Private equity keeps its cool in hot leveraged buyout market

By Joshua Franklin

BERLIN (Reuters) - Leveraged buyouts are the priciest they have been at anytime since the 2007-2008 financial crisis, but private equity firms are not sitting on the sidelines.

Some of the private equity sector's top executives told the industry's annual get-together on Tuesday that they still found attractive deals to pull the trigger on, even as acquisition prices remained at record highs.

"There are always pockets of opportunity," Prakash Melwani, Blackstone Group LP's chief investment officer for private equity, said at the SuperReturn conference in Berlin.

"When people talk about dry powder and they talk about the monolithic private equity industry, I think they're missing the point. You've got to segment it. There are always areas that are interesting," Melwani said.

 

He said Blackstone saw opportunities in emerging economies, such as Greater China and India, as well as larger buyouts and in the energy sector. The latest leveraged buyout boom was different than the one that preceded the financial crisis, in that high valuations are fuelled by optimism over global growth and U.S. tax reform, rather than debt, Melwani added.

Private equity dealmaking volume totaled $1.27 trillion globally in 2017, the highest since the financial crisis. However, the number of deals fell 8 percent year-on-year to their lowest since 2014, according to data cited by McKinsey's global private markets review.

The average price for a leveraged buyout in 2017 globally was just under 11 times a company's 12-month earnings before interest, taxes, depreciation and amortization, the highest since the financial crisis, amid frothy equity and debt markets and fierce competition for deals.

Buyout funds, which buy companies to sell them year later at a profit, had stockpiled a record $633 billion in undeployed capital as of the end of 2017, amid an influx of cash from investors eager to beat public-market returns.

"We are not averse to paying market multiples today if you can justify the growth," said Bennett Rosenthal, Ares Management LP co-founder and co-head of its private equity group.

"Because of the frothiness, people are moving earlier, auctions are shorter and there is less time for due diligence. Because you have less time, you have to have high conviction on the deals you do work on. That does take some deals off the table for us," said Rosenthal.

Investors in private equity funds have also become more cautious. A survey by market research firm Preqin found that 34 percent of investors in private equity funds expect returns to be lower in 2018.

"I do think private equity will outperform, but I don't think 2017 is going to be one of the best vintage years given the high prices that were paid," said Kathleen Bacon, managing director at fund-of-funds manager HarbourVest.

Apollo Global Management LP CEO Leon Black said his firm is doing few acquisitions of companies in financial distress compared to 10 years ago. Instead, it is focused on finding undervalued public companies and snapping up unloved divisions of some companies, or using its portfolio companies as platforms for more acquisitions.

"We don't have a crystal ball," said Black. "What I do think is we have developed a model which allows us to deploy a lot of capital on a risk-reward basis that we think plays to our strengths come what may."

(Reporting by Joshua Franklin in Berlin; Editing by Tom Brown)