FINspeak

Private Equity has been very active in Business Process Outsourcing (BPO) companies for quite some time, trying to take advantage of the high growth in that sector.  Examples of BPO investments include Blackstone Group with Intelenet Global Services, General Atlantic with Genpact and more Providence Equity Partners with eTelecare Global Solutions which amount to approximately 76 BPO acquisitions by Private Equity over the last 2 ½ years according to PitchBook. However, news regarding IT infrastructure acquisitions has dominated headlines recently.
While the two biggest acquisitions of Perot Systems and ACS were by strategic buyers, Platinum Equity purchased the much smaller Pomeroy IT which supports infrastructure as well. For Dell, Perot Systems provides a needed boost into their services business while taking advantage of Dell’s core product lines to deploy more advanced hosted or cloud offerings. Xerox will use ACS to expand out of their traditional product business and into corporate solutions, thereby expanding their market. The strategic buyers created adjacencies and bought cash flow from a stable, but lower growth market. What is the allure for Private Equity in a lower growth market? First, infrastructure services can be utilized by other companies already in the portfolio. While they could not create a shared services organization due to disentanglement issues upon divestiture, core services could be attractively bundled on an individual contract basis. Secondly, IT Infrastructure companies can be used in a broader roll up or platform strategy if the sector continues to consolidate as the use of managed services increases within enterprises. Regardless of the reason, IT Infrastructure is currently at the top of the conversation.

 

Posted by Jeremy Kloubec at 08:01 PM | Permalink | Comments (0) | TrackBacks (0)

Events like Dow Jones Private Equity Analyst conference usually get a significant amount of coverage due to the parent sponsor (Dow Jones) and the wealth of other news services that cater to private equity news. Most of the major headlines have already been widely distributed based on commentary from panel discussions, but often it is hard to get the gist of how those sound bites were really delivered. That to me is more telling than the content itself.

First off, nobody at the conference was painting a picture that the last year has been anything but a mess. Hats off to Guy Hands who had probably the most genuine dialog in the history of panel discussions when he talked about Terra Firma’s troubles along with his call for reassessing goals for private equity practitioners. He was not beaten, but seemingly weary (jet lag can be the culprit as well) and I could not blame him with the millstone of the EMI acquisition hanging from him. Other panelists expressed concern from the slowdown in deal flow, but all seemed bullish regarding the upcoming rebound. Mid-market and mega funds expressed similar sentiments regarding upcoming quarters with their target company sizes dropping slightly due to financing constraints. One of my real tests was to catch Scott Sperling, the co-CEO of THL Partners, after his discussion regarding the need for more debt financing and convergence of buyer/seller expectations to see if the story was the same. As expected, he was just as confident in a side conversation as he was on the stage in front of the crowd (also one of the nicest guys you could meet). David Rubenstein, founder of the Carlyle Group, was not just confident; the man was absolutely locked in. He showed no hesitation during his Q&A interview to close the conference which was not a collection of softball questions by any means. He quickly and affirmatively addressed every item presented even when pressed by the questioner. Granted, this empirical test does not mean we are about to see a collection of multi-billion dollar deals close any time soon. However, it does signal that the buy-out business is ready to bounce back based on the way they were saying it and not just what they said. In my opinion, that is the real test.    

Posted by Jeremy Kloubec at 03:29 PM | Permalink | Comments (0) | TrackBacks (0)

I have previously written a bit about the difference in buyer/seller expectations as one reason for the slowdown in buyouts. Scott Sperling, co-CEO of THL Partners was on CNBC recently and discussed this very issue saying that he has expected opportunities “to buy companies in the 5-7x cash flow range” with the public market expectations of “7-9x [sales price] in most sectors” ( http://www.cnbc.com/id/15840232?video=1249086465&play=1). I am going to trust Scott at his word on this and generally enjoy the perspective he brings in his interviews. The next question is, now what does this really mean?

Well first off, EBITA is the proxy for cash flow multiple that was noted by Scott in his interview. Students of finance would understand it is not exact since it does not account for working capital concerns, but those are secondary costs when using valuation multiples. Next, while a 2x difference may seem small, it has a large impact on the rate of return for an investment. Using oversimplified math and holding all other factors constant, assume you could purchase a company with a multiple of 7x using 4x debt and 3x equity, that same company at a 9x multiple with the same 4x debt (credit markets are tight) requires 5x equity. If you sell that same company for the same purchase multiple, your invested rate of return for the second scenario is 65% less since you had to put in 65% more equity into the deal, losing the advantage of leverage. The second scenario puts more pressure on the PE firm to reduce more costs and to gain more revenues to ensure more equity for the owners upon sale after the debt is paid off to meet their target rate of return. It is not impossible, just more risky and is why the greater use of debt is preferred in the event those best case scenarios are not fully realized. The ideal scenario is to purchase the company at 7x with a sale at 9x to realize outsized returns, it is just that modeling that type of exit based on the current uncertainty regarding asset worthiness, makes a big bet much more difficult. As we continue to climb out of the slow down, it will be interesting to see which direction valuations move, towards the sellers or buyers. What do you think?

Posted by Jeremy Kloubec at 04:18 PM | Permalink | Comments (0) | TrackBacks (0)

A better title may have been “A Startling Look at Deal Flow for H1”, but I decided against panic inducing headlines. All hyperbole aside, Mergermarket’s new report “North American Private Equity in Review” for Aug 2009, provided some sobering statistics regarding the number and total value of deals completed. While I had previously written about global M&A trends, this was simply a closer look into the North American market. The only silver lining appears to be that rate of decline has significantly decreased or leveled off (depending on the metric) which provides some optimism going into next year.

The large buyout firms mostly remained on the sidelines through the first half with the exception of participation by Blackstone and Carlyle in the BankUnited deal or JC Flowers (depending on your definition of large buyouts) in the IndyMac transaction. All other deal values were $650M and below with a sharp drop off to the $250 range. Not only was overall deal size low, the volumes, even for the smaller mid-market firms, were in the 1-2 range for most firms. [note- total values for a club deal counted fully for each participant regardless of equity percentage] Exit volumes favored venture capital firms (as expected) with Blackstone having the largest exit  value by 3x to closest firm’s combined total due to the Stiefel Laboratories sale to GlaxoSmithKline for $3.3B. To sum it up, a few large deals dominated top positions since the balance of the transactions were small value or number. Even if Blackrock would not have swept up Barclays Global Investors from CVC Capital, the numbers would still be poor.

This is not to say all parts of the world have suffered equally. Yes, global M&A is down, but Asia is showing a faster recovery with numerous private equity placements going into China and India both in addition to KKR’s $1.8B purchase of Oriental Brewery in South Korea. Some may call it a flight to quality, however I feel it is simply a flight to opportunity as North America, specifically the US economy, moves along in fits and spurts.

Posted by Jeremy Kloubec at 03:40 PM | Permalink | Comments (0) | TrackBacks (0)