Return of Private Equity Giants?
It’s no secret that dividend recaps are again a major theme in leveraged finance this year. Private equity firms, as usual, are the main source of dividend deals. PE-backed issuers have tapped the leveraged loan and high-yield bond markets for $19.7 billion of dividend financing in 2013 (as of April 26), including $16.9 billion of loans and $2.8 billion of bonds.
That figure is just below the the $19.8 billion recorded during the same period last year ($16 billion/$3.8 billion). For all of 2012 there were more than $60 billion of PE-backed dividend deals, a hefty amount (click below).
Recaps have, in part, filled the hole created by a combination of lackluster LBO activity and the erratic, thin IPO market. With M&A-driven new-money deals far lagging demand for new paper from both loan and high-yield accounts, there’s excess liquidity available to finance dividends.In October, I covered in detail why private equity is eying dividend recaps. Although it's controversial, the resurgence has been helped by investors' appetite for high-yielding debt at a time of historically low interest rates. Also, private equity funds argue that dividend recaps make sense in a flat economy.
But now that stocks are hitting all-time highs, expect a shift to start taking place over the next few years. Jim Kim of Fierce Finance reports, Private equity exit activity to remain strong:
The industry appears to be in the midst of a private equity-backed IPO boom.Indeed, a pickup in IPO activity and strategic buying signals a banner year for exits, which is why shares of the Blackstone Group (BX) and Kohlberg Kravis Roberts & Co. (KKR) have been on fire over the past year (and they pay out a nice dividend too!). With so many pensions moving into alternatives, this is a very hot sector.
Nearly 20 companies are said to be in the pipeline, and more companies may queue up soon. Warburg Pincus and TPG for example, are exploring a sale or a public offering of Neiman Marcus Group, which went private in 2005 for $5.1 billion. The odds of a public float are fairly good, one would think, given the performance of PE-backed IPOs so far this year.
This is a welcome change after years of disappointing IPO activity. The chances of good outcomes are pretty likely for these companies – a fact that explains the warm response they are receiving.
As noted by Lex, "A study of 1,500 IPOs by Mario Levis of Cass Business School found that, while the average IPO underperformed the FTSE All-share by 13 percent over the next three years, those backed by PE funds outperformed by a similar amount. Larger PE-backed IPOs outperformed by even more, as did those where the fund retains a significant stake. And while they come to the market with more debt, this falls away rapidly – from an average of 46 percent of assets just before the float to 20 percent after three years. Finally, margins tend to be high and stable while those for average IPOs are lower and falling."
Exit opportunities in general are looking better. Strategic buyers, many flush with cash, may be warming up to more deal making right now. And sponsor-driven deals will not soon shrivel up. This could end up being a banner year for exits, which is what large private equity firms have been hoping for.
In fact, sentiment is improving and large buyout funds are back. Reuters reports Warburg Pincus LLC has secured $11.2 billion for its latest global fund, one of the largest private equity funds raised since the financial crisis, underscoring investor demand for high-return offerings at a time of record-low interest rates.
But some private equity giants are failing to woo stock investors and shifting their focus to other areas. Greg Roumeliotis of Reuters reports, Carlyle generates less cash from asset sales:
Private equity firm Carlyle Group LP on Thursday reported flat first-quarter profit and a decline in cash generated from managing and selling assets, despite strong capital markets that helped boost earnings for its peers.I wouldn't worry too much about Carlyle, they know what they're doing. The same with KKR & Co, which is emerging as the global private-equity winner in Asia, beating rivals Carlyle and TPG Capital in the performance of funds started since 2006 and their latest money-raising efforts:
A stock market rally and record-low interest rates have buoyed the value of private equity fund assets and prompted buyout firms to exit investments and return capital to their investors.
While Carlyle has been divesting assets, in what is referred to in private equity as realizations, it did not surpass the asset sales leading up to its initial public offering in May 2012.
