My Private Equity Market View

Going to go on a bit of a little rant because its all over the news, falsely in my opinion, and pissing me off - credit markets are thawing and LBO activity is coming back... This is utter BS, credit markets have thawed for either Investment Grade issuers and HY players capable of truly supporting ridiculously high yields / cash paying, no creative PIK toggle features (think above 9%)...

I've got my ear to the market all day, lulling around seeing PE firms either attempting to dispose of troubled assets, at believe it or not still ridiculous multiple expectations or funds clearly staying on the side lines with the existing assets and really rebalancing the investment horizon as multiple expansion is not feasible (or its a contraction in alot of cases), the debt paydown has been minimal and the equity's return is truly garbage as neither of the two has occurred... Funds are now looking to find decent, not good, just decent, assets being sold so they could roll-up a company or two onto a platform to help with the EBITDA increase as their original value play (probably not even, just financial engineering) has turned around and slapped them silly for being naive and stupid... alot of 2005/6 funds are approaching the end of the investment horizon and need to deploy the powder on top of that and what better way than to tac on small build-ups?

Alot of companies are still facing a massive refinancing wall with billions of dollars of maturities coming up across the industry, and no one to really supply the new capital when it comes due... Amendments are flying across desks every day, either as waivers to already loose covenants or just because of the pure fact that that 80 tab model didn't do what it was supposed to and didn't leave enough cash flow cushion for a moderate downside... I've heard of a ridiculous refinancing of a PIK instrument for a 15% cash instrument just to push back the maturity 1 to 2 years, what sane person would do that unless they really cant sell a truly garbage asset... In some amendments, Sub debt has been convinced to roll its debt up to senior portions as the cash burden was toooooo high and the senior's incremental basket was so poorly set, that a truck could be stuck in there without triggering a default...

You've also got to understand that anyone who has a company worth selling does not want to sell it in a market for 5.0x, with a buyer really negotiating each and every point as financing is truly stringent and every point will benefit the irr, they'd rather sit around, do what has worked for the good sponsors, creating value and restructuring ops and when the PE market thaws again, they'll sell at even higher multiples as the amount of dry powder sitting on the PE sideline is amazing (all the way from equity to credit funds) and will easily flood the market... go to preqin.com, they've got a nice piece of marketing material showing the dry powder on the sidelines..

I've got direct lines to most of the Banks, HY, Private Placement, Sub Debt Funds, Senior Primary Funds, from large to small cap, who are all doing the same thing, looking at garbage come across the desk and monitoring the portfolio... The megafunds are just hoping to sell one or two good assets in time for fund raising so they can get that IRR / Multiple above their peers to at least compensate for the current write downs before they go to market in 2010 / 2011 and even attempt to tap a $4+bn fund (nowhere near previous sizes)... Otherwise they're amending credit agreements up the wazoo and monitoring cash like hawks because the debt loads are tooooooo much for any real environment outside of a 2006-2008 period... I can vouch that there are really good assets in some of their portfolio's performing phenomenaly but why sell them into this market if I truly don't have too?

And for anyone thinking from the credit perspective, if inflation is the next big thing, why would I consider putting my capital out in this market so I could have my real return erroded in a two years as inflation hits... Why not just let it hit and then lend at a level that over the long run, will yield a un-erroded real rate that is ripe for a hyperinflated rate market? Sponsors also don't want to borrow and fix large spreads at a 0.6% LIBOR when they know that that LIBOR will skyrocket in 2 years and 0.6% will be 7% + an 800bp spread and the cost of hedging is ridiculous in an environment such as that...

In the end, there is no real motivation for anyone to move, and right now its all about ensuring a performing performance if you even want to attempt to raise a new fund in 1/2 years (the earliest one can even feasibly close...

I could go on with strategies of existig players in the capital structure but I think a debate would be good and address the topics as they arise...

Region

Comments (7)

 
Sep 30, 2009 - 11:19am

jackdaniels:
While I haven't started my BB job, I can safely say that deal flow is quite strong.

Thought you were banker88 the way you started that sentance...

good to know that you don't work but someone is feeding you BS that dealflow is strong... define "strong"? A bank trying to sell a crap asset which wont actually sell... damn strong dealflow there...

when I talk about deals, it executing/closing so i dont really give a sh*t what your non-experienced a$$ hears...

i say dealflow is strong, that means i'm doing jack sh*t and lying to you about it...

 
Sep 29, 2009 - 10:44pm

Really insightful market commentary, and definitely puts in perspective what is going on in the market.

When the wave of corporate debt comes due over the next few years and lenders cannot refinance it will really bring out some of your commentary, particularly the amending of credit agreements.

