Published on February 6, 2009
How the Global Credit Meltdown Has Changed the World of Private Equity – For The Better David M. Rubenstein Co-Founder and Managing Director February 4, 2009 1
At The Peak 2007 commitments to new funds increased by 64% from 2000 ! and 2,250% from 1990 75 funds of $5 billion or more were raised from 2003-2007 ! 58 deals of $5 billion or more were completed from 2003- ! 2007 (up 5,700% from 1996 – 2000 period) 2003-2007 13,000 deals were completed (up 140% from 1996 ! – 2000 period) Senior loan volume for sponsored transactions reached $485 ! billion in 2005-2007 (up 386% from 1999 – 2001 period) Debt / EBITDA multiples increased by 50% from 2001 (4.1x ! Debt / EBITDA average) to 2007 (6.2x EBITDA average) Purchase price / EBITDA multiples increased 62% from 2001 ! (6.0x average) to 2007 (9.7x average) Top 20 public pension funds’ allocations to private equity ! exceeded $100 billion from 2000 to 2007 Source: Thomson Venture Economics, data as of 12/31/08; Capital IQ; Dealogic, data for sponsor-entry transactions; S&P LCD; Private Equity Council, Primer 2007. 2
Now Global deal value declined from $738 billion in 2007 to $212 ! billion in 2008 Commitments to new funds declined from $152 billion ! committed in first quarter of 2008 compared to $49 billion committed in last quarter of 2008 Distributions decreased from 3Q07 to 4Q08 by 78% ! Source: Thomson Venture Economics, data as of 12/31/08; Capital IQ; Dealogic, data for sponsor-entry transactions; S&P LCD; Private Equity Council, Primer 2007. 3
Fundraising Has Slowed Annual Private Equity Fundraising ($B) Global: (5%) Global CAGR ('01-'07): 18% $500 $449 $425 $362 400 $329 $286 $259 300 $233 $166 $165 200 $127 $113 $93 $89 $80 $51 100 $52 0 2001 2002 2003 2004 2005 2006 2007 2008 U.S. Global Source: Thomson Venture Economics, data as of 12/31/08. 4
Fundraising Has Slowed Quarterly Private Equity Fundraising ($B) 1Q08, $152 $155 Global: (68%) 105 4Q08, $49 55 5 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 U.S. Global Source: Thomson Venture Economics, data as of 12/31/08. 5
Leverage Has Declined, Requiring More Equity (21%) Debt / EBITDA 6.2x 6.5x 5.4x 5.3x 5.5x 4.9x 4.8x 4.6x 4.1x 4.0x 4.5x 3.5x 2.5x 2001 2002 2003 2004 2005 2006 2007 2008 Equity / Total Purchase Price (%) 1.2x 38.1% 40.0% 36.1% 34.1% 35.0% 32.9% 32.0% 31.5% 30.8% 29.9% 30.0% 25.0% 2001 2002 2003 2004 2005 2006 2007 2008 Source: S&P LCD, leverage data for U.S. large corporate LBOs (issuer w/EBITDA >$50M), equity data for all U.S. LBOs w/EBITDA with total sources > $1 billion. 6
Deal Value and Average Size Declining Global Aggregate Sponsor-Entry Deal Value ($B) (71%) $753 $738 $800 600 $350 $278 400 $212 $160 $119 $78 200 0 2001 2002 2003 2004 2005 2006 2007 2008 Global Average Deal Size ($M) (60%) $440 $433 $500 400 $279 $253 $219 300 $184 $174 $142 200 100 0 2001 2002 2003 2004 2005 2006 2007 2008 Source: Dealogic, data for global sponsor-entry transactions, includes pending. sponsor- 7
Distributions Have Declined Global Quarterly Distributions ($B) $20 $18 $18 $18 $16$16 (78%) $15 $15 $15 $15 $14 $14 15 $13 $12 $13 $13 $12 $10 $10 $9 10 $8 $8 $8 $6 $7 $6 $6 $5 $5 $4 $4 5 $3 0 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 Source: Thomson Venture Economics, data as of 9/30/08 8
How The Private Equity World Has Changed Confidence in the Future Has Been Diminished 1. From 2002-2007, confidence in private equity's quot; ability to achieve superior returns was at highest levels ever Now: some have concerns (a) whether private quot; equity can yield attractive returns on investments made in 2005-2008 period; (b) whether private equity can ever again reach the returns achieved by private equity at its peak 9
How The Private Equity World Has Changed PE Has Ceased Being the Visible Face of Economic 2. Change and Activity From 2005-2007, private equity was so active in its quot; buying new companies that it essentially became the symbol of capital activity Now: public focus has been on systemic risk from quot; commercial and investment banks, insurance companies, and hedge funds 10
How The Private Equity World Has Changed PE's Main Focus Is Now to Preserve Value of Its Existing 3. Holdings PE firms have been spending most of their time on quot; their portfolio companies--cutting costs, preserving cash, and surviving until the economy and investment world returns 11
How The Private Equity World Has Changed PE Firms Have Sought to Do With Their Firms What 4. They are Telling their Portfolio Companies to Do PE firms have been cutting the size of their staffs, quot; reducing other costs, preserving their cash, and refocusing their efforts on their core businesses 12
How The Private Equity World Has Changed PE Firms are Focusing on Preserving Strength of their 5. Funds Firms are in more regular dialogue with their quot; investors about current investment needs and opportunities 13
How The Private Equity World Has Changed PE firms Have Recognized the Enormous Difficulty of 6. Raising New Funds for the Foreseeable Future Even strongest and best known will find fundraising quot; hardest in decades; PE firms without well known brands or long track records realize they may not be able to raise new capital at all for quite awhile 14
How The Private Equity World Has Changed New Investments Will Be Far Different in Nature, 7. Shape, Size and Structure Than in the 2003-2007 Period Now: investments are few in number; tend to be quot; less than $3 billion in size; have stringent debt terms (where there is debt); have traditional EBITDA multiples; require about 45-50% equity (where a control position is being purchased); and are increasingly minority stake positions 15
How The Private Equity World Has Changed Opportunities for Exit Have Been Reduced, Resulting In 8. Lower Returns and Fewer Distributions PE firms will have to hold onto their companies quot; longer or take prices far below their once anticipated exit levels; and provide less frequent distributions than once projected 16
