“Financial genius” Lenny Dykstra sues JPMorgan for lending him too much (Reuters)
Comparative Effectiveness Research Could Pose Barriers to Medical Development (Stanford)
Free white paper from Catherine Sherwood on FINRA Guidance on Use of Social Media by Financial Services
Revealing chart of the makeup of US federal spending in David Leonhardt’s Economic Scene column (NYTimes)
EU fails to agree on fresh restrictions on American hedge funds doing business in Europe (Washington Post)
Private credit demands are poised to rebound (Morgan Stanley)
Technorati Tags: financial-regulation, government spending, Hedge-Funds, medical research, pharma, private-equity, social-media
But the PE industry faces a formidable refinancing cliff in the coming years, says Bain Capital in its Global Private Equity Report 2010 (free pdf)
Selected excerpts:
Energy and healthcare topped a recent poll of sectors where PE fund managers and their advisers expect to see significant levels of investment over the coming year. Both had been among industries that increased their share of total PE deal making during the rising PE market of 2003 to 2007, and they look poised to continue their ascent.
Hot geography: Asia-Pacific. The smaller impact of the credit crisis on Asia-Pacific’s markets and the better prospects for economic growth continued to make the region attractive to PE investors during the downturn. Even as PE contracted globally from 2007 to 2009, Asia-Pacific’s share of investment nearly tripled from about 8 percent to 23 percent.
Hot asset class: Distressed investing. The tough economy and challenging debt conditions of 2008 and 2009 created some of the most favorable investment opportunities in the distressed debt market, including debt trading, loans-to-own and restructurings.
The most fertile targets for distressed investing will likely be in those hard-hit sectors such as discretionary spending on consumer goods, like luxury products, and media and entertainment. Companies in these areas will continue to need substantially more outside funding over the next two to three years or risk greater probability of default.
Creating value through activist ownership is becoming the most important differentiating capability. Deal returns were 3.6 times the original investment in situations where early post-acquisition work was undertaken—well above the industry average of 1.4 times.
Refinancing challenges: The biggest challenge for the high-yield bond and leveraged loan markets—and consequently for the PE market—is the looming refinancing cliff (also commonly referred to as the refinancing wall). Investors’ limited capacity to absorb a growing supply of refinancings may severely crimp the borrowing needed to finance new PE deals—and the shortfall will begin to show up in 2010, when the market starts to climb the base of the cliff.
Over the next five years, issuers of speculative-grade debt (including PE-backed borrowers) will need to refinance roughly $850 billion in maturing debt denominated in US dollars—$500 billion of it in the form of leveraged loans and $350 billion in high-yield bonds. The refinancing obligations will start off slowly in 2010, amounting to less than $50 billion; but they will rise steeply through 2014, when some $355 billion will come due. The steepest cliff wall will be in the leveraged loan market between 2012 and 2014, when more than 85 percent of loans outstanding mature. Most of that debt is owed by PE-sponsored companies.
Technorati Tags: Asia-Pacific-region, energy, Healthcare, junk-bonds, leveraged-loans, luxury-goods, media and entertainment, private-equity, PulseCheck
Interesting tidbit from PitchBook: Private equity secondary exit activity has been heating up this year.
Thus far in 2010, there have been eight completed secondary deals, versus in 2009 where it took until late April to reach an equivalent number PE-to-PE sales. A positive sign for private equity exit possibilities.
In total, there have been 48 completed or announced secondary deals since the beginning of 2009. Among the sales in 2010 are The Riverside Company’s sale of ATI Career Training Center to BC Partners and J.F. Lehman & Company’s sale of OAO Technology Solutions to Platinum Equity.
Technorati Tags: private-equity
Guest Post by Oxford Analytica
While the crisis of 2008 was self-evidently a market failure, in terms of the mis-pricing of certain assets (particularly property), it was also a regulatory failure in three key respects:
- Regulators did not adequately consider the possibility that the short-term credit market could collapse, threatening several major financial institutions with insolvency.
- This was the by-product of an intellectual failure to keep abreast of how the macroeconomic framework was changing as a result of globalisation.
- While there was an arguably correct perception in the late 1990s that the 60-year-old Glass-Steagall framework was outdated, there was no effort to replace it with a 21st century successor.
