Private equity firms find value elusive, risk pervasive
It’s still a seller’s market in private equity, says Leon Black, chairman and CEO of Apollo Global Management. But Black told the audience at the Private Equity: Rebalancing Risks panel discussion that investors who know where to look will find niche opportunities. Black, who made headlines at Global Conference 2013 for saying his firm was “selling everything that is not nailed down,” noted that interest rates are still historically low. “There’s a lot of easy money around,” which drives up the prices of deals beyond what a value investor like Apollo is willing to pay, Black said.
He said some exceptions to this trend were deals off the beaten track, such as Chuck E. Cheese, the kid-friendly pizza restaurant chain that Apollo bought in January for $950 million; energy and natural resources, where shale oil is fundamentally changing the industry; and bank deleveraging in Europe, which Black described as “just as real as the shale revolution is here.”
Jonathan Nelson, founder and CEO of Providence Equity Partners, agreed. “We’re finding good deals to be scarce,” he said. “Most of us want to be very careful with the capital we have and not repeat mistakes made on the eve of the last crisis.” He said emerging markets like China and Southeast Asia had underperformed developed markets over the past three, five, and 10 years, even without accounting for their higher risk.
He said certain countries were completely off-limits for his firm because the risk is too high. In other regions, Providence is treading carefully. “In the last six months, we’ve been active in Indonesia, sub-Saharan Africa, and we’ve been very active in Brazil.” The key question for Nelson isn’t the country or even the industry, but whether his firm’s expertise can add value. “If they just want capital, they should get it locally or from somebody else.”
David Bonderman, founding partner of TPG, disagreed with Black’s assessment of Europe, saying many investors thought the “revolution” there would have occurred five years ago. But he agreed that private equity firms needed to find niches or specialties to succeed in the current market. “Generalist firms don’t succeed. You have to have a view on management. If you can’t help a company get better, you’re just capital. Leon has his own shtick; Jonathan has got his shtick.”
“What’s your shtick?” asked moderator Maria Bartiromo, anchor and global markets editor for Fox Business Network.
“My shtick is to make fun of both of them,” said Bonderman.
John Danhakl, managing partner for Leonard Green & Partners, LP, offered up his own shtick. “There’s different ways to skin a cat. We want a business where the EBITDA will grow 50 percent. If that company will do what we think it will do, price doesn’t matter. We’ll make money; the only difference is how much money we make.” He said he’s finding things worth buying in today’s market, the most intriguing of which have come from other private equity firms.