While the Dow Jones has hit new records several times this week, I have been following another headline in the financial markets.
That of private equity.
This past month has witnessed some very large Private Equity deals, which we have not seen since 2007, which in hindsight marked the peak of the last financial bubble.
$24.4bn to take Dell private (led by the founder Michael Dell and Silver Lake Partner), $28bn for Heinz Ketchup (led by 3G Capital and Warren Buffett) and Comcast is paying almost $19bn for the 49% of NBC Universal it did not already own. Only one year ago a deal bigger than $10bn would have been unthinkable. Now $20+bn seem quite easily financed.
Well what has changed? In one short word- confidence.
For one the US economy has improved.
Unemployment is improving, the housing market is rebounding for the first time in years and institutional investors are looking for higher yields on their money. One way to find the higher yield is to finance these private equity transactions which offer yields higher than corporate or sovereign bonds.
Confidence has returned to the credit markets and it is likely we will see more $5-10bn leveraged buyouts in the coming months. Shares of private equity firms like KKR, Blackstone, Carlyle Group and Apollo Global Management have all exploded this year (see table below) as the market anticipates a strong rebound in dealmaking and leveraged buyouts.
This has helped other firms that profit from private equity resurgence as well, firms like Lazard, Greenhill that advise on private equity transactions but also firms like Oaktree Capital that specialize in buying the debt of the companies that are being taken private.
With dealmaking having returned, private equity values having risen, the big three private equity firms are returning records amount of capital back to their shareholders (see table below). With every one and their grandmother looking for yield in the current equity market- private equity firms are clearly providing it. Just look at most firms which are listed in the public markets.
They are offering dividend yields which are mouthwatering.
But there are some experts that are warning of signs another bubble is being formed.
At the Berlin Super Return conference last month, private equity founder Leon Black of Apollo Global warned that ‘loans are abundant’ and that record low interest rates are creating a boom for high yield bonds or ‘junk bonds’ which private equity companies use to finance their takeovers. Howards Marks who heads Oaktree Capital has voice similar concerns of pre-crises behavior. Mr Marks thinks the fact that high yield bonds yield less than 6% is a good sign of the current ‘imprudent behaviour’. While we are still far away from the $40bn + deals that took place in 2007 (like KKR’s TXU buyout), the private equity market has clearly come back strong.
The best evidence of that is found in the public markets where most private equity groups now trade in.
Shares of the private equity groups have surged this year and so have the payouts to their investors.
Dealmaking has returned and as long as interest rates remain low, credit markets open and confidence among businesses high, more $5-10bn private equity deals will get done before this year closes.
