The private equity industry has given back $ 230 billion to its investors in 2013 or nearly half a trillion ($ 469 billion) over the last two years, according to Pitchbook, a private equity data provider. The last 2 years have been favorable to the private equity industry wanting to return money to its investors. The best example may well be Apollo. “There’s a time to reap and there’s a time to sow”... 

The private equity industry has given back $ 230 billion to its investors in 2013 or nearly half a trillion ($ 469 billion) over the last two years, according to Pitchbook, a private equity data provider. The last 2 years have been favorable to the private equity industry wanting to return money to its investors. The best example may well be Apollo. “There’s a time to reap and there’s a time to sow”, Apollo’s colorful and somewhat contrarian Leon Black said in 2013, “We’re selling everything that’s not nailed down”. Black has had reason to be boastful  with  excellent  returns and the largest buyout fund raised in the last few years. Apollo has collected $18.4 billion, including $880 million out of its own pocket, for its next fund, the biggest since the phrase “irrational exuberance” was coined. One of the main reasons investors are so enamored of Apollo is the rapid distribution of money  back  to  them.  Apollo’s latest fund was raised in 2008 and has now returned nearly all, 85.5%, of the original dollars invested by that fund and will return as least as much again to its investors. This is excellent and compares favorably to the rest of the buyout industry, with median distributions of roughly 27% for buyouts done by funds that started in 2008, or with 53% for the best quarter of buyout funds. These (DPI) numbers were taken from Preqin, a specialized data provider. The ratio DPI stands for “Distributed to Paid In” and measures the proportion of the invested monies of a fund that have been distributed or returned back to investors in that fund.

One important source of all this money was the stock markets; some of the very large private equity deals have gone public and have performed on average very well. Examples are the hotel group Hilton, which Blackstone put on the market, raising $ 2.7 billion after owning and improving it for six years. The largest IPO with $ 2.9 billion was a group with the not terribly sexy name GP Holdings, active in transportation, storage and marketing of crude and natural-gas liquids; this was an investment of First Reserve, a group specialized in energy buyouts. Warburg Pincus’ Antero Resources raised $ 1.8 billion in another energy IPO. A very recent example was seen on the European slopes where skiers kept warm in their Italian Moncler down jackets, a very successful Eurazeo and Carlyle investment, which went public at the end of 2013 in Milan and gained 47% on its first trading day. Other large European IPO-s were the UK’s Royal Mail and Merlin Entertainment, the London based theme park operator of Blackstone and CVC.

A relatively new feature of private equity backed IPO-s has been less aggressive pricing and piecemeal introductions. In the past IPO-s were often priced as high as possible and private equity floated as much as possible in one fell swoop. Nowadays there is room left for price to increase after the IPO and for successive secondary share offers. Apollo’s LyondellBasell did ten secondary share offers after its IPO, each at a higher valuation. KKR did nine of which only one was lower than a previous one. Expect many more public listings of large buyouts in 2014 if stock markets hold up.

The second source for private equity’s largesse was the very generous debt market. Extremely low interest rates and a willingness to re-finance larger companies, especially in the USA, has enabled buyout houses to re-leverage their investments and to distribute large sums of money to their investors. Europe has been less active, but did benefit from the same trend. Even though many parts of the western economies struggle to raise debt, others that fit creditors’ criteria hardly ever had it so good. Interest rates are low and many larger buyouts have been able to refinance their existing debt at very favorable terms. The “wall of debt” created in 2006 – 2008 with re-payments coming due 5 years later has not materialized. In many cases repayments have been pushed back and borrowing costs lowered. Part of the re-financing has also been used to return money to buyout investors. The largest buyout related loan in Europe in 2013 was the € 3.3 billion syndicated loan for the takeover of the Dutch DE Master Blenders, active in coffee and tea, by JAB Holdings. According to Thomson Reuters Western Europe’s leveraged loan volumes rose to $ 191.5 billion, which were the highest since 2007.

However, the workhorse of private equity exits remains the “trade sale to a strategic buyer”. More than half of all buyout exits are typically made through sales to buyers who see strategic benefits (52% in the first 9 months of 2013 according to Preqin). During periods of increased IPO activity, trade sales also pick up, as companies with higher share prices have a greater tendency to splurge in acquisitions. A good example is eye-care company Bausch & Lomb, which was bought by Valeant Pharmaceuticals from Warburg Pincus for $ 8.8 billion nearly tripling what it paid in. If strategic buyers pay generously to buy companies that private equity builds, it must be doing something right.

 

Hans van Swaay
Partner
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