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.”
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.
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.
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.