SuperReturn Wrap-Up

BERLIN (Reuters) – Private equity firms are being forced to dive into alternative investments or sit it out on the sidelines, as the credit crisis kills their ability to strike large leveraged buyouts.

The mood was gloomy at the industry’s main conference, SuperReturn, on Tuesday, as executives stressed their focus on keeping portfolio companies above water, and facing extra time waiting it out to offload them.

“You have to accept the fact that transactions will be smaller and have far less leverage — that’s a fact,” said Henry Kravis, co-founder of New York-based private equity giant Kohlberg Kravis Roberts & Co.

“That means all of us have to adapt. We have to change the way we’ll do business. If we don’t, we’ll be left out.”

Kravis said the firm was seeking alternative investment opportunities instead of buyouts, as it waits out the credit crisis, including distressed debt, mezzanine financing and infrastructure.

That was echoed by Leon Black, founder of rival New York-private equity firm Apollo Management LP [APOLO.UL]

“Traditional buyouts are essentially dead for the time being due to the lack of financing,” said Black. “The big public-to-privates are gone in the way of the dodo.”

Black, who finished raising a $14.8 billion fund in December, expects to be buying debt for the next two years instead, with the focus on credit-oriented investments, particularly in large senior loans and distressed assets.

“When financing comes back we will be a classic buyout house again but not till then,” Black said.

He said that for the last 18 months Apollo hadn’t struck any traditional private equity deals.

Scott Sperling, co-president of Boston-based private equity giant Thomas H. Lee Partners said at the same panel discussion that valuations of companies still needed to lower to make acquisitions attractive.

“Its a dynamic that has to adjust,” he said on the sidelines of the conference, noting that the operating environment for companies had deteriorated while debt became more expensive.

That’s meant THL hasn’t made an acquisition for over a year. But Sperling said that limited partners — the pension and endowment funds that invest in private equity — were not putting pressure on for them to put money to work.

“I’ve never had an LP say we are not putting money to work fast enough,” he said.


Delegate numbers were down 200 from last year’s conference with the event drawing 1,200, an organiser said. The shutdown of London’s airports meant more disruption as attendees coming from snowed-up England had problems travelling.

The economic and financial crisis is leading to a fundamental change in the business model of the buyout industry and the topics of conversation were a sea change from two years ago, when remarks were about achieving bumper returns and striking $50 billion deals.

Now, problems in portfolios, the erosion of leverage and accounting issues which are causing writedowns in the funds dominated the discussions.

Kravis said looking after the portfolio was his most important focus in 2009.

“It’s portfolio, portfolio, portfolio, it’s our obligation,” he said. “We will focus laser-like on the portfolio. Nothing is more important than managing that portfolio. Our investors demand it.”

The economic forecasts were also grim.

Apollo’s Black said the economic situation was “broader and deeper than everything we have faced in the past.”

Kravis predicted a long and protracted slowdown ahead and said the financial system “must begin to work properly and the credit markets must open up.”

However, he said “one ray of sunshine” was the substantial level of new investment grade debt issued in the United States over the last few weeks without a government guarantee — the first time in many months.

He also pointed to high yield debt issued without a government guarantee and commercial paper rolling over without a government guarantee.

“That was very important,” Kravis said. “It is another indication that maybe things are starting to get better.”

THL’s Sperling said there was a little bit of stability in pricing in the debt markets, but “that doesn’t mean it is robust”. He thought things would get worse before they got better.

Scheduled speakers on Wednesday include Carlyle’s David Rubenstein. A Carlyle investment, car roofing specialist Edscha, filed for insolvency for its European sites on Monday.

By Megan Davies and Philipp Halstrick