Archive for the ‘TPG’ Category

TPG’s Bonderman Sees Mega LBO Coming – $10-15B Deal

Friday, March 4th, 2011

David Bonderman, the founder of TPG, claims that large deals are back, and they are back to stay.  Fueled by cheap credit and impatient investors, mega LBOs will return, and according to him, TPG will be at the forefront.  TPG has not been shy of these deals in the past, leading the $44 billion takeover of TXU with Goldman Sachs and KKR in 2007.  Surprisingly, investor memories are short, and the same leverage multiples and weak capital structures we saw in 2006 are emerging today in the private equity industry.  As takeover multiples rise, so will leverage.  And funny thing is, banks are willing to provide it more than ever.

“Larger deals are back,” Mr. Bonderman said Thursday at the SuperReturn conference in Berlin. “It is as I said before absolutely possible to do a 10-to-15-billion-dollar deal now. It might not be one you want to do. It might not be one you should do. But the capital is available.”

Recent private equity deals have been valued at $5 billion or less, a far cry from those of the 2006-2007 buyout boom. Indeed, in 2007 TPG teamed up with KKR and Goldman Sachs to buy the energy company TXU for $44 billion.

But money for private equity deals dried up in the financial crisis and the recovery so far has brought only smaller deals.

Among those deals is the $3 billion leveraged buyout of the preppy retailer J. Crew by TPG and Leonard Green & Partners, a deal that  was approved by the company’s shareholders this week.

Along with larger deals, Mr. Bonderman and other private equity executives at the SuperReturn conference were all abuzz about the potential of emerging markets.

Mr. Bonderman called emerging markets the “flavor of the month” and predicted that initial public offerings in emerging markets would represent an even larger proportion of the deals in years to come.

“Interesting enough, if you survey folks like all of us in this room, everybody sees emerging markets growing just about as fast as mature markets in the deal business, which of course has never been the case before now,” Mr. Bonderman said, adding that the upside potential for deals remained high.

Growth in emerging markets is being fueled by China’s booming economy, which could even be on the verge of a bubble, as well as broader trends, including the rise of the middle class in those regions, Mr. Bonderman said.

“Even Brazil is a China story,” Mr. Bonderman said, adding that the emerging middle class would add trillions of dollars to emerging economies, particularly on the consumption side. This should lead to a “huge rebalancing of how the world sees itself,” he said.

Mr. Bonderman was asked about TPG’s recent exit from the Turkish spirits company Mey Icki , which TPG acquired in 2006 for about $800 million and sold in February for $2.1 billion.

He responded: “We thought it was a good opportunity, and it turned out to be. We would have taken it public had Diageo not shown up. As in any other place, if you can sell the whole business, you’re better off than taking it public, where you have to dribble it out even though you might get a nominally higher value. We like Turkey as a place to invest and we’ll be back.”

On the sovereign crises, such as the one in Greece, Mr. Bonderman said: “When governments are selling, you should be buying. And when governments are defaulting, we should look at that as an opportunity. Prices are always lower when the troops are in the street. A good default, like Portugal or Greece, would be very good for the private equity business. Might not be so good for the republic, but it would be good for us.”

Private Equity Firms Can’t Find Places to Invest $503 Billion

Thursday, March 11th, 2010

Surprisingly, buyout firms are having difficulty finding good companies to invest in because of regulations and the perceived risk still in the market.  There is approximately $503 billion in dry powder just waiting on the sidelines, waiting to be invested.  Berkshire Partners still does not know how to invest 40% of the $3 billion fund it raised in 2006.  TPG recently released investors of $2 billion in commitments.  Harvest Partners, a NY based middle market fund still has to invest 60% of its fund!
According to Ms. Thornton, Ms. Alesci, and Mr. Kelly of Bloomberg, ” Buyout funds sitting on half a trillion dollars committed by investors may need more than a decade to put the money to work if mergers and acquisitions continue at the current pace.

Firms led by Blackstone Group LP and KKR & Co. announced $87 billion in deals over the past 12 months, according to data compiled by Bloomberg. At that rate, it would take until the middle of 2021 to invest an estimated $503 billion in unspent money, assuming they borrow half the purchase price. Firms usually have three to six years to deploy commitments.

“Unless things really change, larger funds will be especially hard pressed to put their money to work,” said Steve Kaplan, a finance professor at the University of Chicago.

The record amount of capital, most of it raised during a three-year boom that ended with the financial crisis, coupled with fewer and smaller purchases, means firms may have to ask for more time or release investors from capital commitments if they can’t put the money to work. Boston-based Thomas H. Lee Partners has three years left to invest almost half of a $10 billion fund raised in 2006, and London-based Permira Advisers LLP has until the end of 2012 to put $4.9 billion of a $12.2 billion fund to work, according to researcher Preqin Ltd.

“Investors only give the fund a particular investment period, typically three to six years, to invest the capital,” said Michael Harrell, co-chair of Debevoise & Plimpton LLC’s private-equity funds group in New York. “If you don’t use it, you lose it.”

