Thomas Meyer of Deutsche Bank Research just published a study titled Obituaries are premature. The study provides an overview of what has happened over the past few years and why the current environment is a good entry opportunity. The focus of the study is on buyouts with particular emphasis on activity in Europe.
Excerpt:
The financial crisis is not sparing the private equity industry. High uncertainty and a dearth of debt financing are making acquisitions difficult. The volume of new buyouts has slumped dramatically. The recession is hurting private equity (PE) funds’ highly leveraged portfolio companies particularly hard. Asset write-downs and lower returns are likely. Last year, European buyout funds lost over 25% in value on average.
But obituaries are premature. Two qualities help the private equity industry in the present crisis. Firstly, many (but not all) PE funds have considerable capital reserves. They can use these reserves to support portfolio companies or to seize new investment opportunities. Secondly, more and more companies are in need of restructuring. Here, private equity can leverage its traditional strengths.
Interesting tidbits:
The performance of top quartile funds has been higher when GDP growth rates are lower. More specifically, funds that started to invest when GDP growth rates were low had higher IRRs than funds that started to invest when GDP growth rates that were high.
In 2007, the market value of portfolio companies held by PE firms was equivalent to somewhere between 2 and 3 percent of the total market capitalization of public companies.
In 2007, portfolio company sales from one PE firm to another PE firm accounted for over 30 percent of all exits in Europe.
The correlation coefficient between the spreads of U.S. LBO loans and high-yield spreads is 0.9.
In 2008, deals in China and India accounted for 8 percent of the total number of buyout targets.
The study estimates that capital reserves (aka overhang, unfunded commitments) of private equity firms is currently somewhere between $500 and $1,000 billion. This is larger than estimates I have seen elsewhere, but is probably more reflective of the amount of dry powder out there.
Missteps:
Some of the analyses focus exclusively on top quartile funds. I very much dislike any analysis that omits 75 percent of the data. There are times where it is useful to study top performers, but it happens all too frequently in PE research. Portfolio managers need to know about the good, the bad, and the ugly.
Bottom line:
This study is an interesting read. The tone is dispassionate which is appropriate for this type of content. I particularly liked that the commentary focuses on the long-term and that it highlights the importance of private equity’s role as a governance instrument.
Obituaries are premature, a Deutsche Bank Research study
Thomas Meyer of Deutsche Bank Research just published a study titled Obituaries are premature. The study provides an overview of what has happened over the past few years and why the current environment is a good entry opportunity. The focus of the study is on buyouts with particular emphasis on activity in Europe.
Excerpt:
Interesting tidbits:
Missteps:
Bottom line:
This study is an interesting read. The tone is dispassionate which is appropriate for this type of content. I particularly liked that the commentary focuses on the long-term and that it highlights the importance of private equity’s role as a governance instrument.
Hat tip to James Burron for sending me the study.