In the wake of the crisis, political debate has focused on whether to return to the outmoded pre-1999 regulatory framework, rather than on how to adapt this model to address globalisation.
Glass-Steagall no panacea. Even a cursory examination of the old Glass-Steagall framework — which separated deposit-taking commercial banks from investment banks, or ‘broker-dealers’ (BDs) — indicates that it would not have been sufficient to prevent the 2008 crisis:
- Almost all of the banks that failed or were forced into mergers were either BDs (Lehman Brothers, Bear Stearns, Merrill Lynch) or purely commercial banks (eg Washington Mutual or the UK’s Northern Rock).
- The ‘universal banks’ created after Glass-Steagall did not perform noticeably worse — although a few (Citigroup, UBS) were in deep distress before being bailed out by governments. Indeed, some entered the crisis in relatively solid shape (eg JP Morgan Chase, Barclays) and have since benefited from the collapse or absorption of rivals.
Intellectual context of crisis. Thus, the crisis was not simply caused by deregulation, but by a deeper shortfall of risk comprehension in prevailing economic frameworks — which downplay such factors as shifting social contexts and changes in forecasting strategies that determine asset evaluation and market movements.
In other words, difficult-to-quantify human factors and the adaptive interactions of market players were downplayed by many economists and risk managers, who became enamoured of quantitative modelling:
- In the 25 years prior to 2008, academic economics became dominated by an emphasis on numbers — particularly quantitative modelling and statistics associated with ‘rational choice’ theory.
- This intellectual paradigm allowed neoclassical growth theorists to advance a framework with the premises that markets tend to equilibrate around efficient resource allocation and that government policy always does more harm than good in fostering economic growth. This increased the distribution of risk and reliance on complex quantitative modelling techniques to mitigate risk — with disastrous results.
Intellectual reaction. The crisis has significantly undermined this approach, although the economics discipline has been slow to adapt, with the initial impetus to fall back on a Keynesian framework. This reaction drove President Barack Obama’s embrace of the ‘Volcker Rule’ that would prohibit commercial banks from engaging in proprietary trading, and the Senate bill co-sponsored by Republican John McCain and Democrat Maria Cantwell that would reinstate Glass-Steagall in its entirety. However, in order to defuse incipient crises created by asset price bubbles, financial disintermediation and the attendant rise in systemic risk, any new regulatory paradigm would need to incorporate the insights that behavioural economists have developed since the 1970s — eg evolutionary models of how markets reach efficiency and group behavioural studies.
Outlook. Many economists still cling to the validity of their modelling techniques, which appear usefully predictive over the short term — but that are inaccurate as models of human behaviour over time. They tend to protest that improved modelling, rather than a wholesale re-evaluation of their approach, is apposite. This leads many to conclude that any re-regulation would be counter-productive.
However, this fails to account for innovative new research that has emerged from inter-disciplinary and behavioural economists in recent years. This includes the work of John Geanakoplos of Yale University on ‘leverage cycles’, which suggests that leverage cycles have observable and predictable characteristics, targetable by regulators.
Technorati Tags: banks, financial-markets, financial-regulation, Hedge-Funds, private-equity
Private equity research firm, PitchBook Data, Inc., has published Annual Private Equity Breakdown 2010 (free with registration). The report was compiled using data from the PitchBook Private Equity Platform and claims to be the first comprehensive set of statistics analyzing the whole private equity lifecycle from fundraising, to deal flow, to exit activity and to fund returns. It includes:
- Total PE deal flow since 2004
- In-depth breakdown of Investment by Industry
- Deals broken down by Geographic Region
- Deals broken down by Size & Type
- Breakdown of Private Equity Exits by type and size
- Total amount of capital raised by PE funds since 2004
- Detailed data on PE Fund Returns since 1998
- League tables for the most active players in the PE industry:
Top 40 private equity firms
Top 20 closed funds
Top 10 law firms
Top 10 investments banks
Top 10 private equity lenders
Technorati Tags: investment-banking, private-equity
McKinsey paper on CO2 abatement: Exploring options for oil and natural gas companies
Tesla IPO: 12 Things You Should Know
People who think about luxury prior to decision-making tend to act in self-interested ways that may harm others (HBS)
More than four fifths of Private Equity managers expect a wave of closures or mergers because of poor fundraising environment
Must reading: How the U.S. Surplus Became a Deficit (What we know but den – via @pkedrosky)
New borrowing on credit cards, loans and overdrafts in UK outstrips amount paid back for the first time since June
Technorati Tags: Auto-Industry, carbon abatement, credit-cards, private-equity, Tesla
The average Internal Rate of Return for mature funds (vintage 2005 and older), shows that private equity funds (Buyout, Growth and Restructuring funds, among others) have achieved consistently higher returns than venture capital funds, according to a new report from PitchBook. VC funds, which saw outsized returns during the technology bubble of the 1990’s, have found mixed results in the first decade of the 21st century.
