Many leading private equity firms are raising tens of billions of dollars for new funds in spite of declining returns on old deals and growing difficulties in making additional acquisitions.
The amounts being raised are comparable to the fundraising efforts at the peak of the private equity boom in 2006 and early 2007 and suggest ample liquidity remains in the financial system in spite of the market turmoil.
While pension funds have scaled back their contributions to private equity firms in the face of market setbacks, investors say, sovereign wealth funds have become relatively more important investors in the sector.
“It feels harder and it takes longer but the allocations are still being made,” said Marco Masotti, a lawyer with Paul, Weiss, Rifkind, Wharton & Garrison in New York.
People familiar with the firms say Apollo is close to the end of its $15bn fundraising, TPG plans soon to conclude the first stage of its $15bn fundraising, and KKR is putting finishing touches on a €6bn ($9bn) European fund.
Bain Capital is also raising almost $20bn between North American and European funds. Blackstone, a later starter, is just beginning to raise its latest $20bn fund.
The fundraising round is proceeding even though the chaos in the debt markets has complicated the traditional private equity strategy of buying companies with a modest slice of equity and loads of debt. In contrast with the $40bn deals being plotted a year ago, acquisitions worth less than $2bn are the norm now.
Investors are feeling the pain because they are not receiving cheques back from private equity firms – either with profits from sales of holdings or generous dividend payments from portfolio companies.
Investors are also weeks away from receiving annual reports from private equity firms that are likely to contain gloomier news than is being made available.
Investor relations executives at some firms say they expect the annual reports, to be sent in April, will include writedowns on investments – an assessment shared by Monte Brem, head of StepStone Group, a consultancy in La Jolla, California.
A case in point involves Free-scale Semiconductor. In their offering documents, current to September 30, TPG and Blackstone value their investment in Freescale at the price they paid – even though the company’s debt today trades at about 82 cents on the dollar, suggesting the value of that equity is impaired.
Private equity firms say the discount reflects market conditions, not Freescale’s circumstances. However, when annual reports appear, Freescale is expected to be marked down dramatically, reflecting problems in its operations, a declining cash flow and a heavy debt load.
Mr Brem believed investors continued to embrace private equity because they had learnt “the best time to invest is when things look like they are going wrong”.
No comments:
Post a Comment