Crisis, what crisis?
By Paul Mackintosh - 20/08/12
Seeing some private equity industry headlines, you could be forgiven for thinking that Lehman was still standing tall. One such is the report from Bloomberg – unconfirmed by the principal – that Apollo Global Management LLC, Leon Black’s flagship, is seeking to raise up to US$12 billion for its Apollo Investment Fund (APOL) VIII LP fund. This is down on the preceding vehicle, which closed on $15 billion in 2008, but still adds to the record $801 billion Preqin tally for GPs’ fundraising aspirations.
Perhaps any alarm at such headlong ambition is overblown. “Total AUM was $104.9 billion as of June 30, 2012, compared to $71.7 billion as of June 30, 2011, an increase of $33.2 billion or 46%,” read Apollo’s Q2 2012 results release. With figures like that, $12 billion could seem a reasonable, respectable target. To further fuel the optimism, Preqin noted that “there were 705 private equity-backed buyout deals in Q2 2012, valued at an aggregate $60.4 billion – a 37% increase in deal value from Q1 2012”. So perhaps the big buyout boys have won through the crisis with both their AUMs and their attitudes intact, their strategies and aims tried and tested.
On the other hand, though …perhaps there are good reasons to worry that all that buyout money is being raised in a void where deal volumes and debt market conditions are just not likely to support such firepower. For one thing, the last full fundraising year before the crisis, 2007, saw $302 billion raised for the US, according to Dow Jones. Are we really in market conditions that justify more than double that? And deal volume in 2006 was $375 billion for the US; in 2008 Preqin’s global total was $258.2 billion. What’s more, the global private equity capital overhang still looming over the industry in 2011 was $485 billion according to PitchBook – a very different market environment from 2005-08.
Yes, bank leverage may be back on the menu, due to the overall crisis-fuelled cheap cost of money, as typified by the recent leverage-backed bid by Best Buy’s founder to take over the company. But the industry background suggests that the big leveraged buyout (LBO) groups may be heading for an overshoot on the amount of capital they can actually deploy, and much of the fundraising push will run into the sand. Plus, the world has no reason to welcome a resurgence of heavily-levered deals while assets from the 2005-08 buyout boom continue to fetch fire-sale prices as living (or rather, walking-dead) examples of the folly of racking up the debt on targets just because the banks temporarily let you.