Friday, January 18, 2013

Will Private Equity Boom in 2013?

Jeff Bounds of the Dallas Business journal reports, Expert sees robust private equity environment in 2013:
As you will learn in tomorrow’s paper, the fourth quarter of 2012 was a good time for private equity investing in the Dallas-Fort Worth area.

My big question is, what will 2013 look like? For answers, I chatted with Jay Turner, a principal in the Dallas office of Dos Rios Partners, a private equity firm in formation with locations in Houston and Austin.

Things are shaping up to be “very attractive for a robust deal environment in the next 12 to 24 months,” Turner said.

He argues that three factors are combining to push up private equity activity.

For one thing, low interest rates make debt financing inexpensive, Turner said. “This is a good time to deploy and borrow capital.”

There is also pent-up demand from Baby Boomers who need to cash in at least some of their chips on the businesses they own, Turner said.

Many people from that generation delayed selling their companies over the past few years because they would have fetched low prices. But with their golden years looming, they need to get some cash in their pockets, and thus could turn to private equity to make that happen.

In the same vein, private equity funds raised over the past few years are running out of contractually-mandated time to invest the money their limited partners have committed. Being in an invest-it-or-lose-the-commitments situation, private equity firms are therefore writing checks, Turner said.
The third factor is interesting because PE funds can't sit on the cash limited partners have committed to them forever, collecting that 2% management fee (when you're sitting on billions, it adds up to huge money). Either they deploy the capital or risk losing it.

And as I commented in October, private equity has been increasingly eying dividend recaps, back at their old ways of loading companies up with debt to pay themselves juicy dividends. That's why private equity kingpins fought hard to be the big fiscal cliff winners.

In 2012, we saw a changing of the old private equity guard, with newer and smaller funds outperforming the older and bigger buyout funds. Investors started scrutinizing performance much more carefully, and with good reason. Just like hedge funds, a lot of private equity funds were charging big fees and not delivering the absolute returns investors were looking for.

But with US stocks above their five-year high, 2013 is shaping out to be a good year for private equity. And the big buyout funds are back with a vengeance. Bloomberg reports that private equity group Silver Lake Partners and partners are close to lining up about $15 billion in funds for a buyout of Dell Inc. (DELL), the third-biggest maker of personal computers.

According to Reuters, Silver Lake has been busy hunting for investors for the Dell deal, reaching out to several large global investors, including the Canada Pension Plan Investment Board and Singapore's Temasek Holdings:
Silver Lake, in its quest to put together what would be the largest buyout since the global financial crisis, has reached out to the $170 billion Canada Pension Plan Investment Board and other investors in its fund, known as limited partners, the people said.

Thus far, Singapore's state investor Temasek Holdings Pte Ltd -- another prospective equity partner that Silver Lake has tapped -- is not interested in joining the consortium, the people said.

While Silver Lake has yet to line up investment partners, the buyout firm has told its bank lenders that it remains very confident about its ability to secure equity financing, two of the sources said.

Founder and CEO Mike Dell remains a linchpin of the effort. The man who grew Dell from a college dorm-room hobby into the world's No. 3 PC maker is sitting on an estimated personal fortune of $14.6 billion, according to Forbes.

It is unclear how much the billionaire will contribute to the buyout, or how much of his 14 percent stake in Dell will be rolled into the deal, the sources said.

One of the two sources said Silver Lake did not need to line up firm commitments from equity partners like CPPIB ahead of time, because those could be secured after a deal structure is devised and put in place.

"It is not pinned down as to what might be rolled and what might be new. The other equity partners don't have to show up with a signed commitment letter," the source said on condition of anonymity because the discussions are not public.

"It is not around the equity. There is a very fluid situation now."

A Temasek spokesman declined to comment on market speculation. A spokesman for the CPPIB declined to comment. Silver Lake could not be immediately reached for comment. Dell declined to comment.

Silver Lake is a known quantity to Dell or its top executives. Michael Dell was an early investor in their funds while board member Alex Mandl has also worked with the firm in the past.

Dell's software chief, John Swainson, who joined last March, was a senior advisor at Silver Lake.

SETTING SUN

One of the sources aware of Temasek's strategy said a company like Dell does not fit into its investment themes, which include "emerging champions" and "growing middle-income populations."

"It's not happening," another source told Reuters on Thursday, responding to media reports that Temasek is one of the prospective investment partners talking to Silver Lake about joining the consortium.

