PC Symposium: PE Outlook: Pricing prospects, current momentum

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Published April 23, 2007 at 1:12 PM

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PricewaterhouseCoopers partner Greg Peterson moderated today's first panel at The Deal's two-day Private Capital Symposium in New York.

The topic was "The Outlook for Private Capital." Panelists included: Karim Assef, head of financial sponsors, Bank of America Corp.; Andrew Brownstein, partner, Wachtel, Lipton, Rosen & Katz; Anthony J. deNicola, general partner, Welsh, Carson, Stowe & Anderson; and Dan Glickman, managing director, GE Antares Capital.

The discussion centered on pricing prospects and the future of the current momentum.

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From the perspective of an M&A lawyer, Brownstein said, "Going private is a very attractive proposition for dealmakers who get frustrated with short-term, quarter-to-quarter results, frustrated with pressures in the marketplace and short-term strategies." SOX compliance also has driven the going-private fervor of recent months.

Executive compensation also has driven the trend. "It's very attractive for talented management teams to own a piece of the business," he said.
DeNicola agreed with Brownstein and also cited the costs of running a public company and dealing with activist shareholders. It's also a lot easier for companies transforming or repositioning a company to do so out of the public eye, he noted.

FINANCING FUTURE

Assef said the flexibility of financing structures and lack of covenants have helped fuel the dealmaking surge. What's different about this cycle is that the companies being financed are much more established, he noted. "I don't know when it's going to stop. Frankly, it has more legs than we thought it had."

Further, he doesn't see any retreating in terms of deal sizes but noted the recent decrease in frequency of club deals. First Data Corp. and TXU Corp. were very large deals fueled by hedge funds and bridge equities.

Did the DOJ helped cool the club trend? "This is a very competitive industry," Brownstein said. "Clearly, people are being careful not to make any slip. The underlying activity is being driven by economics."

Glickman said the availability of additional capital makes this latest deal frenzy different from 2000 and 2001. But the downturn could be more onerous, he cautioned, when liquidity tightens up.

Hedge funds and PE firms are working together, but with extreme caution, according to Glickman.

Regarding shareholder activism driving deal prices, Brownstein noted the "tremendous uptick" in the public rebelling against premium deals in the market. He cited Clear Channel Communications Inc. as an obvious example. At the end of the day, a sponsor will pay what it can afford to pay, despite activist muscle, he said.

Peterson asked if the regulatory noise of the past few months might quash the dealmaking frenzy. DeNicola said the relationships he has with his LPs are pretty entwined. Folks making billion-dollar investments in Welsh Carson's fund have rights commensurate with that, he said.

Brownstein noted the flipside to that transparency, where at the state level, freedom of information laws are passed to help bring more visibility to PE firms, often perceived as too secretive.

Assef discussed how PE firms have looked to the public markets in this round. Fortress Investment Group LLC has done fairly well and has opened eyes. Most sponsors are in "wait and see" mode. "If some of our brethren do it, are we disadvantaged somehow?" he queried. Being a first mover to the markets for competitive reasons may be more important than the ultimate returns.

Glickman was asked to look to the future. He said he'd be surprised if we got to 2008 without some sort of market correction. Mezzanine returns are certainly lower already, he pointed out, at the 12%-to-14% level. In terms of pricing and leverage, those are right at the same place they were before the last downturn.

Peterson asked if the club deals would be most threatened when the next downturn comes, due to their complexity. Glickman said yes. DeNicola admitted it was hard to pass over "the fundamental laws of capital" that Glickman cited. But as an asset class, he stressed PE is here to stay, even if returns come down. "I don't see anything that dramatically changes the direction we're heading in," he said.

"There will always be firms that don't make the grade" Glickman said. But in total, the number of firms may not go down. In fact, he expects new PE firms to launch with different strategies.

The record capital out in the market has to find a home, Glickman said. Brownstein also cited feeder funds and other opportunities for investors not historically able to access PE activity.

From a lending perspective, Assef thought there will be a cliff at some point, but that it's a couple years out.

Peterson then turned the panel over to audience questions. DeNicola was asked if Welsh Carson might go public. "We are not in a position where it's something that's imminent for us," he said. He cited the fact they espouse the value of being private to portfolio companies so going public may be "somewhat hypocritical." The valuations for Fortress and Blackstone Group LP argue that going public may be the wise thing to do, he said, but others might see it as a reason to sell.

A question was asked about fee structures. Can the 2-and-20 fee structure continue? Glickman noted that some funds have gone up to a 25% sharing. DeNicola noted on the megafund side, 2 and 20 doesn't make sense. Most of the bigger firms have 1.5 and 20 in place.

A question for Brownstein: How do you define fiduciary duty in an IPO? "It's all in the details," he said. The funds themselves have to manage the money allocated to them. —Tom Groppe panel%20one%20morris.JPG panel%20one.JPG