This cycle of recession-induced private-equity buyouts is different for two crucial reasons, according to Barwon Investment Partners’ Sam Armstrong. First, unlike previous vintages, high interest costs and deal prices have not dropped as far as previous fire-sales, and the US$1 trillion of ‘dry-powder’ cash reserves has ensured fierce competition for deals. Second, contrary to past vintages, says Armstrong who’s a partner in Barwon, this one is not likely to generate returns that are twice as good as so-called normal vintages. “While there’s a high level of dry-powder cash reserves,” he says, “deal prices have also been boosted because a shortage of debt finance means that the very best businesses are the only ones securing that debt finance.”
Third, borrowing costs are higher because – even though benchmark (LIBOR) rates have fallen – debt margins are high, meaning costs are 1.5 to 2.5 per cent above what they were in 2003-7. And fourth, debt is still very hard to obtain and leverage multiples are very low with new deals typically requiring 45 to 50 per cent equity, compared to 30 to 35 per cent in more normal times. Like the curate’s egg in George du Maurier’s famous Punch cartoon, the private equity market is good – and bad – in parts. Sentiment ranges from the positive Armstrong, of Barwon, and Blackstone Group’s Tony James, through to the bearish experiences of ING Private Equity Access Ltd’s managing director, Jon Schahinger.
And, pushing the envelope somewhat further than most managers would contemplate, a corporate and investment advisory firm, Galileo Capital Management, with offices in London and Hong Kong, is planning to launch an investment vehicle to tap into what is known as the LGBT market – lesbian, gay, bisexual and transgender (see separate story). If the US$1 trillion of ‘dry-powder’ cash reserves is seen as an ammunition magazine, then one of the stockpiles in that storehouse is the $15 billion that private equity behemoth Blackstone Group has ready to leverage up to about $50 billion, says president Tony James. Australia is seen as good value for private equity investors due to the price/earnings (P/E) multiples of listed stocks, and the values put on private companies, he says. Not that the local P/E are better than in the US, but James sees growth here as having a much healthier future. Australia, he says, is the “perfect vehicle” to get Asian growth without the emerging markets risk, he told the mainstream financial press in November 2010.