That illustrious organ The Economist has a cracking cover this week with a man reading his blackberry at the pinnacle of a mountain totally unaware that he is about to step off into the abyss and the tagline reads: ‘The trouble with private equity’. The story behind the headline is a disappointing rehash of the front pages of the broadsheets over the last two months. The leader offers this wishy-washy explanation for the trouble with private equity:
“It is possible that the debt that powers private equity is starting – just starting, mind you – to become harder to scrape together. It may not happen this month, perhaps not even this year, but sooner or later the private-equity boom will come to an end.”
Thanks for the insight. Not! So what is really happening with the debt situation?
Economists, real ones not the magazine, forecast that interest rates in the UK will hit 6% by the end of 2007 as yesterday’s fifth increase in a year took the rate to 5.75%. Many believe that the rate will hit 6.25% in the first quarter of 2008, a cash cost unseen in the in this country for the past decade. And the hikes aren’t stopping with the Bank of England -another increase is also likely in September from the European Central Bank.
It is possible that these rate rises may not affect the larger buyout houses whatsoever as data from the Bank of England, revealed by the Treasury Select Committee (TSC), suggests some private equity houses were able to borrow beneath the base rate on large deals. But Dominic Murphy, a partner at KKR, said to the TSC: “I am not aware of anybody being able to borrow beneath the base rate; that is news to me. I’m not saying that the bank is wrong – I’m just not aware of it.” He added: “I’d love to borrow at those rates.”
For the majority of private equity houses active in the UK, these rate rises will make existing leveraged deals more difficult to service though many leveraged buyout houses mitigate interest rate risk through hedging. But in an extreme case, a leveraged company will be pushed up against its banking covenant, according to Jeremy Walsh, the head of banking at Travers Smith. “New deals will be more difficult to do as the cost of leveraging increases,” he added.
At the moment, sellers are able to command high prices because they know that private equity houses can borrow so much money but those prices will have to be adjusted as interest rates increase, according to Walsh, though there is still lots of competition and high liquidity.
*** Thanks for having the London-based EVCJ team of myself, Amanda Palmer, and my associate Tom Allchorne as your guest editors this week. The NY-based Buyouts Magazine team is up at the beginning of next week followed by the VCJ writers in San Francisco until our beloved Dan Primack returns from holiday. From all of us here in Blighty: “We bid you good day, sirs.”
KKR has revealed the debt structure of the GBP11bn $22.1m Alliance Boots deal, with the company leveraging a 7.2 EBITDA. The deal will include emphasis on accepting borrowing limits from banks through maintenance covenants, with the debt, falling to 5.2 times EBITDA after five years. The average for buyouts last year was 6.4 times, but in some cases reached 10 times EBITDA. For more on this story, see www.thomsonmergernews.com
Carlyle is to acquire ARINC, a US provider of transportation communications and systems engineering, for an undisclosed amount. Headquartered in Annapolis, Maryland, ARINC has approximately 3300 employees in 100 offices worldwide, generating annual revenues in excess of $900 million. www.arinc.com
Global Atlantic Partners, the US private equity firm, has sold ZANTAZ, a Pleasanton, California-based software company to Autonomy Corporation, a provider of infrastructure software, for $375 million. Other exiting investors include Athena Technology Ventures, Red Rock Ventures, Pyramid Technology Ventures, Novus Ventures, ComVentures, Geneva Venture Partners, Advanced Equities Investment, Critical Path Inc., EMC Corp., GC Technology Fund LP, Innovative Technology Partners, MediaTel Management, Suez Lyonnaise des Eaux and Walnut Creek Capital Ventures. www.zantaz.com
I Q Capital Fund, a UK fund aimed at small to medium sized companies, has invested GBP0.65 ($1.2 million) in Spikes Cavell, a Berkshire-based company specialising in assisting public sector bodies with their procurement headaches. I Q Capital Fund is an Enterprise Capital Fund (ECF), an initiative set-up by the UK Government to bridge the £250,000 and £2m equity gap for seed stage technology businesses. IQ Capital is managed by NW Brown & Company and has a fund size of £25m. www.iqcapitalfund.co.uk
DiBcom SA, a French semiconductor company, has raises EUR60 million ($27.2 million) from lead investor Natixis, 3i, Cipio Partners, Convergent Capital, Credit Agricole Private Equity, Intel Capital, Partech International, SGAM Alternative Investments, UMC Capital and WI Harper Group. www.dibcom.net
Imperial Innovations Group, the listed technology commercialisation and investment company, and The Capital Fund, a GBP50 million ($100 million) Regional Venture Capital Fund for London, have co-invested invested a total of GBP500,000 in NanoBioDesign Limited (NBD), a company developing a range of toxicity screening systems to speed up the drug discovery process. www.imperialinnovations.co.uk
Techtium, an Israeli battery developer, has secured $10 million for its second funding round, receiving commitments from Pitango Venture Capital and Poalim Ventures. www.techtium.com
Tempo Payments Inc., a San Mateo, Calif.-based interoperable retail payment network that clears PIN debit transactions through the ACH payment system, has raised $5m in a Series C round. Led by new investor Integral Capital Partners, Cardinal Venture Capital and Selby Venture Partners also returned to participate. www.tempopay.com
AsiaVest Partners, an Asian VC, has invested $11m in the Series A funding round of Chinese baby and pregnancy retailer Leyou.com. www.asiavest.com
Protiva Biotherapeutics, a Seattle-based biotechnology company focused on pharmaceutical products to fight against cancer, metabolic and infectious disease, has secured convertible debenture financing to the tune of $3.3m from GrowthWorks Capital, BDC Capital, Kinetic Capital and the Canadian Medical Discoveries Fund. www.protivabio.com
NephroGenex, a North Carolina-based biotech company specializing in kidney disease, has raised $3.3 million for its $26.8 million Series A funding round. Investors include Care Capital, drug developer BioStratum and Vanderbilt University. www.nephrogenex.com
Inflexion Private Equity, the UK mid-market private equity investor, has taken a minority stake in Jack Wills, the British preppy premium clothing retailer. Inflexion will work with the existing management team to provide capital and support for the next growth stage in particular with regard to the expansion of the brand in Japan and the US.
