Private equity’s piles of cash have nowhere to go as prices jump


  • Property
  • Thursday, 24 Nov 2016

LONDON: With plenty of money and a scarcity of deals, private equity firms’ cash piles are the highest they’ve been since the depths of the financial crisis.

Then there is increasing competition from newly flush Chinese and pension fund bidders. Add to that low interest rates which lower borrowing costs and investors who want the funds they helped raise deployed. The combination makes the few assets in the market like chum in the water.

“With funds sitting on a lot of capital, there is often a feeding frenzy for attractive assets,” said Neel Sachdev, a partner at Kirkland & Ellis LLP. “This could result in inflated prices and high multiples being paid due to huge demand.”

The average premium buyout firms paid for acquisitions this year is about 31%, an eight-year high, according to data compiled by Bloomberg. That could be a warning sign for buyout firms. They have to find a way to sell assets for more than they paid within a few years to satisfy investors who contributed to their investment pools.

Private equity shops are sitting on about US$862bil in dry powder, the cash they’ve raised but haven’t deployed, according to data from researcher Preqin. That’s up 14% from 2015 and is the highest level since at least 2008, according to the data.

Meanwhile total spending on mergers and acquisitions has fallen 13% from last year, according to data compiled by Bloomberg.

“The supply-demand imbalance is pushing prices up to levels that are difficult to justify,” said Graham Elton, a partner at Bain & Co. “To combat this, the best private equity firms are getting out well ahead of potential processes to increase their deal scrutiny.”

Private equity firms are publicly wrestling with the need to deploy the capital they’ve raised and the desire to stay disciplined. 3i Group Plc, the UK’s largest publicly traded private equity firm, said in its half-year results this month that “with so much investment dry powder having built up in recent years, it is very important that we maintain price and process discipline.”

The owner of Sweden’s Munters is selling the air-treatment business at 12-to-13 times EBITDA, people familiar with the process said. Similar companies would expect to fetch about 9 times, said the people, who asked not to be named because the information is private. A representative for owner Nordic Capital declined to comment.

Still, valuations are generally higher for the best assets, and it’s not just private equity firms that are paying high premiums, Carlyle Group LP managing director Marco De Benedetti said in an interview.

Aside from billions of dollars in capital waiting to be deployed for relatively few targets, competition has also notched up.

Chinese bidders are becoming an increasingly active force in acquisitions in the US and Europe. Buyers from China have spent more than US$230bil on overseas deals this year, according to data compiled by Bloomberg. That’s already more than double 2015’s record-setting US$106bil, according to the data.

Apex Technology Co and Hong Kong-based PAG Asia Capital agreed to buy computer-printer maker Lexmark International Inc in April. The Chinese companies beat out private equity firms Thoma Bravo and Vista Equity Partners, which had bid for the software division, people familiar with the matter said at the time.

A consortium including Bain Capital and Advent International Corp, Swiss investment group Jacobs Holding AG and Japanese brewer Asahi Group Holdings Ltd are among bidders vying for SABMiller Plc’s central and eastern European assets, people familiar with the matter said this month. They’re competing against China Resources Beer Holdings Co, one of the people said.

Private equity firms are also facing increasing pressure from Canadian pension funds and sovereign wealth funds, which have started to invest directly, De Benedetti said.

“It’s a new breed of players in the competitive arena,” he said. “In general more players is a good thing. Yes, on the one side they might be a competitor, as are the corporates, but they are also an additional exit option for private equity sellers.”

As private equity firms pay more for assets, pressure is increasing to ensure higher sale prices in exits and healthy returns. That could prove to be problematic as one of the most popular exit routes, an initial public offering, becomes more difficult in a volatile market.

Tougher IPO markets could be the thing that finally pushes valuations down, Kirkland & Ellis’ Sachdev said. Private equity exits through IPOs have raised US$18.3bil this year, according to data compiled by Bloomberg. That’s down from US$36.4bil in the same period in 2015 and on track for the slowest year since 2009, according to the data.

McGraw-Hill Education Inc, the publisher backed by Apollo Global Management LLC, has delayed its listing indefinitely as it struggles to compete with online peers, people familiar with the matter said in October. UK financial software maker Misys, owned by Vista Equity Partners, cancelled a planned IPO last month after receiving low demand for the shares.

“Valuation expectations can be driven higher if public market exits are also considered a competing route for realisations,” Sachdev said. “However, as recent examples show, valuations might start to adjust down if the IPO markets shut.” – Bloomberg

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