With all the noise coming out of New York concerning it’s pension fund scandal and it’s subsequent repurcussions, it may be useful to review what fund managers should expect from placement agents. From the 2nd edition of the Definitive Guide to Private Equity Fundraising, here’s Kelly DePonte of Probitas Partners on the very subject:
From earlier this month, here is a talk at the Japan Society in New York hosted by Jeffrey Shafer, Vice Chairman, Global Banking and Senior Asia Pacific Representative in New York for Citi, with Stephen Schwarzman, Chairman & Chief Executive Officer, The Blackstone Group. Schwarzman offers his view of the marked changes private equity has undergone in the current turmoil and shares his thoughts on where opportunities lie for his investors.
In the following segment, Steve takes a rare break from bemoaning FAS 157, to demonize his second greatest foe, the dreaded rating agencies:
The full video can be found here: The Japan Society presents the ‘Global Impact of the Financial Crisis’
There’s been much talk in the States about the carried interest tax “loophole” being closed. It currently stands at 15%. Andrew Ross Sorkin wrote an editorial recently (my favorite part of the piece was the Private Equity Council’s Douglas Lowenstein calling into question the bias that venture capital investment is somehow seen as more virtuous than buyout investment money) which was followed up by a call for taxation compromise by Joseph D. Ament, a principal at Chicago law firm Much Shelist Denenberg Ament and Rubenstein.
His proposal is to amend Internal Revenue Code Section 1256 to add carried interest as another type of Section 1256 contract. Thus carried interest would be taxed 40% as a short-term capital gain or loss, and 60% as a longterm capital gain or loss. However, any gray area of compromise will ultimately prove arbitrary. Some figure will be decided on as an increase is certain to come, but it will be in the haggling and positioning that occurs over that final number that will prove interesting. This could be a vital moment for the Private Equity industry to show in the public spotlight it’s long-term objectives.
Of course, depending on how you look at the issue you may be of the mind that there is in fact no gimmick to be fixed, and that it’s simply a tax increase. The Obama administration predicts it will generate $14.7 billion through 2014. That number seems quite high given that the current drought of dealmaking. Also important to consider is whether or not it’s wise to take away some investment incentives at a time when private capital is needed most. Unfortunately, this last point is being lost among the populist outcry.
With leverage markets still in limbo, firms are looking at Equity Buyouts (EBOs) in ever growing numbers. These all-equity deals have greatly increased in the small and lower mid-cap markets over the past year, and they’re starting to creep into the landscape of the big deals. Although it didn’t go through an example would be Bain Capital and Hellman & Friedman’s planned acquisition of Lehman Brothers’ much sought after subsidiary Neuberger Berman with an all equity offering of $1.85 billion. A sucessful case would be Advent International’s all cash deal last October for the card-processing business of Experian France (which Advent renamed Monext) for €203 million. A simplified explanation for the trend is that you don’t need to use leverage to buy companies when they’re trading at a 50% discount to their historic average multiples. The discount itself gives you a similiar effect to leverage. Plus without a debt market (junk bond prices, for instance, have gone from roughly 8% above 10-year Treasurys to about 19% above in the last six months), many firms don’t have any other choice.
There’s a lot of downside to all-equity deals though. They carry greater risk because firms have to contribute far more of their fund to a single deal than in a leveraged buyout. They also don’t provide the tax-shelter benefits of interest payments on the debt, which further increases the overall cost of capital. While these factors can be mitigated by paying a lower purchase price for the asset, in today’s climate it’s still a guess if valuations are as low as they should be. Meaning, after years of companies being overvalued in a bull market, firms now need to know that they’re buying at a discount to the true value of a company’s worth. Which is easier said than done.
The following graph is from a good article in the Wall Street Journal on the subject of EBOs:
According to a report by Preqin, the total level of dry powder available to Private Equity worldwide is currently $1.02 trillion. Funds in Europe hold $165 billion of this total. This global figure comes after PE firms raised $554 billion in 2008, $346.1 billion coming in the first half, followed by a slowdown in the fundraising pace to $207.7 billion in the second half. At the moment there are 1,684 funds targeting an aggregate $888 billion in commitments worldwide, however look for many of these firms to delay or reduce their closings. 2009 won’t come close to the over half a trillion raised last year.
I get asked a lot by the non-American students as to where the Private Equity firms are focused in the States, and now Theo O’Brien from Private Equity Blogger has put together data from Private Equity Info into some nice, easy to read tables and pie charts so answering that question is a whole lot easier:
The firms themselves are not very spread out across the map with three states (New York, California, and Illinois) being the home to nearly half the PE houses in the country, and the top six sates (add Texas, Massachusetts, and Connecticut) are where over two-thirds of the firms hang their hat. The portfolio companies themselves have a much more even level of distribution with only California sticking out in double digit locality.