Subscribe to this page
EquityFC Blog
Showing entries posted in June 2008
Showing items 1 to 8 of 8
Previous |
Another counter-cyclical MBO | 23 June 2008
This is confusing: right at the time when deal-doing is thought to have been hit by economic woes and the festering sore of limited access to debt, we keep getting good news. Take this item about the £16m MBO of Rock Asphalte. Sounds terrific: MD and FD team up to buy the business with PE backing, a classic lower-mid-market MBO. And get this: the company provides structural waterproofing for construction projects. OK, so there's the 2012 Olympics and a few other major projects on the go. But government spending is said to be stuttering and the property market (and hence housebuilders and commercial property firms) is on the rocks. Looks to me like things maybe aren't as bad as people are making out - and that there are great opportunities out there for management and backers keen to exploit genuine business openings.
Are you "glass half full"? | 13 June 2008
If you're interested in working with private equity-backed companies during a period of slow economic growth, it's probably wise to highlight your turnaround credentials. The good news is that FCs and other finance function folk are critical to managing distressed businesses. Driving cash is important to PE backers at the best of times - in a downturn, it's vital. So have sharp, creative, disciplined financial control is a must.
Even better news is that all the cash sloshing around the PE industry is creating huge interest in buying distressed assets while they're, er, still distressed. OK, so much of the headline-grabbing stuff is about aggressive, multi-billion dollar PE funds buying distressed loans, other financial assets and banking stocks. But there will be plenty of opportunities in the mid and smaller end of the market for finance guys who can help their backers turn a company round.
Watch out, too, for corporate balance sheet woes. Right now, things aren't too bad, in general, for BigCos. But if the downturn is prolonged - and it might be - there's a good chance they'll want to sell off assets. The thing to remember is that if you're a divisional controller looking for an MBO opportunity, you might need to sell Group the idea that their glass is half empty. But the moment the PE backers turn up, that glass needs to be half full - and rising.
Even retail is selling | 12 June 2008
Gosh: amid all the uncertainty - recession? Prolonged credit crunch? New private Equity disclosures? - there are still plenty of deals being done. Noteworthy today is Phoenix Equity Partner's purchase of LK Bennett. Linda Bennett sold up for something less than £100m (although somewhat more than £80m - who said PE was getting more transparent...?), which sounds like a lot less than the £150m she was hoping for.
This is significant for three reasons. First, it shows that PE firms are still up for taking risks, even in a sector like retail where any further economic downturn is likely to bite hard. LK Bennett is upper-mid market fashion retailer, which makes it doubly vulnerable to lower spending by middle-class ladies should the economy tighten. Second, it shows that deals are getting done despite all the credit hoo-ha. Yes, mega-LBOs are rare, but £100m ain't chicken-feed. Third, although Linda's cashing out at a much lower level than she wanted, even the low-ball estimate of £80m is £5m more than she was offered for the business back in 2004. OK, we may be talking about more stores - but it's a sign that things aren't nearly as bad out there as some headlines would have you think.
Now all we need to know is whether the management team have a stake (they must do, surely). And whether Phoenix might be scoping out a new FD or FC. Chinese walls here at EquityFC.com mean that even if there is a mandate out there, I wouldn't know about it...
So what is going on with debt? | 9 June 2008
We all know that the volume and value of big leveraged deals has taken a hit in the credit crunch; and that Big Debt is harder to come by. Or is it? According to this post referencing the Financial Times, S&P says the amount of debt in European deals is actually increasing. Which begs the question: why? Why would any bank bump up leverage levels at a time when defaults are likely to go up and their own balance sheets have already taken a pounding? Perhaps they're doubling down, too (see below).
UPDATE: And over in the US, portfolio companies are starting to feel the pinch as development finance fails to show up. In the mid-market, and in the UK where the economy is still growing, this might not be such a big issue. But FDs and their controllers running PE-backed businesses might want to make sure they have a "plan B" in the bottom drawer, just in case their backer has some issues about scheduled funding.
