If you're looking to buy into an upswing post-recession, it doesn't look like the private equity market will be on your list. Valuations didn't fall as much as you might think, meaning that the bargains you usually find during a downturn just aren't showing up this time.In the leveraged buyout market, prices were around 25% higher, on average, than they were in 2001, when the dotcom economy fell apart, according to Standard & Poor's Leveraged Commentary & Data. And transactions closed in the past three months have hit heir highest levels since the private equity market peaked in 2007.
Says Christopher O'Brien, president for U.S. and Europe of Investcorp Bank BSC, another "golden era" isn't coming. He tells Bloomberg News, "There's a lot of pressure to put investors' money to work now, and valuations are still high. It's a seller's market."
Since 1992, buyout firms have returned median annual rate of 21.2%, with funds that kicked off in 2001, following the post-dotcom mayhem, have returned a median annual rate of 24.5%, according to data from Preqin, with the top performers (from 2001) pushing out returns of 40%.
We won't see those types of numbers this time around.
Stephen Schwarzman, CEO of the Blackstone Group (BX), notes that there were some "silly" deals done before the financial crisis at up to 12 times cash flow. There are indicators that another round of "silliness" is coming.
KKR (KFN) just picked up a UK company, retailer Pets at Home, for $1.5 billion, between 11 and 12 times EBITDA. The price carried a 3% premium over an offer by Bain Capital and topped TPG's bid by 10 percent. According to KKR partner John Pfeffer, "We are enthusiastic about the significant further potential for Pets at Home to grow, develop and continue to deliver its unmatched breadth of products, store environment, competitive pricing and customer service."
Other pricey deals that were inked recently include the purchase of Marken Ltd. By Apax Partners for 12 times EBITDA and the acquisition of IMS Health by TPG and the Canada Pension Plan Investment Board for nine times EBITDA.
In addition to higher prices, private equity buyers are leading more transactions. Those led by private equity increased by 32% to $49.2 billion in the second half of 2009. Nonetheless, leveraged buyout action accounted for only a tenth of the $862.8 billion competed in 2007, due in large part to trepidation among banks in making loans. When banks finally did start to let the loan money flow again, they required funds to put up more of their own equity In 2009, leveraged buyouts in the U.S. were 54% deb financed in 2009, compared to 65% in 2001. In Europe, debt financing fell from 62% in 2001 to 47% in 2009, according to S&P.