Any thoughts on some of the implications of the current market conditions on PE...? In addition to obviously tighter credit, and maybe some buyout opportunities(BSC for example), does this type of mkt have any other significant implications on PE?
Just want to get some people's thoughts.
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An inability to exit many of their current portfolio companies (moreso referring to the IPO than divesting to a strategic acquirer)
elan, can you explain why you think BSC represents a good buyout opportunity for a private equity investor? If you were thinking about valuation, I would be interested in hearing your thoughts on why you thought shares was undervalued. Further to that point I would be interested in knowing what type of buyout firm would be that willing to take on the risk of BSC, not the least of which includes all its outstanding bond and CDS commitments, because I personally don't see that happening.
With respect to the current PE environment, at the Buyouts conference a couple weeks back as well as a recent investment committee meeting at our firm, the tone concerning the overall market conditions was pretty pessimistic. As markets deterioriate, so too will consumer and retail which represent north of 60% of the economy, and with the economy in decline, I think there will be further degredation in deal flow. Bankers that I've spoken with have indicated that a number of firms, especially in the upper middle markets and above, have pulled back their mandates because they don't want to sell into declining markets. I think this has forced a number of investment banks and private equity groups to look at smaller deals, in terms of capitalization as well as valuation (e.g. maybe going a couple turns lower than they normally would for buyout multiples).
Maybe things will improve if the government continues to take measures to stabilize the economy, but I don't think most investment banks can tell you with real confidence that they have all that much near-term visibility on what the deal pipeline will look like. If the market doesn't stabilize, you'll continue to see the big banks having to explore smaller deals, and perhaps more PEG's looking into other ways to invest their cash aside from buying companies as some have done already.
Anyone else care to opine? Would be curious to see what some of you others have been seeing or hearing.
JC Flowers looked at BSC according to this Bloomberg article last Friday. Of course, how serious JC Flowers was is still questionable. Also, not sure whether JC Flowers have enough manpower to handle Bear Stearns' books, though. http://www.bloomberg.com/apps/news?pid=20601087&sid=aOBRMPaTe0lQ&refer=…
As for elan's questions, I don't have much enthusiasm for PE industry currently. No leverage means deals won't be done until price goes down low enough to buy it with high equity. Usually, those companies are distressed, and those realms belong to guys like Wilbur Ross. I know one megacap fund who did not do a single deal in 2002.
Instead of buyout, mezz funds should be interesting in the next few years. Expensive source of capital, but it is still a way to gear the company.
As for the outlook on PE industry, sure, the next few years will be bad, but that shouldn't mean that all is lost. Deals made in 2003 were among some of the best PE deals ever, because that was when financing started becoming available and prices had already been hammered during the past 2 years. So when things recovery, which it EVENTUALLY will, PE should pick up. But, for the next 1-2 years, who really knows?
PE firms are supposed to hold their companies for 3-5 years. The past few years were just extraordinary period that allowed PE firms to have 6 month flip, generating insane IRRs. Yes, they will hold it for longer periods, but they can usually negotiate a longer fund life to have more flexibility in exiting their assets. Will market come back within 5 years to sell companies at good valuations? I think so.
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