In the decade to come, private equity will be challenged by a large capital overhang and venture capital will need to reevaluate its exit strategies to achieve competitive returns.
The report (free download with registration) provides an in-depth look at the current state of PE fundraising and for the first time also features data on private equity and venture capital fund returns created by PitchBook’s newly-released fund returns data and analysis tools. The economic turbulence and current private equity overhang of $400 billion† combined in 2009 to cause U.S. private equity fundraising to continue its slide from the high-water mark it hit in 2007. Only 85 funds closed during the year with a total of $135 billion in commitments, a 58% drop from 2008 to a level the industry has not seen since before 2005. A notable fundraising trend in 2009 was the continued progression toward larger sized funds, with funds $500 million and above accounting for over 50% of the funds closed and 90% of the capital raised.
The data shows a number of interesting trends, one of which is the consistent outperformance of PE funds compared to VC funds since the burst of the tech bubble. Also worth noting is that, according to the data collected by PitchBook, the best performing funds on average since 1998 are private equity funds over $1 billion, which, for mature vintages (funds more than 5 years old), have outperformed the rest of the industry every year since 1998. Additionally, mega funds (funds over $5 billion) have the highest median IRR at 11.7% for all mature funds and the highest 25th-percentile point at 9.32% (meaning 25% of the funds have an IRR below 9.32% and 75% have a higher IRR).
Technorati Tags: private-equity, venture-capital
Private equity firms have invested over $4.5 billion in 90 software companies since the beginning of 2009, according to PitchBook.
The top investors in the industry for 2009 were The Carlyle Group, Thoma Bravo and Warburg Pincus with four deals apiece. 2009 had 10 more software-related deals than 2008 and as of Q3 2009 accounted for 7% of all PE deals, a jump from its previous high of 5% in 2006.
Attracting multi-billion dollar investors such as Carlyle and Warburg Pincus hints at the fact that the software industry has reached a more mature stage of business.
Technorati Tags: private-equity, software
Despite being cast by some as one of the villains of the financial meltdown, a new paper finds that private equity appears to have a beneficial effect on most industries.
The paper published by Harvard Business School examines the impact of PE investments across 20 industries in 26 major nations between 1991 and 2007.
Overall, we are unable to find evidence supporting the detrimental effects of PE investments on industries
- Industries where PE funds have been active in the past five years grow more rapidly than other sectors, whether measured using total production, value added, or employment.
- In industries with PE investments, there are few significant differences between industries with a low and high level of PE activity.
- Activity in industries with PE backing appears to be no more volatile in the face of industry cycles than in other industries, and sometimes less so.
- The reduced volatility is particularly apparent in employment.
- These patterns continue to hold when we focus on the impact of private equity in continental Europe, where concerns about these investments have been most often expressed.
However, the authors caution that the buyout boom of the mid 2000s was so massive, and the subsequent crash in activity so dramatic, that the consequences may have been substantially different from other economic cycles.
Private Equity and Industry Performance
Shai Bernstein, Josh Lerner, Morten Sørensen, Per Strömberg
Technorati Tags: financial-regulation, industry, private-equity
Since the start of the meltdown, the exit market has been slowly thawing for private equity investors, with each quarter in 2009 being better than the one before.
The fourth quarter is on track to continue the trend with 42 completed exits so far, according to the PitchBook Platform.
With IPOs again becoming a viable exit method, the number of IPOs has steadily grown while the sales to strategic acquirers has steadily declined.
One possible explanation, according to PitchBook, is that IPOs give PE firms the ability to raise capital for their indebted portfolio companies and return some cash to investors but also enable them to remain majority owners with a stake that they can cash in at a later date and a higher multiple when the economy picks up.
Technorati Tags: IPO, private-equity
