TPG takes advantage of high valuations; KKR’s State of Play a must-read for dealmakers

Good morning, dealmakers. MK Flynn here with today’s private equity news.

Seller’s market. TPG’s earnings report, out this morning, underscores that it’s a good time for exits. Among TPG’s exits in the first quarter was security software developer McAfee, which TPG had taken public in 2020, and was sold to a consortium of PE firms led by Advent International and Permira in a take-private deal that closed on March 1. TPG, which still owned a big stake in the business, made nearly seven times its money on the sale, according to the Wall Street Journal. In another sale, Aptiv agreed to buy Wind River Systems for $4.3 billion. “We’ve consistently felt that creating liquidity in the portfolio and taking advantage of the high-valuation environment that we’ve generally all been living in should be a top priority,” TPG CEO Jon Winkelried told the Journal. “That’s been borne out by the volatility we’ve seen.”

On the buy side, Winkelried told the Financial Times that TPG is eyeing opportunities to invest in fast-growing technology companies. “There are many good companies that are going to look for capital,” he said. “If you look at the long arc of private equity, these kinds of disruptions in the market have been associated with very good investment opportunities.”

State of Play. As regular readers of the Wire know, for the last several weeks, I have been seeking insights into how Russia’s invasion of Ukraine might affect private equity dealmaking. KKR’s recent State of Play report by partner Henry McVey is loaded with analysis. McVey is the CIO of KKR’s Balance Sheet and Head of Global Macro and Asset Allocation (GMAA). If you haven’t read his report, I recommend it highly.

“No doubt, war is a human tragedy,” McVey writes. “It requires heavy reflection on what has transpired and how it can be avoided in the future. However, the current situation also demands that, as fiduciaries, we delve deeply into what the implications are for all our constituencies, including our portfolio companies, our limited partners, and our employees. From our perch at KKR, we believe that the pandemic started – and the war in Europe has now accelerated – structural shifts in the global economic system that warrant investor attention. For starters, we began this cycle with ‘sticky’ inflation that is both broad-based and accelerating; the Russia/Ukraine war as well as the recent surge in Omicron cases in China should only intensify this headwind in the near-term. Yet, surging inflation is occurring at a time when central banks will lag to tighten financial conditions, which means real rates will likely lag this cycle. We are also seeing a further splintering of supply chains. Importantly, we believe that Russia’s attack on Ukraine may only reinforce the notion that security of energy, communications, healthcare, and data is not only an economic priority but a geopolitical one as well. It also has the potential to reinforce populism, geopolitical rivalry, institutional distrust, and political tumult, all recent trends we’ve written about that have significant long-term economic implications. Against this backdrop, we strongly advocate for macro professionals and asset allocators to prioritize inflation protection and pricing power by overweighting collateral-based cash flows, including Infrastructure, Asset-Based Finance, and Real Estate. We also expect Private Equity with high cash flow conversion characteristics as well as opportunistic strategies across both liquid and private Credit to perform well in this new macroeconomic environment we envision.”

There are many take-aways from McVey’s report, but here’s another excerpt that’s particularly relevant for those making PE-backed deals:

“We believe that there is going to be a massive capex cycle that leads to new factories, homes, and jobs, as supply chains become more regional and/or redundant to survive the growing number of geopolitical shocks that are occurring. This phenomenon is not just a U.S. one; rather, as Europe rethinks its dependence for food and fuel on actors like Russia, we envision a wholesale review of energy platforms, including partners, production, distribution, and reserve capacity. These new supply chains are likely to be built to optimize energy and resource efficiency, reinforcing opportunities for investors to focus on companies that balance these objectives.”

Drowning in re-ups. “Some LPs are asking their trusted GPs to ‘pump the brakes’ on fundraising and think about pushing their upcoming fundraising processes to 2023,” Chris writes. “And some GPs are heeding the advice, according to several sources who spoke anonymously to Buyouts. LPs have been contending with a fundraising market that is being driven by a constant stream of re-ups, or GPs bringing back subsequent funds, at a pace that is much faster than ever before. Not only are firms raising follow-up funds faster than ever, but they are raising larger pools and many of them are creating new products to take up even more LP allocation.”

For more, read the story by Chris.

That’s all for now. I’ll “see” you tomorrow.

All the best,MK