Reporting from the Beverly Hills Hotel in sunny 90210, peHUB brings you a live and uncensored take on the state of left coast private equity. In a marathon liveblogging session, I’ll be covering a keynote address from Thomson Reuters’ Matt Toole, a keynote interview with Antony Ressler of Ares Management, and an LP panel.
1:14 The curtains have been drawn, and Matt Toole has taken the stage. Bring on the slideshow.
1:16 Missed the first two slides. He’s saying co-investments and local offices in Asia will lead cross border investments.
1:17 We haven’t seen a deal over $5 billion since July of last year. The decline in deals under that value is only in the 40 percentile, versus a 95% decline for deals greater than that.
1:18 PE is the only active acquisitive party in the retail space. No strategics, interesting.
1:19 Most of these facts are nicely supplemented by charts. I’ll have to see if that can be made available to post.
1:20 There’s an IPO expected this Thursday. What is it? It’ll be the first in 14 weeks!
1:21 Fundraising is only down 10% for PE and 12% for VC. No change in the number of funds since last year.
1:23 The room is actually quite crowded. There is a row of people standing around the back long-necking for open seats.
1:25 The average IRR for the top quartile is 30%. Toole says no wonder there’s such a demand for the best funds, despite the tough market for PE.
1:26 He says the goal for PE is to outperform public markets, even though he just said PE performance is usually correlated to public markets performance.
And he’s done. Keynote time. I’ll be interested to hear Tony Ressler’s take on Ares’ capital position, given the depressed stock prices for many of the BDCs.
1:30 Ressler is talking about how this downturn is different than the past two downturns. He says it might make it worse but doesn’t change the opportunities available. He says this downturn has more of a “survival” focus, where prior ones had a “survive and prosper” focus.
1:30 He says its critically important to improve the secondary loan market. There are no natural buyers of bank loans, he says. So we have forced selling without natural buyers.
1:31 Talkin’ TARP. The goverment’s low cost of capital can help people be in the buying of loans business and that’s important.
1:33 He says every pension fund he knows is coming into the market with new loan funds to buy them cheaply, since they have a mid-teens rate of return with zero leverage.
1:35 Ares Time! “We don’t consider ourselves a buyout fund.” Boiler plate explanation ensues.
1:36 “No disrespect to the audience” he says before telling us that he doesn’t think any one of distressed, junk bonds or leveraged loans is a good business, but their forces combined gives Ares the strength it needs.
1:37 Should CLO funds be worried? “The underlying assets with what makes things dangerous,” he says. Leveraged, quality, and diversification is what counts…
1:38 “A covenant lite loan to us, is a junk bond.”
1:42 dingdingding! “Sellers have not adjusted their price expectations.” There’s one. I’ll be taking a tally on the prevalence of comment throughout the conference. “But they will come down eventually,” he said.
1:43 What’s the new administration going to do? Carry taxed for sure, he says. Hedge funds need to be more transparent for sure, he says. Buyouts get glossed over.
1:44 The mod asks for any deals Ares has done that “might not look so smart now.” Now taking bets on whether he’ll answer that directly.
1:46 Still answering, still talking about successful deals. Come on, let’s hear some regrets.
1:47 He punts. “We have our bumps and our bruises,” but no companies facing the “third rail of private equity situations,” which means “portfolio companies having to have a bank discussion.”
1:49 Wow–he said Ares sent a letter to its 65 largest LPs telling them to invest in bank loans when they are in the low 70s. He says Ares has put $1 -$2 billion in the area, and that its a somewhat self serving letter, I’m not sure I understand how.
1:53 Q&A time. How loan does Tony think leveraged loan prices might go? He says he was one who thought 85 was attractive! Ha, ha. I think this topic will be repeated a lot over the next two days. He sais he believes it is fundamentally mismarked, for technical, forced selling reasons. It doesn’t mean there are fundamental changes in the company.
1:53 New question. Would you still like to buy the debt of your own companies if you could? He says no doubt.
1:55 Second Question from the first guy. Who are buying loans if there’s no natural buyer? Every meaningful distressed debt fund and hedge fund not terrified of redemptions is buying them, he says. Private investment managers are a current buyer, whether they’re a natural buyer, is looking at it. He hopes in teh near term, “for the country we live in,” its in all of our best interest to see LIBOR+ 3-4-500 spread off of LIBOR so that the average small company can access capital. “Bank debt is the blood that runs through the patient,” he said.
1:58 That rant ends with a finger pointed at mark to market.
Jim Beecher, the publisher of Buyouts, introduces the LP panel. If you’re still reading, this panel is usually a fan favorite. The panel features Mac Hofeditz of Probitas Partners, Fabrizio Natale of Capital Dynamics, Ethan Natale of Neuberger Investment Management, Michael Flaherman of New Mountain Capital, and Jon Madorsky of RCP Advisors.
2:01 One of the panelists is MIA! But they’re starting without him! Hijinks!
2:02 Mac of Probitas joins the panelists. Admits to “not being able to tell time.”
2:04 The amount of funds raised this year is double the amount of deals done! Yikes.
2:07 Michael Flaherman of New Mountain was formerly with Calpers. He says there are horror stories. Tell us!