United Test and Assembly Center Ltd (UTAC), a listed Singapore-based microchip tester, is to be acquired by US private equity giant Texas Pacific Group and Asian buyout house Affinity Equity Partners for $1.4 billion.
Nord-Est, a French packaging and mining concern, said Thursday its majority shareholder, Harwanne Cie. de Participations Industrielles et Financières, had begun negotiations to sell the business to 21 Centrale Partners, a private equity shop linked to Italy’s Benetton family. The offer from Paris-based 21 Centrale values the company at $282 million. www.21centralepartners.com
MBF Australia is in talks with several potential buyers over a possible takeover that could be worth $1.54 billion. MBF, Australia’s second-largest private health insurer, is considering an offer from rival BUPA Australia as well as other potential bidders including Kohlberg Kravis Roberts and Pacific Equity Partners. www.kkr.com
Insight Equity Holdings is to acquire Atwood Mobile Products, the automotive parts supplier, from Dura Automotive Systems for $160.2 million. http://www.duraauto.com
Apax Partners’ and Morgan Stanley portfolio company Hub International, a Chicago-based insurance firm, has bought Steel City Agency. www.hubint.com
Concho Resources, a Texan oil and gas company, is to list on the New York Stock Exchange with an IPO of 21.2 million shares with a price range of $14 to $16 per share. The business is backed by Yorktown Energy Partners, a New York-headquartered private equity investor specializing in energy companies.
Validus, a Bermuda-based provider of reinsurance, has filed for an IPO which will see the company sell 15.66 million shares with an indicative price range of $24 to $26 per share. It is backed by Aquiline Capital Partners, Goldman, Sachs & Co. Goldman, New Mountain Capital and Vestar Capital Partners. www.validusre.bm
Gulfstream International Group, a Florida-based passenger flight operator, is to listed on the New York Stock Exchange. The company is looking to raise $14.05 million by selling 1 million shares with an estimated price range between $11 and $13 a share, according to a prospectus filed with the SEC. Weatherly Group backed Gulfstream in March 2006. http://www.twgco.com
Berkshire Hathaway subsidiary Richline Group acquired two gold jewelry manufacturers on Thursday. Norwest Equity Partners said it sold Aurafin to Richline for an undisclosed amount. Richline also acquired Bel-Oro International to become what it said would be the largest supplier of gold jewelry to retailers. www.nep.com
PE-BACKED M&AAleris International, an aluminium-sheet maker owned by TPG Capital, has acquired has Wabash Alloys, an Indiana-based scrap metal recycler. www.aleris.com
Firms & Funds
Indian venture capital firm NEA IndoUS Ventures (NIUV) has reached a second closing on its latest fund, raising $189 million, already making the largest ever VC fund in India. The fund will target early and later stage technology companies, and has already made its first investment, backing Mumbai-based telecom company Microqual to the tune of $10 million.
SVB Capital, the private equity arm of SVB Financial, is reported to have closed its third venture fund-of-funds on $225 million, surpassing its previous effort by almost $100 million.
Pershing Square Capital Management, which has been battling Ceridian over that company’s proposed buyout, indicated that it would not nominate a replacement director to the Ceridian board. Shareholders are scheduled to vote on Ceridian’s $5 billion buyout by Thomas H. Lee Partners and Fidelity National Financial in September. Pershing Square presented a slate of alternative directors for Ceridian’s board earlier this year. www.thlpv.com