Private equity: The private equity industry was challenged in 2009. Deal flow remained slow, portfolio companies struggled and investors in buyout funds scrambled to meet their cash commitments. Rebounding bond and equity markets helped some firms in the second half. But the rally was too late for others. As the industry enters a new decade, expect the divide between the sheep and goats of the buyout world to widen.
The industry will still be much duller than its 2007 height. Some mega-LBOs aren’t healthy and their lenders may need to write off big loans. So banks will be hesitant to lend to new deals. Private equity firms may struggle to sell companies too. Already public market investors have been selective about taking up shares of private equity-owned firms. Corporate buyers have yet to show an interest in the huge companies in private equity coffers, opting for manageable targets as the market rebounds. Companies already owned by private equity will still struggle with the lackluster economy. Some firms have bought back debt or refinanced their investments, which helps eliminate or delay problems. But some deals, particularly in Europe where the high-yield bond market is smaller, haven’t been so lucky. Furthermore, banks that were until recently struggling on multiple fronts may be less lenient when it comes to renegotiating existing buyout loans today. Add it all up and the buyout industry will have a harder time making money. For a few firms that have struggled for some time, this could spell the end.
Likewise, newer entrants – those that raised funds from 2005 in particular – may struggle to convince investors that mediocre results were a fluke. Even the established buyout groups won’t get a free pass. Britain’s Candover has been around for nearly 30 years yet is winding down its latest fund. It will close if it can’t raise a new one – which doesn’t look promising. Some other long-established firms, like TPG and others, have already cut funds and refunded fees. Concessions like these to limited partners may continue next year if private equity firms have a tough time booking gains and returning cash. The largest pension fund in the United States, Calpers, has endorsed calls for lower fees. That sets precedents that other big investors are likely to demand.
Attrition in the industry could be good for stronger firms like Blackstone. The publicly-traded group led by Steve Schwarzman has some problems. Blackstone has a big portfolio of office properties whose values almost certainly have taken a hit in the commercial real estate rout. But Blackstone has been able to sell other assets at a profit. And it plans to continue doing so: Travelport and Merlin Entertainment are poised to go public in Europe next year. Likewise, Kohlberg Kravis Roberts and Apollo will likely have access to new financial resources and a public-market currency when they complete their full public listings on the New York Stock Exchange in the coming year.
Overall a smaller industry is no bad thing. The easy money of the credit bubble allowed too many firms to raise too much money and do too many duff deals. As the overall poor returns from the boom become clear, investors will necessarily become more selective in distinguishing the industry’s sheep from its goats.