‘Dry Powder’

The funds that may eventually face the toughest time are the industry’s largest, raised in 2007 and 2008. TPG has $15.3 billion left of an $18.9 billion fund raised in 2008, according to a person with direct knowledge of the fund. A European fund raised by CVC Capital Partners Ltd. in the same year has $11.3 billion left of $14.2 billion, according to London-based Preqin.

TPG and CVC declined to comment.

Of the $503 billion in unused capital, $86 billion is from funds raised between 2004 and 2006, Preqin data show. Funds raised in 2007 and 2008 account for $310 billion in so-called dry powder.

Palladium Equity Partners LLC, a firm that makes equity investments of $15 million to $75 million in the U.S. Hispanic market, has until the end of the third quarter to deploy about half of $800 million raised in 2004, according to a person with knowledge of the firm’s investments who declined to be identified because the information is private.

Harvest, Palladium

New York-based Harvest Partners, which specializes in buyouts of middle-market companies, has yet to deploy 64 percent of $815 million it raised in 2006, according to the firm. The fund’s investment period ends in 2012.

“A lot of people are in this position,” said Robert Finkel, managing partner of a Chicago-based private-equity firm Prism Capital and author of “The Masters of Private Equity and Venture Capital.”

Spokesmen for THL, Permira, Harvest and Palladium declined to comment on their funds and how they plan to invest the capital.

By rushing to deploy billions of dollars, buyout firms are driving up price tags. Prices paid in leveraged buyouts last year, after the worst financial crisis in seven decades, were about 25 percent higher on average than in 2001 after the dot- com bubble, according to Standard & Poor’s Leveraged Commentary & Data.

Driving Up Prices

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.”

Blackstone and KKR, the largest publicly traded private- equity firms, have told investors they see a pick-up in the pace of buyouts. Between the second quarter and the fourth quarter of last year, the value of deals doubled to $31.9 billion. Still, deals announced in the past three months, at $23.9 billion, remain below the $25.3 billion in the same period a year earlier, data compiled by Bloomberg show.

CCMP Capital Advisors LLC is among those that have returned to the buyout market. The New York-based firm on March 8 agreed to buy database marketing company Infogroup Inc. for about $463 million in cash. When the deal is completed, CCMP will have deployed half of its current fund and must allocate the remainder by 2012, when the investment period ends, according to the firm.

Returning to Market

“The market has just returned to a level where transactions can happen because they’re a fair reflection of the asset values,” CCMP Chief Executive Officer Stephen Murray said in an interview.

CCMP offered $8 a share for Infogroup, a discount of 2 percent compared with the previous closing price of $8.16. The price values the company at 9.2 times earnings before interest, tax, depreciation and amortization. The average for U.S. private-equity-led transactions in 2009 was 7.7 times Ebitda. Including a debt restructuring, the Infogroup deal is valued at $635 million, or 12.6 times Ebitda, according to Bloomberg calculations based on company data. Excluding restructuring and one-time charges, CCMP paid 5 times Ebitda for Infogroup.

Some funds say their investors are glad they have held on to their commitments during the buyout boom, when rising prices hurt returns. Boston-based Berkshire Partners LLC has not yet decided how to invest 40 percent of a $3.1 billion fund it raised in 2006. The investment period ends in 2013.

‘Bunch of Blanks’

“Our investors care most about making good investments, not the quantity. Our investors give us a lot of credit for not investing as much as many others did in 2006 and 2007,” said Kevin Callaghan, a managing director of Berkshire Partners. “You’d rather have dry powder than a bunch of blanks.”

New York-based Diamond Castle has $479 million, or 26 percent, of $1.82 billion it raised in 2005 that has not been deployed. The firm says it’s keeping commitments in reserve for portfolio companies’ needs.

“It is not unusual for private-equity firms to reserve a portion of the committed capital for follow-on investments,” Diamond Castle senior managing director Ari J. Benacerraf wrote in an e-mail.

New York-based JLL Partners has $200 million, or 13 percent, left of $1.5 billion raised in 2005 and an investment period that ends at the end of the year. Paul Levy, a founding partner, said the fund is looking at potential acquisitions and has reserved capital to invest in its existing portfolio companies.

Venture Capital’s Lesson

If funds “have a lot of money that’s not invested, they’ll ask for an extension,” Levy said in an interview.

The industry’s predicament has parallels with the venture capital industry in 2002, according to Josh Lerner, a professor of investment banking at Harvard Business School in Boston. By 2002, more than 20 venture capital firms had returned near or in excess of $1 billion, because acquisitions had slowed and shrunk in value compared with the peak of the Internet bubble when the money was raised.

“Like the venture capital firms in 2002, the pace of buyout firms’ deals has become slower and the size of their deals has become smaller,” said Lerner. “It’s a real issue for private-equity firms.”

Announced buyouts reached volumes of as much as $43 billion in 2007, when Goldman Sachs Group Inc., KKR & Co. and TPG banded together to buy the largest power utility in Texas, known at the time as TXU Corp. That’s 8.6 times the $5 billion that TPG and the CPP Investment Board agreed in November to pay for IMS Health Inc. in the largest buyout of the past 12 months.