"We've been on a realization mode in the last two years, having realized $33 billion ... As I look at the relatively near term, we do think our distributable earnings will be relatively flat," Carlyle's co-founder and co-chief executive, William Conway, told analysts on a conference call.
Carlyle shares slumped 3.2 percent to $31.18 in afternoon trading. Through Wednesday they were up 23.7 percent this year, compared with rises of 44 percent for peer Blackstone Group LP, 38.7 percent for KKR & Co LP and 55.2 percent for Apollo Global Management LLC.
Carlyle's 2012 fourth-quarter earnings also failed to impress stock market investors as the private equity firm reaffirmed its conservative approach to sharing with its shareholders "carried interest" - the slice of the profits from its investment funds the firm is eligible to receive.
If Carlyle's deals underperform an investment return hurdle that has been agreed with private equity fund investors, the firm may have to return carried interest to the investors, a move known in the industry as "claw-back."
Washington D.C.-based Carlyle said first-quarter economic net income, a measure of profitability that takes into account the market value of assets, was $394 million, compared with $392 million a year earlier. Its portfolio appreciated by 7 percent during the quarter.
On a post-tax basis, this translated into $1.02 per adjusted unit, beating analysts' average forecast of 94 cents in a Thomson Reuters poll.
Distributable earnings, however, which includes both management fees and performance fees and shows cash available to pay dividends, was $168 million on a pre-tax basis, down 6 percent. This led to a distribution of 47 cents per unit.
Blackstone reported a 134 percent rise in first-quarter distributable earnings to $379 million, while KKR posted a 77 percent rise to $290.6 million.
Carlyle had a very strong year of asset sales in 2011, when capital markets were much weaker and some of it peers held on to their holdings, a fact that it touted to potential shareholders as it marketed its IPO. It reported distributable earnings of $864.4 million in 2011 and $687.9 million in 2012.
ASSET SALES
Among Carlyle's asset sales in the first quarter were sales of shares in car rental company Hertz Global Holdings Inc, television ratings company Nielsen Holdings NV, financial software firm SS&C Technologies Holdings Inc, BankUnited Inc, and Cobalt International Energy Inc, as well as an exit from China Pacific Insurance Co Ltd .
All these deals reflect returns of between two and seven times Carlyle's investors' money, Conway said.
Carlyle also took advantage of bullish debt markets in the first quarter to offload about $950 million of debt assets in its buyout, mezzanine, distressed and real estate funds, he said.
Founded in 1987 by Conway, David Rubenstein and Daniel D'Aniello and rooted in private equity, Carlyle in recent years has expanded in other alternative asset classes, including corporate credit, hedge funds and real estate.
Carlyle said total assets under management were $176.3 billion at the end of March, up from $170.2 billion at the end of December. It raised $4.9 billion from fund investors during the first quarter, up from $2 billion a year ago.
Rubenstein said on the same conference call that Carlyle's latest flagship U.S. buyout fund, whose investment period kicks off in June, had raised $7.1 billion so far, would likely reach $9 billion in the second quarter, and could exceed its target of $10 billion this year.
Carlyle is also moving toward securing its first commitments from investors for its latest European buyout fund, and has secured $1.5 billion toward its latest $3.5 billion Asian buyout fund, while its fund-of-funds subsidiary AlpInvest is close to raising a $4.6 billion fund to invest in stakes in other private equity funds, Rubenstein said. Carlyle is currently raising 13 funds in total.
Carlyle has recently made efforts to expand its pool of high-net-worth investors. It launched Carlyle GMS Finance Inc, a private business development company to lend to U.S. companies, and a fund-of-funds that allows qualified investors to put money into Carlyle private equity funds with as little as $50,000.
Following Carlyle's takeover of commodities-trading hedge fund manager Vermillion Asset Management LLC and energy-focused buyout firm NGP Energy Capital Management LLC, Rubenstein said his firm was working on how to further expand its investment platform, but would not give details.