Not sure where I remember reading this (can't take credit for it), but how about the idea that over the past year, with equity markets getting crushed, tons of investors were rebalancing their portfolios, moving cash from equity funds to large bond funds. These bond funds need to spend the infusion of cash on something, so as a result their has been demand recently for IG and HY. The recent demand is demand from the money flow, not necessarily because investors love these companies. Not sure what the long term implications are for this, that's for someone smarter than me to figure out...

 
Sep 30, 2009 - 12:08pm

MezzKet:
Going to go on a bit of a little rant because its all over the news, falsely in my opinion, and pissing me off - credit markets are thawing and LBO activity is coming back... This is utter BS, credit markets have thawed for either Investment Grade issuers and HY players capable of truly supporting ridiculously high yields / cash paying, no creative PIK toggle features (think above 9%)...

I've got my ear to the market all day, lulling around seeing PE firms either attempting to dispose of troubled assets, at believe it or not still ridiculous multiple expectations or funds clearly staying on the side lines with the existing assets and really rebalancing the investment horizon as multiple expansion is not feasible (or its a contraction in alot of cases), the debt paydown has been minimal and the equity's return is truly garbage as neither of the two has occurred... Funds are now looking to find decent, not good, just decent, assets being sold so they could roll-up a company or two onto a platform to help with the EBITDA increase as their original value play (probably not even, just financial engineering) has turned around and slapped them silly for being naive and stupid... alot of 2005/6 funds are approaching the end of the investment horizon and need to deploy the powder on top of that and what better way than to tac on small build-ups?

Alot of companies are still facing a massive refinancing wall with billions of dollars of maturities coming up across the industry, and no one to really supply the new capital when it comes due... Amendments are flying across desks every day, either as waivers to already loose covenants or just because of the pure fact that that 80 tab model didn't do what it was supposed to and didn't leave enough cash flow cushion for a moderate downside... I've heard of a ridiculous refinancing of a PIK instrument for a 15% cash instrument just to push back the maturity 1 to 2 years, what sane person would do that unless they really cant sell a truly garbage asset... In some amendments, Sub debt has been convinced to roll its debt up to senior portions as the cash burden was toooooo high and the senior's incremental basket was so poorly set, that a truck could be stuck in there without triggering a default...

You've also got to understand that anyone who has a company worth selling does not want to sell it in a market for 5.0x, with a buyer really negotiating each and every point as financing is truly stringent and every point will benefit the irr, they'd rather sit around, do what has worked for the good sponsors, creating value and restructuring ops and when the PE market thaws again, they'll sell at even higher multiples as the amount of dry powder sitting on the PE sideline is amazing (all the way from equity to credit funds) and will easily flood the market... go to preqin.com, they've got a nice piece of marketing material showing the dry powder on the sidelines..

I've got direct lines to most of the Banks, HY, Private Placement, Sub Debt Funds, Senior Primary Funds, from large to small cap, who are all doing the same thing, looking at garbage come across the desk and monitoring the portfolio... The megafunds are just hoping to sell one or two good assets in time for fund raising so they can get that IRR / Multiple above their peers to at least compensate for the current write downs before they go to market in 2010 / 2011 and even attempt to tap a $4+bn fund (nowhere near previous sizes)... Otherwise they're amending credit agreements up the wazoo and monitoring cash like hawks because the debt loads are tooooooo much for any real environment outside of a 2006-2008 period... I can vouch that there are really good assets in some of their portfolio's performing phenomenaly but why sell them into this market if I truly don't have too?

And for anyone thinking from the credit perspective, if inflation is the next big thing, why would I consider putting my capital out in this market so I could have my real return erroded in a two years as inflation hits... Why not just let it hit and then lend at a level that over the long run, will yield a un-erroded real rate that is ripe for a hyperinflated rate market? Sponsors also don't want to borrow and fix large spreads at a 0.6% LIBOR when they know that that LIBOR will skyrocket in 2 years and 0.6% will be 7% + an 800bp spread and the cost of hedging is ridiculous in an environment such as that...

In the end, there is no real motivation for anyone to move, and right now its all about ensuring a performing performance if you even want to attempt to raise a new fund in 1/2 years (the earliest one can even feasibly close...

I could go on with strategies of existig players in the capital structure but I think a debate would be good and address the topics as they arise...

I agree with everything you said, except for the hedging costs. I happen to have hedged a €15m facility last week for 3 years at a fixed rate of 2.6%. (Which is high compared to current Euribor/Libor rates but over an historical period is a pretty good average.)

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