PE HUB Wire Highlights, 1.10.19


Photo of Luisa Beltran, PE HUB Senior Editor, courtesy of Buyouts Insider.

New Mountain said to seek $1B fund to buy minority co stakes; Penfund mid-market fund raises C$1.15B; Are div recaps worth the pain?

We’re now in what seems like day 2000 of the partial government shutdown. Hubsters, I don’t have children but many of you do. How do you handle temper tantrums?

Henry McVeyKKR‘s head of global macro and asset allocation, says public equities are now pricing in a recession, with liquid credit not far behind. According to his report, “The Game Has Changed,” McVey said that for the first time in three years, he is now moving to an overweight position in public equities, including the U.S.

KKR is also cutting leveraged loans overweight to zero, he said. “After over two years of leaning-in to Leveraged Loans as a pure play idea, we are reducing this overweight to zero from three percent and a benchmark weighting of zero,” McVey said in the report. “Leveraged Loans have had a great run in recent years, as their floating rate feature and strong technical flows have served this asset class well, particularly relative to High Yield.” See more of the report here.

Dividends: Yesterday, I asked your thoughts, Hubsters, about dividend recaps and whether they were worth the trouble. Here are a couple of the responses.

Leonard said: “Recaps are an important selling point for any strategic exec. They must know there’s a workload associated with it. They universally love [the] thought of actually being able to have some liquidity before the end of a 5-7 year hold.”

David, who works at a PE pledge fund, said: “Recaps works fine for us in the smaller segment, but clearly you need a bank that want to play the game. It doesn’t make sense to keep the capital in the company (unless it can be used for growth, add-ons, etc.) just because LP’s will not ‘accept’ it! And why sell a business if you can hold it for another 3-4 years and make additional 2-4x MM on top of the 2-4x MM you take out when doing the recap. In other word, keep a good business and recap it continuously. The only problem is that the traditional PE doesn’t allow that with closed-end funds. You may, however, face two problems as traditional PE: 1) LP’s want capital gains and not dividends for tax reasons and 2) to avoid dividends you have to sell the company to oneself in a new Newco structure, which is typically not allowed in your LPA. So be your own LP and problem is solved…but difficult when/if you want to think big!”

Milana Vinn, our brand spanking new Buyouts reporter, has a story on SFW Capital. Just a few months ago, SFW posted a whopping return, nearly 9x, on its sale of Spectro Scientific. The firm has now made back most of its investment in Gerson Lehrman Group, which paid out a dividend. See here story here.

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