How are things looking from your vantage? Any big changes in the lock-down environment?
This was interesting out of KKR’s earnings call yesterday: Scott Nuttall, the firm’s co-president and co-chief operating officer, said he sees investment opportunities emerging around four themes (which from my view seem to be occurring simultaneously).
First, Nuttall sees opportunities in markets for traded equities and credit; second involves providing liquidity to companies in need. In this case, Nuttall used the example of KKR’s former portfolio company US Foods. KKR agreed in April to buy $500 million in convertible preferred equity in the company, which it acquired with CD&R in 2007. US Foods went public in 2016.
“When we have companies we know and like looking for liquidity, we can move quickly,” Nuttall said. “US Foods is one example.” KKR has several other situations like this in the pipeline, he said.
The third theme is portfolio companies adding on to their platforms. Add-on activity will increase as valuations come down and target acquisitions that firms have already researched to grow platform investments become cheaper. Here is an area I’ve seen a good amount of, just monitoring the deal-related press releases that roll through each day. Announced add-on activity, while slower than in normal times, seems to have keep a steady pace, especially among smaller firms.
Finally, the fourth emerging theme is around large companies, public and private, selling non-core subsidiaries as they look to pay down debt and potentially buy back stock.
These themes started in the traded market and are now moving into the private markets, Nuttall said. “Some of those are in areas we may have shied away from in the past because valuations were too high and started to come back our way,” he said.
KKR has deployed about $8 billion since late February, with $5 billion in credit investments and $3 billion in equity, Nuttall said. The firm raised about $10 billion over the last two months.
I spoke with a secondaries buyer who brought up the idea that the large deal syndicates that emerged over the past couple years in secondaries may not be a significant part of the market for a while. Large deals, including single-asset transactions, were getting done with lead buyers representing smaller pieces of the total price tag, and deal groups growing larger.
“It does put pressure on the ability to close those types of deals,” the buyer said. The question is, “can all that capital be there, is all that capital happy to move? If you have a large single asset deal that demands syndication, now you’ve got some form of risk in terms of, ‘how do I pull it together’? You don’t have a single buyer to make that call.”
Secondary activity is probably even slower than the regular M&A environment. Secondaries buyers and sellers are far apart on pricing agreement and it’ll be some time before either side gets visibility on how to mark assets in funds.
Small deals are still quietly happening, sources have told me. The expectation is that this challenged market will force some distressed sellers who need to quickly bail out of commitments to funds. This will likely happen among high net worth individuals, rather than institutions. Though selling could also come from sovereign funds experiencing commodity dislocation, the buyer said.
What kind of action are you seeing out of secondaries? Hit me up at email@example.com.
Here’s an emerging manager deal! Arcline Investment Management, which closed its debut fund on $1.5 billion in 2019, acquired Unitec Elevator from Pacific Avenue Capital Partners. Pacific Avenue bought Unitec Elevator in 2019, so it’s a pretty quick flip for the California firm. Read our news brief here on PE Hub.
LACERA’s CIO Jonathan Grabel said it has no plans to change its private equity program in the financial downturn, having learned lessons from the global financial crisis, writes Justin Mitchell on Buyouts.
“Looking back, LACERA would have been better served maintaining a consistent investment pace,” Grabel wrote. “The 2009 vintage year has been one of the best performing vintage years in private equity over the past two decades. Though we cannot predict the duration and severity of the covid-19 pandemic, we can learn from the past and sustain our deployment pace in both good markets and bad.”
That’s it! Have a great rest of your day. Hit me up as always with tips n’ gossip, feedback or just to chat at firstname.lastname@example.org, on Twitter or find me on LinkedIn.