Private-equity firms tell investors that the years following recessions offer the best opportunity to make money. This time may be different.
Prices paid in leveraged buyouts last year, at the tail of the worst financial crisis in more than seven decades, are about 25 per cent higher on average than in 2001 after the dot-com bubble burst, according to Standard & Poor’s Leveraged Commentary & Data. Some transactions in the past three months are valued at levels not seen since the peak of the market in 2007. In addition, buyout firms are using more equity in their deals, which may further limit returns for investors.
Firms are eager to invest a record $507 billion in cash raised before the crisis, triple the comparable figure in December 2001, according to London-based researcher Preqin Ltd. That so-called dry powder, combined with a scarcity of assets for sale and recovering equity markets, means bargains are hard to find, executives at some buyout firms say.
Those seeing another “golden era” are talking “nonsense,” said Christopher O’Brien, New York-based president for the US and Europe at Investcorp Bank BSC, a buyout, hedge-fund and real estate firm that manages $17.6 billion. “There’s a lot of pressure to put investors’ money to work now, and valuations are still high. It’s a seller’s market.”
Buyout firms such as Blackstone Group LP and Carlyle Group are pointing to returns achieved in the years following previous recessions to appeal to investors. Funds that started investing in 1992, after the US savings-and-loan crisis, delivered a median 21.2 per cent annual rate of return, and those that began in 2001, after the dot-com market sell-off, yielded 24.5 per cent, according to data compiled by Preqin.
The best-performing 2001 funds had annual rates of return of up to 40 per cent, a fivefold increase of their backers’ investments in five years. Yields went as low as 6.9 per cent in 1998. The 2007 funds, with 34 per cent of capital invested, are showing a 17 per cent annual rate of loss, according to Preqin.
It is “a wonderful time to buy assets,” Blackstone Chief Executive Officer Stephen Schwarzman said in an interview at the World Economic Forum in Davos, Switzerland, in January. His New York-based firm is seeking to raise $10 billion for a new global buyout fund, according to a person familiar with the effort.
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“Valuations cycle up and down,” Schwarzman said. “They get as low as around five times cash flow. In the most frothy period that can get up to 10 times. There were some silly deals done at 12 times, and right now we’re in the five-to-seven-times zone,” he said.
US private-equity-led transactions in 2009 were valued at 7.7 times earnings before interest, tax, depreciation and amortization, the usual benchmark for valuation in the private- equity world, according to S&P. That compares with six times Ebitda in 2001, when the technology bubble burst, and is more than in 2004. In Europe, buyout firms paid 8.9 times Ebitda last year compared with seven times in 2001. The European multiples are about the same as they were in 2006.
Prices in Europe are “almost as high as they’ve ever been,” Blackstone President Tony James said on a call with reporters Feb. 25. “When there’s something in the right range, it’s very competitive.”