Good afternoon, fine readers of peHUB. My name is Heidi N. Moore, and I’ll be one of your cruise directors for the next two weeks. If you look out the windows on your left side, you’ll see a massive crisis surrounding European sovereign debt. Those on the right side of the ship will see unprecedented lack of faith in our national stock markets.
Crisis, crisis everywhere, and not a moment to think. So here’s the question: How and why did private equity somehow avoid its own massive crash?
Consider how the industry has come roaring back in recent weeks. Financing is looking pretty good; the junk bond markets are booming to record volume and pricing levels not seen since 2007. Leverage multiples are lofty, to say the least. (Bloomberg reports that TPG Capital paid a whopping 13X EBITDA for American Tire Distributors Holdings Inc.) After 3 years of the industry waiting for The Great Pumpkin in the form of a mega-buyout, The Blackstone Group’s rumored interest in Fidelity National may be a big vote of confidence.
At the same time, the heavens appear to be opening on other ways. The route to the exits, long blocked, may be clearing. Dealogic data shows that IPO exits by financial sponsors have hit $5.6 billion in volume already this year, compared to a piddling $292 million in the dark days of 2009.
This looks all the more remarkable when you remember that it was only a few months ago that the future of the LBO industry looked somewhere between “dire” and “nonexistent.” A preemptive obituary for private equity was written by New York Post reporter Josh Kosman, who took a justifiably apocalyptic bent in calling his book The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis. Kosman’s reasoning seemed borne out when nearly all of last year’s private equity-backed IPOs were launched purely to shave away the mountains of debt that these companies had accumulated.
Kosman built a powerful case that the private equity industry’s appetite for indigestible debt and megabuyouts would create a wall of refinancings in 2011 to 2015. Moreover, when former Treasury Secretary Hank Paulson was promoting his memoir last fall, he frankly told audiences that he was taken unawares by the bank crisis – because all of his staffers expected the big crisis to come from private equity.
Obviously the industry has a vested interest in looking as healthy as possible, particularly with the prospect of financial reform looming large. But good fortune like this doesn’t come without a cost. Readers, what do you see in the business? Is private equity truly facing sunny skies, is this irrational exuberance, or has the industry only kicked the can down the road?