Q&A Houlihan’s Adelson: PE Firms are the New Conglomerates

Scott Adelson has spent more than two decades at Houlihan Lokey, an IB known for its restructuring work, fairness opinions and middle market advising.  Adelson, who is co-head of the corporate finance unit, is a “big picture” guy who can speak on everything from the IPO markets to what is happening in Japan.

He spoke to me by phone recently.

Q.  Do you think we’re out of the recession?
A. I believe we are coming out of it. Yes, we are out of it…Despite the difficult things going on in the world, the market seems to be brushing that off and moving forward.

Q.  What about Japan? They had some pretty serious aftershocks recently. Do you think their economy will rebound after?
A.  It is very difficult. Japan was a difficult economy before this occurred. The velocity of capital in Japan was really not keeping pace with the rest of world. They had a shrinking population prior to all this happening. There will be a huge influx of activity from an economic standpoint for what has been insular society. This could help it in some ways. Obviously there are other ways to help it occur.

They are an incredibly resilient people, and they were back at work the next day. They are a resilient, tenacious culture that I’m sure will ultimately thrive despite the horribly devastating sequence of events. We have about dozen people in Japan. All are still there, in Tokyo.

Sitting here, with all the images that we get of the massive devastation, the biggest issues in Tokyo are the problems with the electrical grid and the psyche of individuals. But life is carrying on. Certainly it’s not normal, but life is carrying on.

Q. We’ve seen some large deals recently, including AT&T buying T-Mobile. It seems like conglomerates are being built back up, which is different from what we’ve seen the last few decades.
A.  Under a different name, [conglomerates] have been rebuilt. If you look at some of larger [PE] funds that have gone public, it is a little hard to draw a distinction between those and conglomerates of yesteryear… One of the big differences is that conglomerates have permanent capital and PE groups recycle it. When you take a PE firm public, and you provide them with permanent capital, you remove one of the differences. As we continue to thrive, conglomerates as a concept may not be as bad as people thought.

Q.  What do you think of the IPO market?
A.  I feel pretty good about it right now. Thirty-nine deals done were done in first quarter for almost $16 billion. Fifteen were PE-backed. PE- backed companies going public is certainly the theme of the year.

Q.  We’ve seen some big, PE backed companies—HCA and Nielsen–do well lately. Will this continue?
A.  Investors are voting that they do believe in [these companies] for the longer term. The fact that the market is open at all to deals of this size is a very good sign. It certainly feels like it will [stay open for rest of year]. IPOs are sloughing off some difficult things going on in the world.

Q.  There seem to be a lot of PE M&A recently. What is driving this? The overhang?
A.  A huge amount of activity loosened up at the end of the year and that was tax driven. We certainly saw a spike because of that. The deal activity has dipped a bit for the quarter. In 2008 to 2009, activity levels dropped off dramatically, but we’ve come back meaningfully. We are more in the normal range of activity. It’s strong but not unbelievably aggressive. I’m feeling very good about activity levels. Private equity needs realizations because they took a hiatus on realizations during the more difficult times. Corporates are feeling much, much better about overall outlook of the economy. They are much more focused on growing their businesses and deploying their capital. Both of those bode well.

Q.  Are there any sectors which you think are overheated? Or showing signs of a bubble?
A.  Overall, we don’t see excess frothiness. The debt markets seem to have forgotten some of the things that occurred and moved beyond the recent past very quickly. But we’re not at the insane leverage multiples that there were. Many of the features that had credit people scratching their head seem to be coming back. But at the end of day, people are rational. There is a lot of capital that needs to be deployed.

Q.  There seems to be a bubble in tech. Do you agree?
A.  To me this does not feel like a bubble. Maybe because I’ve lived through a few bubbles. Just because something is active, it feels like a bubble. But I don’t think it is a bubble yet.

Q.  What about the great wall of debt? About $575 billion in risky debt comes due in 2014. There was much concern about this a few years ago. There doesn’t seem to be as much now.
A.  It’s still there and it’s coming due. But the difference now is the capital markets have come back. Companies that are able to refinance are doing so. We have kicked the can down the road and there is plenty of time to push it back even further. So it remains to be seen whether this will be a major problem or not, and I think much of that depends on the economy. If the economy continues to grow, and the markets remain strong and robust, then we will be able to work our way through it.

Q.  Do you think LPs will get annoyed by all the dividend recaps? Or is money money?
A.  When markets will allow it, recaps can be a useful tool for investors. An LP’s job is to get a return on their capital. The recap provides them a return of capital and if they believe their ultimate returns will be enhanced as a result of the recap, then there is no reason for them to be upset.

Q.  What books do you read?
A.  I just finished reading Peak from Chip Conley. It’s a non-fiction business book that we had much of firm read as part of a retreat. I always have more than one [book] on my bedside table. Also, my wife has been at me to read The Art of Racing in the Rain. One I have been reading is Tartine Bread by Chad Robertson. Basically, it’s about guy who went out to make the best bread in the world. You are taking the simplest thing in the world, and if you are passionate about it, you can do the simplest thing better than anyone else.