Releasing Investors

The average leveraged buyout in the last three months has shrunk to $185 million from $646 million in 2007, according to Bloomberg data.

Fort Worth, Texas-based TPG has already released investors from $2.1 billion of commitments to a $4.6 billion fund raised in 2008 to invest in financial institutions. The buyout firm decided there were fewer opportunities to invest in financial institutions in part because of regulations, according to a person familiar with the firm.

Some older funds have also released investors from their commitments or asked for extensions of the life of their funds. New York-based buyout fund Vestar Capital Partners, with $7 billion of capital committed to its funds, cut commitments to a $2.48 billion fund raised in 1999 by 2 percent at the end of last year. The firm had kept 6 percent of the commitments for add-on investments or other purposes, according to Vestar spokeswoman Carol Makovich.

“If I were an investor and it’s been 11 years, I’d say ‘enough already,’” said University of Chicago’s Kaplan.

KKR & TPG Interested in Purchasing CICC Stake from Morgan Stanley

Monday, March 1st, 2010

Over the past three years, Morgan Stanley has had difficulty managing its stake in CICC or China International Capital Corp., one of China’s most prominent investment banks.  Recently both TPG and KKR, two of the most powerful private equity firms in the U.S. announced that they were interested in purchasing this stake from Morgan Stanley.  Other firms, including Bain and J.C. Flowers had showed interest in 2008, but valuations for too low at that point for Morgan Stanley to sell.  Morgan Stanley will now be able to start its own investment bank in China without having a conflict of interest.

According to Bloomberg’s Cathy Chan, ” TPG Capital LLP and Kohlberg Kravis Roberts & Co. are in final talks to buy Morgan Stanley’s stake in China International Capital Corp., the first Sino-foreign investment bank, for more than $1 billion, said four people with knowledge the matter.

The U.S. private equity firms plan to equally split Morgan Stanley’s 34.3 percent holding in CICC, the people said, asking not to be identified because the talks are confidential. Bain Capital LLC lost out in bidding for the stake after offering less than $1 billion, one person said.

Selling the stake will allow Morgan Stanley to build its own investment bank in China after being a shareholder in CICC for a decade without having management control. It’s the bank’s second attempt to dispose of the stake, after talks with buyout firms fell apart in early 2008 on disagreements about price. New York-based Morgan Stanley invested $35 million in CICC when it was established in 1995.

“It’s a good profit and Morgan Stanley has been seeking to build its own platform as they can’t exert influence on CICC,” said Liang Jing, a Shanghai-based analyst at Guotai Junan Securities Co. “For the buyout funds, it’s nice choice of investment if you don’t mind being a passive investor.”

Morgan Stanley ceded management control in 2000 and CICC is now run by Levin Zhu, the son of former Chinese Premier Zhu Rongji.

China Fortune

The Chinese government allowed Morgan Stanley to invest in CICC in return for the expertise required to build China’s first investment bank. Elaine La Roche, the last Morgan Stanley- appointed head of CICC, stepped down in June 2000. The partners bickered about compensation, management and strategy and that lack of consensus worked against both firms, she said in a 2005 interview.

Wei Christianson, Morgan Stanley’s chief executive officer in China, declined to comment, as did Joshua Goldman-Brown, an outside spokesman for KKR in Hong Kong, and officials at TPG. The Wall Street Journal and Financial Times earlier reported the two buyout firms are close to acquiring the CICC stake.

Morgan Stanley signed an initial agreement in 2007 to buy a one-third stake in China Fortune Securities Co. Regulators declined to sign off on that venture, partly because Morgan Stanley already owned a stake in CICC, people with knowledge of the matter have said.

“They have to start building the business from scratch and it will take five years before they can expand beyond underwriting business if they decide to be on their own,” Liang said.

Top Underwriter

The China Securities Regulatory Commission said late 2007 that overseas-invested financial firms that had been operating for five years would be allowed to expand into brokerage services.

CICC was last year’s top manager of Chinese domestic equity offerings, rising from No. 2 in 2008, according to data compiled by Bloomberg. Domestic equity and equity-linked sales in China rose to 245.6 billion yuan ($36 billion) in 2009 from 232 billion yuan a year earlier.

Buyout firms including TPG, Bain Capital, CV Starr & Co., J.C. Flowers & Co. and General Atlantic LLC showed interest in the CICC stake in 2008, people familiar said at the time.

Goldman Sachs Group Inc. was the first Wall Street investment bank to gain approval to form a securities venture in China in 2004, followed by UBS AG.

Credit Suisse Group AG and Deutsche Bank AG ventures won approval to underwrite bond and stock sales in 2008 and 2009 respectively, while Macquarie Group Ltd. is in the process of getting regulatory approval. CLSA Asia-Pacific Markets, the regional broking arm of Credit Agricole SA, formed its China venture in 2003.”

~I.S.