UPDATE II: How would you define "small"? I'll bet it's a bit smaller than $1bn to $2bn deals. But that, apparently, is the type of small deal that will save PE in the US...
More on the big LBO "double down" | 5 June 2008
I like blackjack (the casino variety, that is - although the penny chews were nice, the cosh is rarely a practical weapon). And one of the critical strategies in the game is doubling down - deciding to re-wager on an initial deal or 9, 10 or 11. It's hard to not to see the big LBO funds' purchase of their own debt from troubled banks as something of a double down.
Yes, it looks like the banks are offering preferential treatment because they're in trouble - like a dealer tempting the player to stake more when it looks like they have a great hand in the offing. But the dealer knows there's only one card to come after a double down - the player can't keep going indefinitely.
The banks, like the house in the casino, play a conservative game when it comes to risk. They might take a loss on the loans, but by shifting them off the books, they're limiting that loss. For the PE fund's investors, if the company goes south (in a recession, say...) they lose not just their equity stake - they take a hit on the debt, too. If the company pulls through - the dealer places an ace on that ten - the double down plays off. But if the dealer puts a two on that ten, it'll be the banks laughing - and the fund investors (not, note, the PE managers...) walking away from the table with a heavy heart.
John Gapper's column in the Financial Times today touches on this subject without resorting to such a tortuous analogy.
PE shakeout: good thing, too | 4 June 2008
Check out this interesting post from The Prince of Wall Street. Key lines: "We should welcome the shakeout because it will make distinctions between different private equity funds much more apparent. The funds that claim they add value to operations will have to prove their claims. Funds that have been getting by based mostly on leverage will be tarnished. Funds that generate true alpha by picking the right companies to LBO will shine in this downturn and will be rewarded with more funds in the future."
Not big, not clever | 4 June 2008
Actually, the news that private equity funds are buying back the debt they borrowed to do leveraged
deals from banks that no longer have balance sheets strong
enough to support the loans probably classifies as both "big" and "clever".
Especially when you factor in the "synthetic leverage" (I don't understand it - and if you're an FC who does, why aren't you an investment banker?) that some of them are using to make a fat return on yet more financial engineering.
No sign, of course, of this kind of thing happening at the smaller end of the market. Unlike those leverage boys, banks never got round to offering crazy-cheap billions for modest development capital deals and mid-market MBOs. But while I have reservations about complex financial instruments seemingly designed solely to benefit PE funds - they look like the financial equivalent of the pearl-handled revolver for the banks - this is a clear sign that there are a lot of smart people in private equity. It remains an interesting game for both investors and management at portfolio businesses.
Ready for the upturn | 2 June 2008
I feel something in the air - and I think it's an upturn in mid-market private equity activity. Why? Three reasons.
First, there's still loads of money sloshing around PE funds. Terra Firma boss Guy Hands has even suggested giving some of it back to investors (well, telling them it's no longer "committed", anyway). But other options include changing tack and that means looking for solid, long-term value plays. It's harder work than the financial engineering/quick flip strategy - and there are more viable targets in the smaller end of the market. They won't soak up so much of the cash - but they offer more interesting growth possibilities, and that's where the returns will come if leverage is off the table.
Second, people are learning to live with the credit crunch. And that means more equity-only deals. Sure, the big funds and consortiums can probably still stalk the FTSE 350. But many PE firms are going to look at biting off what they can chew without bank support, and that means the smaller end of the mid market.
Finally, there's more management upside. In a giant business, a PE firm could reasonably tackle the group board and maybe a few key managers. And that's fine, but they're never going to be able to drive operational change throughout the organisation. But in mid-market investments, not only can a PE fund manager get to know and influence the whole business, they can also realistically bring in support for management in key areas. Better yet, as they hone their portfolio management skills, they can find big savings in consolidating service functions and supply agreements across their investments. I know one mid-market player who's saved all his companies a chunk of cash by negotiating pan-portfolio insurance deals, for example.
Good reasons, then, to keep an eye on PE-backed opportunities, despite the economic and financial uncertainties.