Private equity takes pains to avoid overpaying for Western companies

Wed Feb 26, 2014 1:04am EST
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By Greg Roumeliotis

BERLIN (Reuters) - Private equity fund managers, who have taken advantage of favorable Western capital markets to sell companies for top dollar, say they need to move beyond traditional buyouts to avoid overpaying for companies.

Even after returning hundreds of billions of dollars to their fund investors in the last two years through asset sales, the private equity industry is still sitting on $817.9 billion of investor money it can invest, the highest amount of "dry powder" since 2008, according to market research firm Preqin.

This is despite dealmaking having picked up, with leveraged buyout volumes, including the debt of the companies acquired, reaching $174.2 billion in 2013, up from $136 billion in 2012 and the most since 2007, according to Thomson Reuters data.

At the industry's main annual gathering in Berlin this week, the SuperReturn International conference, buyout bosses bemoaned that competition meant rising prices for companies in Europe and North America. But they expressed confidence that niche strategies and a focus on increasing the value of companies by improving them could overcome frothy valuations.

Leon Black, who told the Milken Institute conference last year that his firm, Apollo Global Management LLC, (APO.N: Quote) was "selling everything not nailed down", conceded on Tuesday that Apollo's investment pace had not kept up with its asset sales but said his firm was still busy working on new deals.

"That (phrase) was not to imply there were no good investment opportunities, it was really meant to say it was a very good period for realizations," Black told the SuperReturn International conference, arguing out that his firm's affinity for complex deals helped it avoid competitive auctions.

"What I'm so proud of about our last fund is not so much the high returns but the fact that the whole $15 billion fund was put together at 6.2 times average earnings before interest, tax, depreciation and amortization (of acquired companies) when the average deal size for $500 million equity checks was at nine times," Black said.

Black pointed to strategies such as creating new companies through the carve-out of unloved divisions of conglomerates and taking over companies in distress through debt-for-equity swaps as some of the ways Apollo strived not to overpay.   Continued...