Wall Street analysts without direct knowledge of the deal discussions have cast doubt on the wisdom of investing in a stagnant PC industry rapidly getting eclipsed by a growing preference for mobile connected devices, like tablets.

In the PC market itself, Dell has steadily ceded market share to nimbler rivals such as Lenovo Group and is struggling to re-ignite growth. That's in spite of Michael Dell's best efforts in the five years since he retook the helm of the company he founded in 1984, following a brief hiatus during which its fortunes waned rapidly.

Silver Lake is having markedly more success on other aspects of the deal. It has tapped Credit Suisse, Bank of America Merrill Lynch, Barclays and RBC to finance a potential deal, sources have previously told Reuters.

A potential buyout of Dell -- a $19 billion company -- would allow Dell, which has been trying to become a one-stop shop for corporate technology needs as the PC market shrinks, to conduct that difficult makeover away from public scrutiny.

Dell, which has been in talks with private equity firms on a potential buyout, has had on-and-off discussions with the firms but talks heated up late last year, sources have said.
If the Dell deal goes through, it will be a big boost to private equity, which is why smart investors, like Yale's Investment Office, continue to push private equity. Of course, they have the right contacts and have been in the game for a long time, cultivating relationships with top funds.

Even if the Dell deal falls through, PE funds have been busy snapping up gym clubs and commercial real estate. According to eTN, Americas hotel transaction volume to eclipse 2012 at $18.5 billion in 2013:
Hotel real estate investors, who unlocked capital and aggressively bid on hotel assets in 2012, are expected to increase their buying activity in 2013.The abundance of equity capital and improving debt markets will support a buoyant market for hotel trades this year. Americas hotel transaction volume for the year is expected to surpass the $17.5 billion that 2012 netted, with a moderate increase to $18.5 billion[i], according to initial results from Jones Lang LaSalle's annual Hotel Investment Outlook report.

The Hotel Investment Outlook report is a forward-looking, global analysis which tracks key factors affecting the hotel investment market. The Americas highlights include:

Competition for high-quality assets will push up capital values and drive down yields

Strong re-emergence of hotel financing will be driven by CMBS: Private equity funds to be the largest net buyers of hotels in 2013
"We expect 2013 to be another strong year for hotel transactions," said Arthur Adler, Americas CEO of Jones Lang LaSalle's Hotels & Hospitality Group. "The United States remains the world's most liquid hotel investment market which will lead the Americas region to transact approximately 55 percent of the global transaction volume. We should see global volumes top $32 billion this year."

Urban Land Institute's Emerging Trends in Real Estate 2013 report agrees that this year will continue to gain transaction velocity, noting "transaction volume should finally gain momentum as buyers capitulate in the face of strong revenue growth and lenders dispose of more foreclosed assets."

The Propellers of Debt Liquidity

A strong re-emergence of hotel financing driven by CMBS will propel debt liquidity to its highest level since 2007. CMBS lenders will continue to drive pricing, terms and accessibility. Balance sheet lenders are more selective with regard to asset quality, market and sponsorship, but will continue to provide floating rate structures that are favored by hotel owners. It's expected that hotels will remain a targeted asset class for lenders as they offer high yields, relative to other real estate and fixed income classes, relative to the risk.

"The unpaid balance of hotel CMBS loans with initial maturity dates through 2013 totals nearly $19 billion[iii]. Lenders, and in particular subordinate lenders, have shown an increased willingness to foreclose or exercise other rights and remedies, including note sales. Consequently, 2013 could very well mark the beginning of the long-awaited 'great deleveraging' particularly for hotel assets," added Mathew Comfort, Executive Vice President of Jones Lang LaSalle.
You should read the rest of the article but it's obvious that high quality hotels are on the menu and PE funds like Blackstone who scooped them up for a song during the downturn will make a killing selling them off.

On real estate, Steve Forbes interviewed Ron Baron, founder of Baron Capital Group. Baron talks about his investment strategy and his firm’s expansion into REIT and energy funds. A video and a transcript of  their conversation is available here.

Below, Peter Misek, an analyst at Jefferies & Co., talks about the outlook for Dell Inc. Dell, the third-largest personal-computer maker, is discussing a leveraged buyout with private-equity firms TPG Capital and Silver Lake, a person with knowledge of the matter said yesterday. Misek speaks with Tom Keene, Scarlet Fu and Cristina Alesci on Bloomberg Television's "Surveillance."