"If you have any good ideas, just email us -- david.rubenstein@carlyle.com," Conway told analysts on the call.
Global firms are amassing new regional funds as their last rounds raised between 2005 and 2008 are nearing the end of their investment cycles. TPG, based in Fort Worth, Texas, has raised $1.3 billion for its newest Asia fund since last year and expects to reach $2 billion -- half of its goal -- by the middle of this year, and intends to keep the target, two people with knowledge of the matter said.
Carlyle has gathered slightly more than $1 billion, just a third of its target of $3.5 billion, for its fourth fund, the two people familiar with the fund said.
Carlyle’s first Asia fund, raised in 1998, was its most successful, returning a net 18 percent, or four times capital, to investors after it completed its sale of a stake in China Pacific Insurance Group Co. in January, the firm reported. Its second fund had a 1.7 multiple at Dec. 31, company filings show. The firm said today its third fund was 1.2 times capital invested with a net return of 1 percent as of March 31.
Stable Team
On the investment side, fund performance is measured by criteria including internal rate of return, multiple of invested capital and cash distributed to investors.
KKR has had a more stable Asia team than its peers since it came to Asia in 2005, with no departures among its partners, and has made fewer mistakes in its investment decisions, according to two investors considering participating in the firm’s second fund who asked not to be identified. KKR is also good at managing client relationships by keeping investors posted on its portfolios, they said.
Its first Asia fund has exited two investments, including Intelligence Holdings Ltd., a Tokyo-based recruitment firm, in April. That sale returned to investors five times more than capital invested, according to two people with knowledge of the matter who asked not to be identified because the returns haven’t been made public.
Investors’ PrioritiesInstitutional investors should read the entire Bloomberg article here. Clearly Asia is a hot region for private equity and there is fierce competition among PE giants to deliver results to their investors, improving their chances of raising assets for new funds.
“Investors look at exits and cash returns first and foremost,” said Roy Kuan, a managing partner at CVC, whose current Asia fund has returned to investors 75 percent of its $2.9 billion at 3.3 times capital invested. “Many Asian funds simply haven’t returned very much cash back to investors yet.”
KKR’s sale of computer-parts manufacturer Unisteel Technology Ltd. in Singapore last year also returned about two times capital invested, the people said.
The firm’s $1.8 billion acquisition of Oriental Brewery Co. of South Korea in 2009 will probably generate the fund’s highest return, the two people said. Values of its stakes in China Modern Dairy Holdings Ltd. (1117) and Chinese financial-leasing company Far East Horizon Ltd. are already 2.5 times to three times the cost, based on recent stock prices, one of the people said.
KKR sold a 20.5 percent stake in China Modern Dairy this week, representing 2.98 times invested capital, the person said. The fund retained a 3.5 percent stake.
Not all KKR’s investments are a success. The firm is expected to mark down the value of its $300 million stake in China International Capital Corp. investment bank, the people familiar with the fund said. Bond and stock underwriting revenues for 2011 slumped 62 percent from 2010 when private-equity firms including KKR and TPG bought stakes, according to the Securities Association of China, a self-regulatory body for the industry.
In my last comment, I covered how pension funds are doubling down on distressed debt. This too is another area which benefits many of the larger players in the PE space. Looks like the changing of the old private equity guard was a transient shift. From my vantage point, private equity giants are bigger and better than ever, although clearly some are doing better than others.
Below, Phil Canfield, managing director at GTCR, discusses opportunities in the private equity market and how his company approaches a deal. He speaks on Bloomberg Television's "In The Loop."
And Scott Sperling, co-president of Thomas H. Lee Partners LP, talks about the private equity market, investment strategy, and Blackstone Group LP's decision to withdraw its bid for Dell Inc. He speaks with Cristina Alesci at the Milken Institute 2013 Global Conference in Los Angeles. Deirdre Bolton also speaks on Bloomberg Television's "Money Moves." Mr. Sperling explains why they are cautious given uncertainty in the macro environment.