Cheap financing fuels U.S. leveraged buyout boom
U.S. leveraged buyouts almost doubled in the third quarter of 2012 from a year ago, reaching their highest levels since before the financial crisis as cheap financing fueled private equity's appetite for deals.
Robust debt markets, buyout funds flush with uninvested capital and a desire by sellers for the high prices private equity buyers are willing to pay have combined to give rise to the strongest quarterly U.S. LBO volume since the third quarter of 2007.
Investors chasing better returns amid persistently low interest rates have driven demand for high-yield debt and sent yields to historical lows in recent months, providing an abundant source of low-cost capital to buyout firms looking to buy assets.
The yield on the Barclays US High Yield Index reached a record low of 6.15 percent on Tuesday, the lowest in the almost 30 years since the index's inception.
"Though there is still a lot of wood to chop, investors are increasingly willing to venture down the risk spectrum. The need and desire to find yield is fueling that migration," said John Miller, head of the global financial sponsors and industrials groups at Barclays Plc (BARC.L).
Total U.S. LBO volumes reached $28.87 billion in the third quarter through September 18, up 96 percent from the same period last year and outperforming a 32 percent growth in global leveraged buyouts, Thomson Reuters data shows.
In comparison, non-private equity U.S. mergers and acquisitions dropped 13 percent over the same period as continued worries over the European debt crisis and the U.S. election curbed the appetite of chief executives for larger-scale deals.
The robust debt market is making it easier for private equity firms to meet the value expectations of sellers, in turn prompting more companies to take the opportunity to rebalance their portfolios and sell non-core assets.
"There is enough liquidity and capacity in the high-yield market to empower financial sponsors to be aggressive in auction processes and, as a result, we're seeing robust competitive tension in recent sale processes," said Miller, who advises some of the world's largest private equity firms on buying and selling companies.
Low-cost debt financing has also led to increased secondary buyouts - sales from one private equity firm to another. Looking to cash out on their investments, buyout firms are opting to sell to other buyout shops rather than braving a still volatile equity market to take companies public.
U.S. secondary buyouts have surged 116 percent in the third quarter to $15.75 billion, representing more than half of overall LBO activity.
This quarter's biggest private equity deal was the acquisition of Suddenlink Communications by BC Partners Ltd and the Canadian Pension Plan Investment Board from a consortium led by Goldman Sachs Capital Partners (GS.N). Including the assumption of existing debt, the deal valued the U.S. cable operator at $6.6 billion.
Trailing this was Carlyle Group LP's (CG.O) deal to buy DuPont Co's (DD.N) car paint business for $4.9 billion. Carlyle has announced more buyouts this year than any other private equity firm, with a combined value exceeding $15 billion.
MEGA LBO NO-SHOW
The rise in leveraged buyouts has investors speculating whether the mega LBOs of the go-go days of 2005 to 2007 may return. This year's largest LBO is the $7.1 billion takeover of El Paso Corp's oil and natural gas assets by Apollo Global Management LLC-led (APO.N) consortium.
In the most-high profile effort of late to pull off such a deal, Best Buy Co Inc (BBY.N) founder Richard Schulze has been trying to attract private equity money to the company. A buyout of the struggling U.S. consumer electronics retailer could top $10 billion.
"Every once in a while you might see a large mega-deal, but I tend to think that very large deals will be more of the exception rather than the rule moving forward," said Kewsong Lee, managing director at private equity firm Warburg Pincus LLC.
"The liquidity is there to pull together the debt, but general partners (GPs) just don't want to write $1.5 to $2 billion commitments and fund them anymore because fund sizes are smaller and a lot of GPs have figured out that partnering in large consortia has been more difficult than not," Lee said.
Limited partners also are not sure they love the dynamics of these types of mega deals anymore, he added.
Year-to-date, U.S. LBO volumes are up 27 percent from 2011. While private equity deal making is on track to finish the year higher, activity next year will depend on macro-economic conditions being stable, market participants said.
Europe's sovereign debt woes, the prospect of slowing growth in China and other emerging markets and the fiscal cliff facing the U.S. government budget are just some of the threats that still lurk in the market.
Dealmakers say fundamentals are still in place to drive volumes even higher.
"By our latest count, there was over $450 billion in uncommitted equity capital that the financial sponsors need to put to work in the next several years," said Jack MacDonald, co-head of Americas M&A at Bank of America Merrill Lynch (BAC.N).
"When you put leverage against that - $450 billion plus, you're looking at over $1 trillion in financial sponsor activity that we should see follow through in the next several years."
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