2:10 Lets talk about LPs missing capital calls. Moderator asks, is there more smoke than fire on the LPs missing capital calls? Flaherman says yes indeed.
2:11 “People are confusing an allocation crisis with a liquidity crisis.” MF says.
2:11 RCP doesn’t view it as a risk at all. Natale agrees completely. We have officially debunked the myth of missed capital calls. They said LPs are often more scrutinizing on capital calls.They said after some scrutinization, some GPs are calling capital not for a deal but to test the system. It’s a small scale bank run!
2:11″However,” Natale says, “many of them are underallocated to cash.”
2:13 What about fund size reductions? A panelist hijacks the panel to ask. The panelists draw the parallel to VC funds reducing their sizes in the tech bubble. They say less funds did that then you’d think.
2:15 Hofeditz (the late one) says its LPs fault for over allocating to a long term asset class. Defaulting on capital calls isn’t thet solution they’ll find for it, though.
2:17 What’s a turnoff/turnon in this market? Viable strategies with not much leverage of course, Madorsky says. He says he’s had to recalibrate his gauge of what a healthy portfolio is today versus four months ago. For example, flat EBITDA is good now, last year it would have been bad.
2:18 “Too much optimism is a turn-off.”
2:19 THANK YOU! Natale says “Everyone is going to tell you they know how to add value.” Finally, someone else is as tired as I am of hearing that cliche, even if its true every time (that every GP in every firm knows how to truly add real serious tangible measurable awesome value.)
2:22 RCP Advisors just raised a fund and has all of it to deploy. However, the fund of funds’ pace has slowed from one fund per month to one per 4 or 5 months.
2:23 Flaherman says the bank loan strategy is a compelling one because of the depressed values. What did I tell you? Depressed loan values + secondary loans is going to be a big theme to come out of this conference.
2:25 The increase in allocations to PE over the last few years is driven by models that would say funds invest 100% of their money with private equity, Flaherman says. But now, its going to be harder to calculate and appetites will start to change. the “articificial smoothing” of FAS 157 could drive that change too.
2:27 Falkove is talking about secondary LP stakes. The beginning of this year saw a big jump in mega-buyout funds on the secondary market. “This is the most robust deal flow we’ve ever seen. We’ve seen a tripling of deal flow, but we haven’t been closing the most deals ever. Sellers have sticker shock when they hear the prices they can’t get.” The amount of people who have to sell is lower, but we’re putting out some pretty low pricing.
5:30 Mod asks how low? EF says the first half of hte year had a 15% discount, now its rare to see a fund with a smaller discount than 30%. For big buyout funds, there are a number we won’t even touch because of the number of zeros. One big well-known fund was offering a 65% discount! Holy crap. (Any guesses? Apollo?)
5:30 Late Mac weighs in. There’s not enough buyers to handle the secondary market right now. He says a 65% discount is GENEROUS! Wow. He says we’re seeing a 70-80% discount to funds of firms with names we all know. That is nuts. “I don’t think GPs appreciate that the LP capital market may shut down.” He says why would you, if you can get exposure in the secondary market for so cheap.
5:32 Late Mac thinks 2006, 2007 are going to be bad vintages. Ethan adds that vintages of 2004 and 2005 are full of recapped companies that are levered 7X and not attractive to secondary buyers either. Good point.
5:34 Q&A. What’s the outlook for mezz funds? They bring up the captive mezz fund idea, GPs raising mezz funds. peHUB covered this a few weeks ago. RCP doesn’t like the idea of captive mezz funds! Take that, Insight Equity and KRG. Furthermore, Late Mac says new mezz funds are a “tough sell” to LPs.
5:38 More on captive mezz funds. Natale says it’s also not attractive to him. Same goes for Falkove. Everyone’s hating on captive mezz.
5:38 Token political question. I can promise you readers, I will not burden the audience with this question on my panels. Guess what? The panelists think carry is going to get taxed.
5:41 Person asleep alert: There is a guy with his eyes closed in the back row. Thank goodness there’s a coffee break coming up in 4 minutes. Luckily everyone else is pretty rapt.
5:42 One more Q. Technical question about secondaries. Do capital calls function into the discount equation. Ethan Falkove of Neuberger jumps in. Absolutely.
5:44 Last one, the moderator promises. is it a good time to invest in GPs? Flaherman says GPs are like real estate brokers, who have a reason that it’s a good time to invest in both good and bad markets. RCP’s Madorsky says his fund is in the market raising capital, but it’s not that newsworthy since most FoF raise a fund every year or so. Flacove says it’s a good time to invest. Late Mac says he’s infuriated when he reads that LPs claim to be out of the market right now. I’ll take that as Yes-ish. Natale says its a great time to invest for LPs now. They have come down with a case of panel groupthink, they’re all in agreement!
5:49 Final question, this time they promise! New money from SWFs? Flaherty says they’re not rushing into the market now. Late Mac says European and Asian LPs are looking at deals now, cautiously. People who have a new program (in the last few years) is where the money is right now.
5:50 Ok We’re done! </Marathon Blog>
5:51 Yes that was an html joke. This much liveblogging will do that to you. Stay tuned for the videos and further peHUB commentary.