either sold or took public 112 companies, generating roughly $21 billion. That was the highest number of first quarter exits since 2007, according to private equity research firm PitchBook Data.

"What you're seeing is the confluence of an improving economy, pretty strong debt markets and strong appetite among sellers and buyers," said Gordon Pan, managing director at Baird Private Equity, which manages $3 billion.

Thanks to this year's market rally, buyers and sellers appear confident about the pricing of deals. And banks are once again facilitating acquisitions by providing the debt financing.

"If the markets continue to be as stable as they've been so far, it's going to be a record year for exits," said Jorge Mora, head of financial sponsors at Macquarie.

The majority of exits come from sales to either companies or other buyout firms, but a healthy initial public offering market is giving buyout shops another alternative.

Roughly 10% of the exits were from IPOs, according to PitchBook data. Automotive parts distributor Allison Transmission Holdings (ALSN) and payment processor Vantiv (VNTV) were among the largest public equity public offerings of the first quarter.

This has been good news for the largest publicly traded buyout firms. Shares of KKR (KKR, Fortune 500) and Blackstone (BX) are both up with the broader market.

Distressed buyout firm Oaktree Capital (OAK) went public to a decidedly more tepid review last week, however. It fell roughly 2% from its offering price last Thursday and dipped again on Friday.

But few analysts expect Oaktree's debut to cast a cloud over the private equity industry -- or other IPOs for that matter.

Industry watchers say there's another key impetus to sell in 2012: Fears of major tax changes after the U.S. Presidential election. Several investment bankers and lawyers say private equity firms think they must sell in 2012 or face potentially punitive tax consequences.

"Most people think it's inevitable that taxes will go up no matter who wins," said Macquarie's Mora.

Republican presidential candidate Mitt Romney's history as a former executive at private equity firm Bain Capital has shone a spotlight on the unique tax structure enjoyed by buyout firms.

Under current tax law, when a private equity firm sells a business it's treated as an investment profit. Such sales are taxed at roughly 15%. Partners in private equity firms also pay taxes of roughly 15% on what they personally earn from private equity profits because it's also considered an investment return rather than income that's taxed at rates of 35%.

Meanwhile, private equity firms are also rushing to sell companies or take them public because it's simply time to do so. 2006 and 2007 were record years for both the amount of money raised by PE firms and the amount they put into taking companies private. And most PE investors only look to hold on to companies for about five years.

"All the stars seem to be aligned. The inventory of companies is there. The capital is there to buy them," said John Gabbert, CEO of PitchBook Data.
PE funds are very cognizant that the time is right to exit from their investments. Conditions haven't been this good in years. As mentioned in the article above: "What you're seeing is the confluence of an improving economy, pretty strong debt markets and strong appetite among sellers and buyers."

Finally, Bloomberg reports that Carlyle Group is seeking to raise as much as $762.5 million in an initial public offering that would give the Washington-based private-equity firm less than half the market value of Blackstone Group:
Carlyle, the world’s second-biggest buyout firm by assets under management, will offer 30.5 million shares at $23 to $25 each, a regulatory filing today shows. At the top end of the range, the firm would be valued at as much as $7.6 billion, compared with about $16.5 billion for Blackstone, the biggest private-equity firm, and $9.8 billion for KKR & Co.
Below, Bloomberg's Cristina Alesci reports on the Carlyle IPO. She mentions that the "founders are not selling" and mentions that these private equity stocks have had a "spotty track record," which is true. Also Fortune's Katie Benner reports on why Blackstone is in the hotel business. As you can see, private equity powerhouses are funding and playing the global economic revival.

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