How The Private Equity World Has Changed More than a Few of the Best Known and Largest 9. Investments completed in the 2005-2007 Period Will Have to Be Recapitalized in Order to be Preserved 17
How The Private Equity World Has Changed Increased government regulation of banks and other 10. lending organizations could constrain credit availability beyond normal market constraints 18
What 2009 Will Bring to the World of Private Equity 19
What 2009 Will Bring to the World of Private Equity Relatively few U.S. buyouts will be completed; buyout 1. firms will be focused on their existing portfolios; sellers will not like the available sale prices; and banks will not return to lending for all but the safest transactions. Buyouts completed in this environment will likely yield high returns in several years Private equity firms will complete, proportionately, a 2. higher percentage of non-control investments than ever; many of these will be outside the U.S. and Europe, in emerging markets Exits on existing investments will be relatively few, 3. with strategic buyers providing the only available exit route 20
What 2009 Will Bring to the World of Private Equity Few new funds will be raised at the sizes truly desired 4. by private equity firms; funds which are raised will be raised by the best brand name firms or firms with specialized expertise in attractive niches Some investors will continue selling their stakes in 5. private equity funds; the sales will yield larger than normal discounts to NAV Other investors will increase their private equity 6. stakes; and some investors not yet in private equity will enter the private equity world 21
What 2009 Will Bring to the World of Private Equity More than a few well-known investments will likely not 7. survive New private equity funds (for new organizations) will 8. have a difficult time getting any funding Private equity firms will reduce the size of their 9. organizations and will narrow their focus 10. The appeal of PE to new MBA’s and financial professionals will be reduced, as compensation and activity are reduced 22
Why Might All Of This Be For The Better? Need for private equity capital is greater than ever 1. Reduced prices will likely yield very high returns for 2. private equity capital invested now and over the next 2-3 years Many private equity transactions now available do not 3. need new debt, or any debt A return to normal patterns is always welcome--less 4. frenzy, uneconomic activity, more time to improve companies Pressure on banks to lend will result in enhanced credit 5. availability for deals needing leverage--likely by mid-- 2009 Co-investment opportunities will be far greater than 6. before 23
Why Might All Of This Be For The Better? Debt will be on terms which ensure more discipline in 7. the investment decision and process Pressure to invest funds quickly will be reduced 8. Less disciplined buyers will be largely removed from 9. the market Governments and others will increasingly see private 10. equity as a solution to problems Enhanced recognition that private equity was not a 11. cause of systemic risk--not a cause of the economic decline Expectations of what private equity can do to fix 12. companies, achieve returns, solve society's problems will return to more normal (and realistic) levels Private equity will stabilize; better firms will stay in 13. business and grow 24
Why Might All Of This Be For The Better? Image of private equity will have a chance of 14. improving as more normal investment patterns and performance returns 15. Private equity will emerge as the clearly preferred form of alternative investing 25
Challenges For The Industry Recognize that the world of finance--and private 1. equity--has dramatically changed over the past year (this is not your father’s private equity world), and the private equity firms need to adapt their investment approaches and business model to accommodate these changes--if they want to continue to be active in the private equity world The Theory of Evolution applies to private equity as quot; well as to animal species 26
Challenges For The Industry Realize that governmental actions can play a larger 2. role in the private equity world, and be prepared therefore to better explain to government officials-- and the general public--precisely how private equity adds value to an economy and therefore deserves to be treated as an important and valued partner in economic growth and recovery plans It is up to the industry to ensure that governments quot; understand and value private equity 27
Challenges For The Industry Work to strengthen limited partner relationships and 3. trust by understanding limited partner concerns and needs and aligning interests as closely as possible over a reasonable period The economic and structural relationships of the quot; industry are not written in stone; they may need to be updated to reflect the new world of private equity 28
Challenges For The Industry Recognize that the current public image of the 4. industry is not a positive one, and continued efforts (by GP's and LP's) to improve this image (and ensure there is reality behind this image) will be needed if the industry is to be seen as additive to society rather than negative for society The public needs to be treated as a partner if the quot; industry is going to survive and prosper; and partners need to be informed about what is actually occurring on a timely basis 29
Challenges For The Industry Preserving as much equity and as many jobs as possible 5. during the economic downtown What happens in the private equity world will not quot; stay in the private equity world; what is done in this period will be remembered far more than what is done in good economic times 30
How the Global Credit Meltdown Has Changed the World of Private Equity – For The Better David M. Rubenstein Co-Founder and Managing Director February 4, 2009 31
Carlyle Group co-founder David Rubenstein spoke at the SuperReturn 2009 conference in Berlin earlier this week (submit a better name here), and argued that ...
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