Private Equity

Misc

NAV Loans

  • Borrowing by private equity firms at the fund level.
  • Ted Seides argues it is an end-of-cycle phenomenon.
  • “NAV loans strike me as a canary in the coal mine signaling the end of the private equity boom. According to Preqin, 645 firms have not raised a new vehicle since 2015. With interest rates higher and the fundraising environment tighter, credit is scarce. NAV loans feel like the “extend and pretend” activity we saw after the GFC. For every Vista NAV loan, there are probably ten used to cure the woes of a GP.”
Stocks

Leverage at Record Highs

  • “This risk is particularly noteworthy given that many companies with loans outstanding are carrying significant debt loads. The average debt-to-EBITDA ratio in new U.S. loan transactions hit a record-high 5.5x in 1Q2022, above the 4.9x recorded just before the Global Financial Crisis.“
  • “Importantly, companies involved in these transactions were often more highly levered than they appeared on paper, as many used aggressive EBITDA adjustments (e.g., for synergies, cost cuts, etc.) when making these leverage calculations.”
  • Source: Oaktree.
Stocks

Private Equity Valuations Paid

  • Bain report on private equity industry is always worth a flick.
  • This was an interesting chart on valuations – showing that multiples started to drift up from 2015 onwards reaching highs last year.
  • Part of this was a mix shift towards growth and technology, where 2020/2021 saw ballooning multiples paid for software businesses (here, page 49).
Misc

Probabilistic View of Private Equity

  • The probability that a mature private equity fund will deliver 2x on investment fell in the 1990s and has since held steady at 30-35%.
  • In other words the probability of NOT achieving 2x is 65-70%.
  • For >2.5x the probability of NOT achieving is nearly 90%.
  • The data uses North America and EU strategies, >$100m, across buyout, growth and turnaround. 2011 vintage year is used to eliminate non-mature funds. This filter led to 1,200 funds.
  • Source.
Stocks

Dell

  • “Splitting a good black jack hand” is a great way to describe how Michael Dell pulled off perhaps the most daring deal of the last decade.
  • “Before the LBO, he owned 15.6% of his company, shares worth less than $4 billion. Thanks to the miracles of his financial engineering, he will own 52% of Dell and a 42% stake in VMware. The total value of his Dell holdings is $40 billion.“
  • A really great article from Forbes.
Misc

US Buyout Returns

  • Private Equity buyout returns measured by multiples on invested capital (MOIC) – a simple cash-in vs. cash-out metric, have been falling since 2009.
  • Interestingly internal rate of return (IRR), a time-weighted measure of return, has been rising.
  • The reason is the increased use of subscription lines – managers financing investment with bank loans delaying capital calls to LPs until later.
  • Mercer data suggests their use has grown 6x since 2010.
  • Note also average and median returns don’t differ much.
  • The note compares returns to public markets showing 1-5% pa excess returns, which have also fallen.
  • Source.
Stocks

Public to Private Equity

  • “Over the past quarter century there has been a marked shift in U.S. equities from public markets to private markets controlled by buyout and venture capital firms. This change has had reverberations for asset managers, investors, executives, and policy makers.“
  • A phenomenal and must read note from Mauboussin.
Misc

Illiquid Investments

  • The popularity of illiquid investments has risen strongly over time.
  • As shown in this interesting chart from a Cambridge Associates report.
  • It depicts the asset allocation of endowments with greater than $500m assets.
  • These entities now hold 23% in private investments up from 8% 15 years ago.
  • In addition the median institution also holds 16% of their portfolio in uncalled capital commitments to private investment.
  • All this has serious implications in terms of liquidity.
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