A small and unassuming, privately published blue book is making its way around London’s private-equity circles.
If you’re a private-equity executive or partner, or a fund investor, open this 20th-anniversary celebration volume and prepare an appreciative nod for a true success story of British high finance. This book contains an outsize story. Can you name the once British, now global, private equity fund-of-funds with £13 billion under management?
Certainly you can if you are one of the 260 investors who have placed capital with Pantheon Ventures, or if you hold shares in Pantheon International Participations (PIP), Pantheon’s investment trust, whose stock price has held rock-steady right through the recent turmoil. PIP’s market capitalisation is over £750 million – it holds nothing but participations in the top private-equity funds around the globe. Pantheon’s quiet literary celebration provides a welcome palliative to headlines about hedge funds and the credit crunch at the wider end of the debt markets.
Pantheon’s anniversary publication wasn’t the only celebration to take place among certain investment houses amid the financial maelstrom of early 2008, highlighting an oft-overlooked but irrefutable investment truth: the world’s greatest investors have an impeccable sense of timing. Great investors with long track records of success are like that constantly in-demand dinner-party guest who is a terrific listener but always seems to be the fellow who interjects a well-chosen remark when the flow of talk is ebbing, setting the conversation off in a new direction.
While there is no denying the genuine distress and job losses caused by the unprecedented write-downs washing through so many of the world’s leading financial institutions, many private-equity investors are now taking pains to conceal a subtle knowing sparkle in their eyes. Investors who have been through a cycle or two recognise the sure signs of upcoming bounty. ‘We are at the start of a good time to be investing,’ says Rory Brooks, founder and managing partner at Mezzanine Management, Europe’s first mezzanine fund with over $1.5 billion under management. ‘Corporate earnings aren’t yet exhibiting decline, but good-quality companies will have fewer financing options in these markets.’
This is in contrast to late 2007 when getting your private-equity deal done at a sensible valuation was the bane of investment committees everywhere. Financial institutions were competing with each other to provide dirt-cheap debt, and loose credit had been driving up company valuations in the private-equity market for quite a few years. The capital structures employed in recent leveraged buyouts regularly stacked debt equal to four, five, and even six or seven times operating profits on top of a modest sliver of equity.
Unprecedented capital inflows into the hedge-fund industry further exacerbated price competition in the private-equity markets, since the influx of institutional money encouraged many hedge-fund managers with long-equity orientations to stretch their typically loosely defined investment mandate and join the hunt for private-equity deals. Watch carefully as private-equity fund managers who closed investments in this context at high prices and with significant leverage are forced to work very hard to make those investments perform, and fight to find exits in the new landscape of tighter credit and skittish capital markets in the short- to medium-term.
Currents markets are much friendlier to the private-equity sector. What is apparent now is that investors with vision, panache, a deft touch and a helpful cash pile – the bigger the better – are stepping forward and closing some historic deals. Warren Buffet is no kid, but he certainly has found the candy store. Berkshire Hathaway is providing $4.4 billion in subordinated debt alongside a $2.1-billion private-equity investment in support of Mars Inc.’s $23-billion takeover of iconic chewing-gum brand Wrigley.
In a normal climate, a prodigious banking syndicate would have provided the multibillion-dollar debt facility, and the debt bankers from the bulge bracket firms would have given up their everlasting gobstoppers to lead the debt deal. Buffet’s fleetness of foot and slightly maverick willingness to provide a mammoth block of cash at a moment when banks are immobilised has won him the participation in what will be the world’s largest confectioner, with a global-number-one market share in chocolate and chewing gum. As Buffet put it in a recent interview, ‘a good time to buy a really great business is when you can do it.’
New York’s consummate deal-maker Jamie Dillon, CEO of JP Morgan Chase, is garnering a few comments of his own in many a dinner-party conversation as he leads his bank’s all-stock takeover of Bear Stearns. Buying a fabled, 80-year-old investment bank over the course of a weekend last March for roughly $1 billion plus another $1 billion of loan guarantees (not to mention $29 billion of help from Uncle Ben at the US Federal Reserve) surely ranks amongst the boldest deals so far this year.
The Bear Stearns bailout is a public-markets deal, but it has a famed
private-equity precedent. No doubt Dillon has studied another banking acquisition incubated in troubled economic times: the takeover of the bankrupt Long Term Credit Bank of Japan by a consortium led by Tim Collins of Ripplewood Holdings and
ex-Goldman banker J. Christopher Flowers. LTCB was bankrupt, nationalised and staring at potentially $50 billion of non-performing loans.
In 2000, amidst the rubble of a Japanese financial system in desperate need of reform after decades of neglect, Ripplewood put together a $1.2-billion private-equity syndicate to acquire the bank from the Japanese government, and managed to include the famous ‘put back’ to the government to protect the investor group in case any of LTCB’s commercial loans went sour. The equity syndicate was a who’s who of banks and investors – with Ripplewood and JC Flowers leading, the investors that stepped up included David Rockefeller, Mellon Bank, Deutsche Bank, BSCH, Bank of Nova Scotia, ABN Amro, Paine Webber, and Jacob Rothschild via RIT Capital Partners.
Renamed Shinsei Bank, the business was listed on the Tokyo stock exchange less than four years later netting a 3.3-times cash return for the investment group. JP Morgan Chase is paying $10 per share, plus around $6 billion in balance-sheet provisions for Bear Stearns. Bearing in mind that Bear Stearn’s share price was $170 less than one year ago, a number of analysts predict that this timely investment may deliver even stronger returns than the Shinsei deal.
Deal lists are also plump at the small- to mid-cap end of the market, where deals are typically not that reliant on bank debt and leverage. London’s AIM market has a well-deserved global reputation as a rewarding option for businesses seeking equity finance in the range of £2 to £50 million, or more. There are over 1,500 companies quoted on AIM, representing a robust £100 billion of market capitalisation, but IPOs completed in the last the six months are down 50 per cent compared to previous year.
Surely the IPO window is only temporarily closed, and animal spirits will reanimate the IPO market as markets calm. In the meantime, dozens of interesting smaller companies looking for capital have been pushed into the welcoming arms of private-equity firms. Private-equity fund managers now have a rich choice of investments , and investors should look forward to outsized performance for well-managed vintage 2008 and 2009 funds.