Monitor

Private Capital Monitor 14/07

14th July 2023

PE Podium

Saved by the Sell

Bloomberg reports that PE funds are under pressure to show investors profits and are increasingly selling shares of their portfolio companies, despite unfavourable market conditions. While the number of share sales and their value have increased, the pace is still insufficient to demonstrate meaningful gains. Firms are having a tough time convincing institutional investors to invest fresh capital due to a lack of realized gains and overexposure to private equity. These firms are now having to get creative, adopting strategies such as such as delaying the sale of remaining stakes and selling stock back to the companies themselves..

Worth a read

Downton Assets

Oliver Gill writes for The Telegraph on the challenges that rising interest rates pose to the private equity industry. Stephen Quinn, Managing Director at 17Capital, underscores the need for PE firms to secure alternative capital sources, especially as secondary deals now constitute approximately one in four transactions. Quinn also points out that a mismatch between buy and sell expectations is adding to these challenges. Meanwhile, despite the prospect of reduced returns, Archie Norman, of both Bridgepoint and Marks & Spencer, maintains that the private equity sector is still likely to outperform.

The Walking Debt

FT Alphaville reports on Verdad Advisors founder, Dan Rasmussen’s, critical analysis of the operational improvements claimed by private equity firms. Rasmussen examined public bond sales on 993 US deals between 1996 and 2021. His analysis suggests underwhelming performance in revenue growth, earnings margins, capex, and profitability compared to listed peers. However, private equity’s success lies in increasing debt-to-earnings ratios. Rasmussen cautions investors against expecting future returns based on past industry performance, particularly during decades of falling interest rates.

Game of Loans

Bloomberg reports that traditional high leverage ratios are being reduced, with recent deals averaging around 4 – 4.5x earnings. Despite the lower leverage available, buyout target valuations remain elevated, creating a divergence in price expectations, which has led to the failure of several deals in recent months. To proceed, PE firms must contribute a larger chunk of equity.

Deal of No Deal

The Financial Times reports on KKR eventual triumph over smaller rival Arcline Investment Management during a bid battle for US industrials company Circor. KKR succeeded through focusing on deal certainty and committing to financing the deal out of its own equity funds. After raising its initial bid from $49 to $56 per share, KKR argued that Arcline’s $57 bid posed greater risks due to potential antitrust issues and unstable loan markets. Despite Arcline’s efforts to alleviate these concerns, Circor’s board ultimately favoured KKR’s offer due to its perceived “increased deal certainty”, highlighting the increasing importance of certainty over absolute dollar value in deal-making.

Media of the week

Venture capital veteran Alan Patricof on A.I.: This by far outweighs any technology revolution

­Watch the video here ­

Wall of money

Audax Banks $7.8 Billion for Two ‘Buy and Build’ Funds

Audax Group has closed its seventh flagship PE fund on $5.25 billion and Audax Private Equity Origins Fund I, which focuses on lower-middle-market deals, on $774 million

Welsh Carson ups ante again by raising over $5bn for biggest-ever fund

WCAS XIV LP closed above its target and the firm’s prior fund, WCAS XIII, L.P., which closed at $4 billion. The four largest investors in WCAS XIV increased their capital commitment by approximately 25% from WCAS XIII.

Alpine Investors Defies Fundraising Slowdown With $4.5 Billion Buyout Fund

Alpine Investors has closed its ninth flagship fund on $4.5 billion, double the size of the software and services-focused investor’s prior fund. The fund’s predecessor closed in 2021 at $2.25 billion.

Deal Chart

Movers and Shakers

• Carlyle has hired Franklin Templeton’s Shane Clifford as head of private wealth strategy.
• Tim Franks, the head of KKR & Co’s private equity business in the UK and Ireland, has decided to quit just months after the firm closed it latest European buyout fund with $8bn in capital commitments.

From the Horse’s mouth

“If debt is going to cost more and there is less available, then logically funds cannot pay the same price as when interest rates were almost 0pc and debt was more accessible.” ” – Stephen Quinn, Managing Partner at 17Capital.

­”Debt multiples are going down but deals for the highest quality companies are being done at enterprise values that are still high” – Michael Dennis, co-head of European credit at Ares Management Corp.

­ “I think it’s part of human nature, that we want to achieve. It’s definitely a kind of cosmopolitan nature, wanting to achieve in the fast lane” – Phoebe Waller-Bridge, English actress, screenwriter and producer, born on this day 1985.