Recently, as PE firms have had difficulty gaining financing, some firms like Blackstone have suggested that they are trying to bypass the Ibanks and syndicate debt directly to buyers like hedge funds. I was wondering what people on the sell side and buy side think the likelihood of this actually happening is. I can see how the large PE firms would have cost saving and more flexibility to raise financing, but it also seems like the expertise of banks and their relationships throughout the financial markets are crucial for syndication of debt. Do you think PE firms should circumvent the traditional system?
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yes and i think more of them will do so in the future.
H & F just did this.
Avista did it on one 500mm deal by working with a couple HFs, not sure which ones. H&F has done a couple deals combining "non traditional lenders" and HFs - barcap, RBS greenwich capital, GE, Farallon (unsurprisingly), GSO, etc. The guys who founded GSO were doing buyout financings at CS before going out on their own, and with Blackstone buying GSO there's some potential to put together financing for MM deals there. I think the most nimble firms will be able to pull of putting together their own debt on small deals where they can get enough binding commitments up front, but as soon as you get north of to 1B I don't think it's practical to cobble together it all up front so long as sellers are still insisting on committed financing. I know there was some talk last summer with the KKR ipo docs that they were going to build a capital markets business. Could large buyout firms do what banks do and write commitments for the debt finance themselves in advance of the MA and then place it prior to close? Sure, but that would take them setting aside some amount of capital for underwriting (whether firm capital or raised from investors) and I think after seeing the banks get burned this bad in the current crunch no one will want that much risk concentrate in those few hands.
A VP friend of mine at Avista worked on that deal (I forget the name but it was one they did right before the Bristol Myers Imaging deal - which they also employed a similar strategy).
For right now it can only be done for small - midcap deals. If you need to tap a large instiutional or pro rata base though, you have to go through the normal bank process.
Sponsors have been doing this for awhile for arranging mezz / 2nd lien pieces, where they will drag one or two investors through the diligence process. No way is Blackstone going to be able to bring 200+ investors though data rooms and management presentations though.
Absolutely. I think this is a great advance and will enable better free flow of capital.
Direct debt placements of this sort are nothing new - often times, the hedge fund(s) will turn around and try to syndicate a portion of these debt securities anyway. As Ginntonic pointed out, the traditional third-party syndication process will continue to serve larger and more senior placements though, since this would just be a headache for financial sponsors.
It's not a question of whether sponsors could place their own debt, but rather why they would ever want to spend their time doing so. Aside from niche placements, it doesn't make much sense.
http://blogs.wsj.com/deals/2008/02/20/for-private-equity-buyers-now-the… http://blogs.wsj.com/deals/2008/03/05/banks-to-pe-you-need-us-you-reall…
is a balance sheet to house the debt prior to syndication. "Expertise of banks and their relationships" are things PE shops have/can develop.
Running a debt syndication takes time and money. Banks keep a large in house staff of people with contacts and time on their hands to do this. Where is the value for a PE shop that won't be distributing debt all the time to pay for this infrastructure. Sure, for a one off deal they can call up their friends and syndicate some debt.
You might as well ask, can they do all their own M&A advisory, IPO themselves, etc, etc. They can, but it doesn't necessarily make sense. Paying the fee to the bank who can build and maintain the infrastructure necessary to do these thing and to keep a small team to sanity check or run first approximations is all they need.
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